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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003

OR

oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File No. 000-12739

AESP, INC.

(Exact Name of Registrant as Specified in Its Charter)


|                                                                                     |  |                                             
|------------------------------------------------------------------------------------ |  | --------------------------------------------
|FLORIDA
(State or other jurisdiction of
incorporation or organization)               |  | 59-2327381
(IRS Employer
Identification No.)
|                                                                                     |  |                                             
|1810 N.E. 144th STREET
NORTH MIAMI, FLORIDA
(Address of Principal Executive Offices) |  | 33181
(Zip Code)                            

Registrants Telephone Number, Including Area Code: (305) 944-7710

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes   x   No   
o

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes   o   No   
x

On August 12, 2003, the registrant had 6,043,596 outstanding shares of its
common stock, par value $.001 per share.



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TABLE OF CONTENTS



|                                                     |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Part I. Financial Information                       
|                                                     | Item 1. FINANCIAL STATEMENTS                                                                 
|CONDENSED CONSOLIDATED BALANCE SHEETS               
|CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                                     | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                     | Item 3. QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK                               
|                                                     | Item 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION                          
|                                                     | Item 1. LEGAL PROCEEDINGS                                                                    
|                                                     | Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                                                     | Item 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                                                     | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS                                
|                                                     | Item 5. OTHER INFORMATION                                                                    
|                                                     | Item 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|EX-31.1 SECTION 302 CERTIFICATION OF CEO            
|EX-31.2 SECTION 302 CERTIFICATION OF CFO            
|EX-32.1 SECTION 906 CERTIFICATION OF CEO            
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO        



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AESP, INC. AND SUBSIDIARIES

INDEX

|        |  |                                                                                                                       |  |     
|------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                       |  | Page
|        |  |                                                                                                                       |  |     
|        |  | PART I. FINANCIAL INFORMATION                                                                                         |  |     
|       
|Item 1. |  | FINANCIAL STATEMENTS.                                                                                                 |  |     
|        |  |                                                                                                                       |  |     
|        |  | Condensed Consolidated Balance Sheets at June 30, 2003
(unaudited) and December 31, 2002                              |  | 3   
|        |  |                                                                                                                       |  |     
|        |  | Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 2003 and 2002 (unaudited) |  | 4   
|        |  |                                                                                                                       |  |     
|        |  | Condensed Consolidated Statement of Shareholders Equity for
the six months ended June 30, 2003 (unaudited)           |  | 5   
|        |  |                                                                                                                       |  |     
|        |  | Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and 2002 (unaudited)           |  | 6   
|        |  |                                                                                                                       |  |     
|        |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                      |  | 7   
|        |  |                                                                                                                       |  |     
|Item 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.                                |  | 14  
|        |  |                                                                                                                       |  |     
|Item 3. |  | QUANTITATIVE AND QUALITIVE DISCLOSURES ABOUT
MARKET RISK.                                                             |  | 22  
|        |  |                                                                                                                       |  |     
|Item 4. |  | CONTROLS AND PROCEDURES.                                                                                              |  | 22  
|       
|        |  | PART II. OTHER INFORMATION                                                                                            |  |     
|        |  |                                                                                                                       |  |     
|Item 1. |  | LEGAL PROCEEDINGS                                                                                                     |  | 23  
|        |  |                                                                                                                       |  |     
|Item 2. |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                                                                             |  | 23  
|        |  |                                                                                                                       |  |     
|Item 3. |  | DEFAULTS UPON SENIOR SECURITIES                                                                                       |  | 23  
|        |  |                                                                                                                       |  |     
|Item 4. |  | SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS                                                                     |  | 23  
|        |  |                                                                                                                       |  |     
|Item 5. |  | OTHER INFORMATION                                                                                                     |  | 23  
|        |  |                                                                                                                       |  |     
|Item 6. |  | EXHIBITS AND REPORTS ON FORM 8-K                                                                                      |  | 23  

FORWARD LOOKING STATEMENTS

EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q CONTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934 WHICH ARE INTENDED TO BE COVERED BY THE SAFE HARBORS CREATED THEREBY.
THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING BUT
NOT LIMITED TO THE FOLLOWING: THE COMPANYS ABILITY TO OBTAIN SUFFICIENT
WORKING CAPITAL TO MEET ITS CURRENT AND FUTURE REQUIREMENTS, THE COMPANYS
ABILITY TO REFINANCE ITS U.S. LINE OF CREDIT, COMPETITION FROM OTHER
MANUFACTURERS AND DISTRIBUTORS OF CONNECTIVITY AND NETWORKING PRODUCTS BOTH
NATIONALLY AND INTERNATIONALLY; THE BALANCE OF THE MIX BETWEEN ORIGINAL
EQUIPMENT MANUFACTURER SALES (WHICH HAVE COMPARATIVELY LOWER GROSS PROFIT
MARGINS WITH LOWER EXPENSES) AND NETWORKING AND INTERNATIONAL SALES (WHICH HAVE
COMPARATIVELY HIGHER GROSS PROFIT MARGINS WITH HIGHER EXPENSES) FROM PERIOD TO
PERIOD; THE COMPANYS DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND
ASSEMBLY OF PRODUCTS AND THE ABSENCE OF SUPPLY AGREEMENTS; ECONOMIC FACTORS
THAT AFFECT THE MARKET FOR TECHNOLOGY PRODUCTS; THE U.S. AND EUROPEAN ECONOMIES
GENERALLY AND COMPANYS ABILITY TO FINANCE AND INTEGRATE FUTURE ACQUISITIONS.
THESE AND ADDITIONAL FACTORS ARE DISCUSSED HEREIN AND IN THE COMPANYS FORM
10-K FOR THE YEAR 2002 (THE FORM 10-K). THE FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN AND THEREIN INVOLVE AND ARE SUBJECT TO KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH COULD CAUSE THE COMPANYS ACTUAL
RESULTS, PERFORMANCE (FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER FROM
THE FUTURE RESULTS, PERFORMANCE (FINANCIAL OR OPERATING), ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENT. INVESTORS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY
RELEASE ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF
UNANTICIPATED EVENTS.

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Part I. Financial Information




Item 1. FINANCIAL STATEMENTS

AESP, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


|                                                             |                                                                                                                    |   |               |        |                   |   |        |        |  
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------ | - | ------------- | ------ | ----------------- | - | ------ | ------ | -
|                                                             |                                                                                                                    |   | June 30, 2003 |        | December 31, 2002
|                                                             |                                                                                                                    |   |               |        |                  
|                                                             |                                                                                                                    |   | (unaudited)   |        |                   |   |       
|Current Assets                                               |                                                                                                                    |   |               |        |                   |   |        |       
|                                                             | Cash                                                                                                               |   | $             | 584    |                   |   | $      | 1,226  |  
|                                                             | Accounts receivable, net of allowance for doubtful accounts of $276
at June 30, 2003 and $242 at December 31, 2002 |   |               | 3,900  |                   |   |        | 4,347  |  
|                                                             | Inventories                                                                                                        |   |               | 5,706  |                   |   |        | 5,500  |  
|                                                             | Due from employees                                                                                                 |   |               | 48     |                   |   |        | 35     |  
|                                                             | Prepaid expenses and other current assets                                                                          |   |               | 435    |                   |   |        | 372    |  
|                                                             |                                                                                                                    |   |               |        |                   |   |        |       
|Total current assets                                         |                                                                                                                    |   | 10,673        |        |                   |   | 11,480 |       
|Property and equipment, net                                  |                                                                                                                    |   | 535           |        |                   |   | 646    |       
|Goodwill, net                                                |                                                                                                                    |   | 643           |        |                   |   | 643    |       
|Deferred tax assets                                          |                                                                                                                    |   | 137           |        |                   |   | 144    |       
|Assets of business transferred under contractual arrangement |                                                                                                                    |   | 652           |        |                   |   | 682    |       
|Investment in marketable equity securities                   |                                                                                                                    |   | 58            |        |                   |   | 129    |       
|Other assets                                                 |                                                                                                                    |   | 396           |        |                   |   | 122    |       
|                                                             |                                                                                                                    |   |               |        |                   |   |        |       
|TOTAL ASSETS                                                 |                                                                                                                    | $ | 13,094        |        |                   | $ | 13,846 |       
|                                                             |                                                                                                                    |   |               |        |                   |   |        |       
|Liabilities and Shareholders Equity                         |                                                                                                                    |   |               |        |                   |   |        |       
|Current Liabilities                                          |                                                                                                                    |   |               |        |                   |   |        |       
|                                                             | Lines of credit                                                                                                    |   | $             | 2,707  |                   |   | $      | 2,457  |  
|                                                             | Accounts payable                                                                                                   |   |               | 5,314  |                   |   |        | 4,499  |  
|                                                             | Accrued expenses                                                                                                   |   |               | 682    |                   |   |        | 928    |  
|                                                             | Accrued salaries and benefits                                                                                      |   |               | 582    |                   |   |        | 769    |  
|                                                             | Income taxes payable                                                                                               |   |               | 28     |                   |   |        | 233    |  
|                                                             | Customer deposits and other                                                                                        |   |               | 227    |                   |   |        | 820    |  
|                                                             | Current portion of long-term debt                                                                                  |   |               | 11     |                   |   |        | 34     |  
|                                                             |                                                                                                                    |   |               |        |                   |   |        |       
|Total current liabilities                                    |                                                                                                                    |   | 9,551         |        |                   |   | 9,740  |       
|Long term debt, less current portion                         |                                                                                                                    |   | 4             |        |                   |   | 11     |       
|                                                             |                                                                                                                    |   |               |        |                   |   |        |       
|TOTAL LIABILITIES                                            |                                                                                                                    |   | 9,555         |        |                   |   | 9,751  |       
|Shareholders Equity                                         |                                                                                                                    |   |               |        |                   |   |        |       
|                                                             | Preferred stock, $.001 par value; 1,000 shares authorized; none issued                                             |   |               |       |                   |   |        |       |  
|                                                             | Common stock, $.001 par value; 20,000 shares authorized; issued 6,044                                              |   |               | 6      |                   |   |        | 6      |  
|                                                             | shares at June 30, 2003 and 5,984 at December 31, 2002                                                             |   |               |        |                   |   |        |        |  
|                                                             | Paid-in capital                                                                                                    |   |               | 13,466 |                   |   |        | 13,466 |  
|                                                             | (Deficit)                                                                                                          |   |               | (9,555 | )                 |   |        | (8,975 | )
|                                                             | Deferred compensation                                                                                              |   |               | (29    | )                 |   |        | (93    | )
|                                                             | Accumulated other comprehensive loss                                                                               |   |               | (349   | )                 |   |        | (309   | )
|                                                             |                                                                                                                    |   |               |        |                   |   |        |       
|TOTAL SHAREHOLDERS EQUITY                                   |                                                                                                                    |   | 3,539         |        |                   |   | 4,095  |       
|                                                             |                                                                                                                    |   |               |        |                   |   |        |       
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                   |                                                                                                                    | $ | 13,094        |        |                   | $ | 13,846 |       
|                                                             |                                                                                                                    |   |               |        |                   |   |        |       

See accompanying notes to condensed consolidated financial statements.

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AESP, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


|                                                    |                                              |   |                    |       |                  |   |          |       |          |   |        |        |   |   |        |       |  
|--------------------------------------------------- | -------------------------------------------- | - | ------------------ | ----- | ---------------- | - | -------- | ----- | -------- | - | ------ | ------ | - | - | ------ | ----- | -
|                                                    |                                              |   | Three Months Ended |       | Six Months Ended
|                                                    |                                              |   |                    |       |                 
|                                                    |                                              |   | June 30,           |       | June 30,         |   | June 30, |       | June 30,
|                                                    |                                              |   | 2003               |       | 2002             |   | 2003     |       | 2002    
|                                                    |                                              |   |                    |       |                  |   |          |       |         
|Net sales                                           |                                              | $ | 7,401              |       |                  | $ | 6,795    |       |          | $ | 15,504 |        |   | $ | 14,281 |      
|Operating expenses                                  |                                              |   |                    |       |                  |   |          |       |          |   |        |        |   |   |        |      
|                                                    | Cost of sales                                |   |                    | 5,251 |                  |   |          | 4,867 |          |   |        | 10,643 |   |   |        | 9,904 |  
|                                                    | Selling, general and administrative expenses |   |                    | 2,825 |                  |   |          | 2,657 |          |   |        | 5,554  |   |   |        | 5,036 |  
|                                                    |                                              |   |                    |       |                  |   |          |       |          |   |        |        |   |   |        |      
|Total operating expenses                            |                                              |   | 8,076              |       |                  |   | 7,524    |       |          |   | 16,197 |        |   |   | 14,940 |      
|                                                    |                                              |   |                    |       |                  |   |          |       |          |   |        |        |   |   |        |      
|Income (loss) from operations                       |                                              |   | (675               | )     |                  |   | (729     | )     |          |   | (693   | )      |   |   | (659   | )    
|Other income (expense):                             |                                              |   |                    |       |                  |   |          |       |          |   |        |        |   |   |        |      
|                                                    | Interest, net                                |   |                    | (50   | )                |   |          | (42   | )        |   |        | (88    | ) |   |        | (88   | )
|                                                    | Other                                        |   |                    | 95    |                  |   |          | 91    |          |   |        | 134    |   |   |        | 110   |  
|                                                    |                                              |   |                    |       |                  |   |          |       |          |   |        |        |   |   |        |      
|Income (loss) before income taxes                   |                                              |   | (630               | )     |                  |   | (680     | )     |          |   | (647   | )      |   |   | (637   | )    
|Provision for income taxes                          |                                              |   | (131               | )     |                  |   | 32       |       |          |   | (79    | )      |   |   | 70     |      
|                                                    |                                              |   |                    |       |                  |   |          |       |          |   |        |        |   |   |        |      
|Net income (loss)                                   |                                              |   | (499               | )     |                  |   | (712     | )     |          |   | (568   | )      |   |   | (707   | )    
|Preferred stock dividends                           |                                              |   |                   |       |                  |   |         |       |          |   | 12     |        |   |   |       |      
|                                                    |                                              |   |                    |       |                  |   |          |       |          |   |        |        |   |   |        |      
|Net income (loss) applicable to common shareholders |                                              | $ | (499               | )     |                  | $ | (712     | )     |          | $ | (580   | )      |   | $ | (707   | )    
|                                                    |                                              |   |                    |       |                  |   |          |       |          |   |        |        |   |   |        |      
|Net loss per common share                           |                                              | $ | (0.08              | )     |                  | $ | (0.15    | )     |          | $ | (0.10  | )      |   | $ | (0.16  | )    
|                                                    |                                              |   |                    |       |                  |   |          |       |          |   |        |        |   |   |        |      
|Net loss per common share assuming dilution         |                                              | $ | (0.08              | )     |                  | $ | (0.15    | )     |          | $ | (0.10  | )      |   | $ | (0.16  | )    
|                                                    |                                              |   |                    |       |                  |   |          |       |          |   |        |        |   |   |        |      

See accompanying notes to condensed consolidated financial statements.

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AESP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
(IN THOUSANDS)


|                             |                                    |                                                                             |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |        |        |          |      |   |     |   |    |       |      |             |     |        |      |   |      |       |       |  |      |  
|---------------------------- | ---------------------------------- | --------------------------------------------------------------------------- | - | --------------- | ---- | ------------ | - | --------- | - | ----- | ----- | ------- | ---- | --------- | - | ----- | - | ------------- | ------ | ------------- |  | ------ | ------ | -------- | ---- | - | --- | - | -- | ----- | ---- | ----------- | --- | ------ | ---- | - | ---- | ----- | ----- |  | ---- | -
|                             |                                    |                                                                             |   | Preferred
Stock |      | Common Stock |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |        |        |          |      |   |     |   |    |       |     
|                             |                                    |                                                                             |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |        |        |          |      |   |     |   |    |       |      |            
|                             |                                    |                                                                             |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |        |        |          |      |   |     |   |    |       |      | Accumulated |     |        |      |   |      | Total
|                             |                                    |                                                                             |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        | Addit.        |  |        |        |          |      |   |     |   |    | Other |      | Compre.     |     | Share-
|                             |                                    |                                                                             |   | Shares          |      | Par          |   | Shares    |   | Par   |       | Paid-In |      |           |   |       |   | Defer.        |        | Comprehensive |  | Income |        | holders'
|                             |                                    |                                                                             |   | Outstand.       |      | Value        |   | Outstand. |   | Value |       | Capital |      | (Deficit) |   | Comp. |   | Income (Loss) |        | (Loss)        |  | Equity
|                             |                                    |                                                                             |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |       
|Balance at December 31, 2002 |                                    |                                                                             |  |                 |      | $            |  |           |   |       | 5,984 |         |      | $         | 6 |       |   | $             | 13,466 |               |  | $      | (8,975 | )        |      | $ | (93 | ) |    | $     | (309 | )           |     |        |      |   |      | $     | 4,095 | 
|                             |                                    | Issuance of common stock, net                                               |   |                 |      |              |   |           |   |       |       |         | 60   |           |   |       |  |               |        |               |  |        |        |          |      |   |     |   |    |       |      |             |     |        |      |   |      |       |       |  |     |  
|                             |                                    | Conversion of common stock                                                  |   |                 | 230  |              |   |           |  |       |       |         | (230 | )         |   |       |  |               |        |               |  |        |        |          |      |   |     |   |    |       |      |             |     |        |      |   |      |       |       |  |     |  
|                             |                                    | Conversion of preferred stock                                               |   |                 | (230 | )            |   |           |  |       |       |         | 230  |           |   |       |  |               |        |               |  |        |        |          |      |   |     |   |    |       |      |             |     |        |      |   |      |       |       |  |     |  
|                             |                                    | Net income (loss)                                                           |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |        |        |          | (568 | ) |     |   |    |       |      |             |     |        |      |   | (568 | )     |       |  | (568 | )
|                             |                                    | Amortization of deferred
compensation                                       |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |        |        |          |      |   |     |   | 64 |       |      |             |     |        |      |   |      |       |       |  | 64   |  
|                             |                                    | Preferred dividends                                                         |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |        |        |          | (12  | ) |     |   |    |       |      |             |     |        |      |   |      |       |       |  | (12  | )
|                             | Other comprehensive income
(loss): |                                                                             |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |        |        |          |      |   |     |   |    |       |      |             |     |        |      |   |      |       |       |  |     
|                             |                                    | Unrealized (loss) on
investment in marketable
equity securities,
net of tax |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |        |        |          |      |   |     |   |    |       |      |             | (20 | )      |      |   | (20  | )     |       |  | (20  | )
|                             |                                    | Foreign currency
translation adjustment,
net of tax                         |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |        |        |          |      |   |     |   |    |       |      |             | (20 | )      |      |   | (20  | )     |       |  | (20  | )
|                             |                                    |                                                                             |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |        |        |          |      |   |     |   |    |       |      |             |     |        |      |   |      |       |       | 
|                             |                                    |                                                                             |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |        |        |          |      |   |     |   |    |       |      |             |     |        | (608 | ) |      |       |       | 
|                             |                                    |                                                                             |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |        |        |          |      |   |     |   |    |       |      |             |     |        |      |   |      |       |       | 
|Balance at June 30, 2003     |                                    |                                                                             |  |                 |      | $            |  |           |   |       | 6,044 |         |      | $         | 6 |       |   | $             | 13,466 |               |  | $      | (9,555 | )        |      | $ | (29 | ) |    | $     | (349 | )           |     |        |      |   |      | $     | 3,539 | 
|                             |                                    |                                                                             |   |                 |      |              |   |           |   |       |       |         |      |           |   |       |   |               |        |               |  |        |        |          |      |   |     |   |    |       |      |             |     |        |      |   |      |       |       | 

See accompanying notes to condensed consolidated financial statements.

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AESP, INC. AND SUBSIDIARIES




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(IN THOUSANDS)


|                                                    |                                                                                      |                                               |                                           |      |                           |      |       |      |    |      |  
|--------------------------------------------------- | ------------------------------------------------------------------------------------ | --------------------------------------------- | ----------------------------------------- | ---- | ------------------------- | ---- | ----- | ---- | -- | ---- | -
|                                                    |                                                                                      |                                               |                                           |      | Six months ended June 30,
|                                                    |                                                                                      |                                               |                                           |      |                          
|                                                    |                                                                                      |                                               |                                           |      | 2003                      |      | 2002 
|                                                    |                                                                                      |                                               |                                           |      |                           |      |      
|Operating Activities:                               |                                                                                      |                                               |                                           |      |                           |      |       |     
|                                                    | Net (loss)                                                                           |                                               | $                                         | (568 | )                         |      | $     | (707 | ) 
|                                                    | Adjustments to reconcile net income (loss) to net cash used in operating activities: |                                               |                                           |      |                           |      |       |      |   
|                                                    | Provision, net for losses on accounts receivable                                     |                                               |                                           | 4    |                           |      |       | 14   |   
|                                                    | Depreciation and amortization                                                        |                                               |                                           | 130  |                           |      |       | 141  |   
|                                                    | Provision for inventory obsolescence                                                 |                                               |                                           |     |                           |      |       | 36   |   
|                                                    | Amortization of deferred compensation                                                |                                               |                                           | 64   |                           |      |       |     |   
|                                                    | Deferred income taxes                                                                |                                               |                                           | 10   |                           |      |       |     |   
|                                                   
|                                                    | (Increase) decrease in:                                                              |                                               |                                           |      |                           |      |       |      |   
|                                                    |                                                                                      |                                               | Accounts receivable                       |      |                           | 647  |       |      |    | (298 | )
|                                                    |                                                                                      |                                               | Inventories                               |      |                           | (16  | )     |      |    | 702  |  
|                                                    |                                                                                      |                                               | Income tax receivable                     |      |                           |     |       |      |    | 83   |  
|                                                    |                                                                                      |                                               | Prepaid expenses and other current assets |      |                           | 7    |       |      |    | 36   |  
|                                                    |                                                                                      |                                               | Other assets                              |      |                           | (263 | )     |      |    | 40   |  
|                                                    | Increase (decrease) in:                                                              |                                               |                                           |      |                           |      |       |      |   
|                                                    |                                                                                      |                                               | Accounts payable and accrued expenses     |      |                           | (40  | )     |      |    | (977 | )
|                                                    |                                                                                      |                                               | Income taxes payable                      |      |                           | (213 | )     |      |    | 33   |  
|                                                    |                                                                                      |                                               | Customer deposits and other               |      |                           | (594 | )     |      |    | 88   |  
|                                                    |                                                                                      |                                               |                                           |      |                           |      |       |     
|Net cash (used in) operating activities             |                                                                                      |                                               | (832                                      | )    |                           |      | (809  | )   
|                                                   
|Investing Activities:                               |                                                                                      |                                               |                                           |      |                           |      |       |     
|                                                    | Additions, net to property and equipment                                             |                                               |                                           | (4   | )                         |      |       | (131 | ) 
|                                                    | Collection of loans due from employees                                               |                                               |                                           | (3   | )                         |      |       | (42  | ) 
|                                                    | Collection on note receivable from sale of Ukrainian subsidiary                      |                                               |                                           | 30   |                           |      |       | 26   |   
|                                                    |                                                                                      |                                               |                                           |      |                           |      |       |     
|Net cash provided by (used in) investing activities |                                                                                      |                                               | 23                                        |      |                           |      | (147  | )   
|                                                   
|Financing Activities:                               |                                                                                      |                                               |                                           |      |                           |      |       |     
|                                                    | Net proceeds (payments) on borrowings                                                |                                               |                                           | 196  |                           |      |       | 263  |   
|                                                    | Payment of preferred stock dividends                                                 |                                               |                                           | (12  | )                         |      |       |      |   
|                                                    |                                                                                      |                                               |                                           |      |                           |      |       |     
|Net cash provided by (used in) financing activities |                                                                                      |                                               | 184                                       |      |                           |      | 263   |     
|                                                    |                                                                                      |                                               |                                           |      |                           |      |       |     
|Net decrease in cash                                |                                                                                      |                                               | (625                                      | )    |                           |      | (693  | )   
|Effect of exchange rate changes on cash             |                                                                                      |                                               | (17                                       | )    |                           |      | 48    |     
|Cash, at beginning of period                        |                                                                                      |                                               | 1,226                                     |      |                           |      | 1,288 |     
|                                                    |                                                                                      |                                               |                                           |      |                           |      |       |     
|Cash, at end of period                              |                                                                                      | $                                             | 584                                       |      |                           | $    | 643   |     
|                                                    |                                                                                      |                                               |                                           |      |                           |      |       |     
|Supplemental information:                           |                                                                                      |                                               |                                           |      |                           |      |       |     
|                                                    | Cash paid for:                                                                       |                                               |                                           |      |                           |      |       |      |   
|                                                    |                                                                                      | Interest                                      |                                           | $    | 98                        |      |       | $    | 95 |     
|                                                    |                                                                                      | Taxes                                         |                                           |      | 104                       |      |       |      | 79 |     
|Non-cash transactions:                              |                                                                                      |                                               |                                           |      |                           |      |       |     
|                                                    |                                                                                      | Conversion of common stock to preferred stock |                                           | 230  |                           |      |       |     |   
|                                                    |                                                                                      | Conversion of preferred stock to common stock |                                           | 230  |                           |      |       |     |   
|                                                    |                                                                                      | Conversion of debt to equity                  |                                           |     |                           |      |       | 152  |   
|                                                    |                                                                                      | Common stock issued for investment services   |                                           |     |                           |      |       | 176  |   

See accompanying notes to condensed consolidated financial statements.

6



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##### Table of Contents



AESP, INC. AND SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


1. Basis of Presentation

The accompanying unaudited condensed
consolidated financial statements have been
prepared in accordance with generally
accepted accounting principles for interim
financial information and with the
instructions to Form 10-Q. Accordingly,
they do not include all of the information
and footnotes required by generally
accepted accounting principles for complete
financial statements. In the opinion of
management, all adjustments (consisting of
normal recurring adjustments) considered
necessary for a fair presentation have been
included. Operating results for the three
and six month period ended June 30, 2003
are not necessarily indicative of the
results that may be expected for the year
ended December 31, 2003. The condensed
consolidated balance sheet information as
of December 31, 2002 was derived from the
audited consolidated financial statements
included in the Companys Annual Report on
Form 10-K for 2002 (the Form 10-K). For
further information, refer to the
consolidated financial statements and
footnotes thereto included in the Form
10-K. Certain prior period balances have
been reclassified in the condensed
consolidated financial statements in order
to provide a presentation consistent with
the current period. AESP, Inc. (AESP) and
its subsidiaries are collectively referred
to herein as the Company.

2. U.S. Line of Credit

In January 2003, the Company obtained an
extension of a $1.9 million U.S. based line
of credit from a financial institution.
Borrowings available under the line of
credit, which matured on July 22, 2003,
bear interest at the rate of prime plus
three percent. On July 21, 2003, the
Company reached an agreement in principle
with the financial institution to extend
the maturity date of the loan until
September 30, 2003, with an additional
extension until November 30, 2003 if
certain milestones regarding minimum
paydowns are achieved (as described below).
The extension agreement is expected to be
signed shortly and will be retroactive to
July 22, 2003. The agreement governing the
U.S. line of credit contains covenants that
impose limitations on the Company
(including the requirement that any
acquisitions be approved by the financial
institution), limits the Companys
borrowings based upon a borrowing base
formula tied to the carrying value of the
Companys accounts receivable and inventory
from time to time, and requires the Company
to be in compliance with certain financial
covenants. If the Company fails to make
required payments, or if the Company fails
to comply with the various covenants
contained in its credit agreement, the
lender may be able to accelerate the
maturity of any outstanding indebtedness.
As of June 30, 2003, the Company was not in
compliance with the tangible net worth and
leverage covenants contained in the U.S.
line of credit agreement. The Company does
not anticipate, however that such failure
to comply with those financial covenants
will prevent the Company from signing the
extension agreement with the financial
institution, and, although there can be no
assurance, the Company expects that the
extension agreement will modify the
covenants such that the Company will not
violate the covenants at June 30, 2003.

On July 21, 2003, the Company reached an
agreement in principle with its lender to
extend the maturity date of the line of
credit until September 30, 2003, with an
additional extension until November 30,
2003 if the Company is able to reduce the
outstanding line of credit by at least $1.0
million by that date. In connection with
this most recent extension, the Company
anticipates that the interest rate on the
line of credit will be increased to prime +
4% for the period from July 22, 2003 until
September 30, 2003 and prime + 6% for the
period between September 30, 2003 and
November 30, 2003. The extension agreement
is expected to be signed within the next week
and will be retroactive to July 22, 2003.
The Company is currently seeking new
financing to replace the existing line of
credit and exploring its options to reduce
the outstanding line of credit by at least
$1.0 million by September 30, 2003.
However, while the Company expects to be
able to replace the line of credit with a
new line of credit, there can be no
assurance that it will be able to do so.

7



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##### Table of Contents



AESP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Additionally, the Company may not meet its financial covenants in future periods unless its results of operations substantially improve. Further, the lender
has advised that at this time that it will not renew the line of credit. While the Company expects to be able to find alternative financing, there can be no
assurance that it will be able to do so. The Company believes that its internally generated cash flow from operations including expected operating cost
reductions, combined with its lines of credit, will be sufficient to fund current operations for the next twelve months, provided efforts to increase
working capital and to obtain a replacement U.S. line of credit are successful. The Company may also consider selling debt or equity securities in order to
meet current and future working capital requirements or to fund future acquisitions. If the Company is unable to replace its U.S. line of credit, generate
sufficient cash flow from operations or in some other fashion, or reduce expenses to meet its operating requirements, its operations will be materially and
adversely affected.

3. Earnings (loss) per share

The following reconciles the components of the earnings (loss) per share (EPS) computation (in thousands, except per share amount):

|                                                                             |                           |   |                                     |   |              |  |           |   |             |   |               |   |           |   |      |   |      |  |       |   |  |   |       |   | 
|---------------------------------------------------------------------------- | ------------------------- | - | ----------------------------------- | - | ------------ |  | --------- | - | ----------- | - | ------------- | - | --------- | - | ---- | - | ---- |  | ----- | - |  | - | ----- | - | 
|                                                                             |                           |   | FOR THE THREE MONTHS ENDED JUNE 30, |   |              |  |           |   |             |   |              
|                                                                             |                           |   |                                     |   |              |  |           |   |             |   |              
|                                                                             |                           |   |                                     |   |              |  | 2003      |   |             |   |               |   |           |   |      |   | 2002 |  |       |   | 
|                                                                             |                           |   |                                     |   |              |  |           |   |            
|                                                                             |                           |   | Loss                                |   | Shares       |  | Per-Share |   | Loss        |   | Shares        |   | Per-Share
|                                                                             |                           |   | (Numerator)                         |   | Denominator) |  | Amount    |   | (Numerator) |   | (Denominator) |   | Amount   
|                                                                             |                           |   |                                     |   |              |  |           |   |             |   |               |   |          
|Earnings (loss) per common share:                                            |                           |   |                                     |   |              |  |           |   |             |   |               |   |           |   |      |   |      |  |       |   |  |   |       |  
|Net income (loss)                                                            |                           | $ | (499                                | ) |              |  | 5,939     |   |             | $ | (0.08         | ) |           | $ | (712 | ) |      |  | 4,597 |   |  | $ | (0.15 | )
|                                                                             | Preferred stock dividends |   |                                     |  |              |  |           |  |             |   |               |  |           |   |      |  |      |  |       |  |  |   |       |  | 
|                                                                             |                           |   |                                     |   |              |  |           |   |             |   |               |   |           |   |      |   |      |  |       |   |  |   |       |  
|Net income (loss) applicable to common shareholders                          |                           |   | (499                                | ) |              |  | 5,939     |   |             |   | (0.08         | ) |           | $ | (712 | ) |      |  | 4,597 |   |  | $ | (0.15 | )
|Effect of dilutive securities:                                               |                           |   |                                     |   |              |  |           |   |             |   |               |   |           |   |      |   |      |  |       |   |  |   |       |  
|                                                                             | Stock options             |   |                                     |  |              |  |           |  |             |   |               |  |           |   |      |  |      |  |       |  |  |   |       |  | 
|                                                                             |                           |   |                                     |   |              |  |           |   |             |   |               |   |           |   |      |   |      |  |       |   |  |   |       |  
|Net income (loss) applicable to common shareholders plus assumed conversions |                           | $ | (499                                | ) |              |  | 5,939     |   |             | $ | (0.08         | ) |           | $ | (712 | ) |      |  | 4,597 |   |  | $ | (0.15 | )
|                                                                             |                           |   |                                     |   |              |  |           |   |             |   |               |   |           |   |      |   |      |  |       |   |  |   |       |  

|                                                                             |                           |   |                                   |     |              |  |           |   |             |   |               |   |           |   |      |   |      |  |       |   |  |   |       |   | 
|---------------------------------------------------------------------------- | ------------------------- | - | --------------------------------- | --- | ------------ |  | --------- | - | ----------- | - | ------------- | - | --------- | - | ---- | - | ---- |  | ----- | - |  | - | ----- | - | 
|                                                                             |                           |   | FOR THE
SIX MONTHS ENDED JUNE 30, |     |              |  |           |   |             |   |              
|                                                                             |                           |   |                                   |     |              |  |           |   |             |   |              
|                                                                             |                           |   |                                   |     |              |  | 2003      |   |             |   |               |   |           |   |      |   | 2002 |  |       |   | 
|                                                                             |                           |   |                                   |     |              |  |           |   |            
|                                                                             |                           |   | Loss                              |     | Shares       |  | Per-Share |   | Loss        |   | Shares        |   | Per-Share
|                                                                             |                           |   | (Numerator)                       |     | Denominator) |  | Amount    |   | (Numerator) |   | (Denominator) |   | Amount   
|                                                                             |                           |   |                                   |     |              |  |           |   |             |   |               |   |          
|Earnings (loss) per common share:                                            |                           |   |                                   |     |              |  |           |   |             |   |               |   |           |   |      |   |      |  |       |   |  |   |       |  
|Net income (loss)                                                            |                           | $ | (568                              | )   |              |  | 5,831     |   |             | $ | (0.10         | ) |           | $ | (707 | ) |      |  | 4,509 |   |  | $ | (0.16 | )
|                                                                             | Preferred stock dividends |   |                                   | (12 | )            |  |           |  |             |   |               |  |           |   |      |  |      |  |       |  |  |   |       |  | 
|                                                                             |                           |   |                                   |     |              |  |           |   |             |   |               |   |           |   |      |   |      |  |       |   |  |   |       |  
|Net income (loss) applicable to common shareholders                          |                           |   | (580                              | )   |              |  | 5,831     |   |             |   | (0.10         | ) |           | $ | (707 | ) |      |  | 4,509 |   |  | $ | (0.16 | )
|Effect of dilutive securities:                                               |                           |   |                                   |     |              |  |           |   |             |   |               |   |           |   |      |   |      |  |       |   |  |   |       |  
|                                                                             | Stock options             |   |                                   |    |              |  |           |  |             |   |               |  |           |   |      |  |      |  |       |  |  |   |       |  | 
|                                                                             |                           |   |                                   |     |              |  |           |   |             |   |               |   |           |   |      |   |      |  |       |   |  |   |       |  
|Net income (loss) applicable to common shareholders plus assumed conversions |                           | $ | (580                              | )   |              |  | 5,831     |   |             | $ | (0.10         | ) |           | $ | (707 | ) |      |  | 4,509 |   |  | $ | (0.16 | )
|                                                                             |                           |   |                                   |     |              |  |           |   |             |   |               |   |           |   |      |   |      |  |       |   |  |   |       |  

Vested options to purchase 2,508,000 shares of common stock at $0.81  $3.69 per share, were outstanding at June 30, 2003, but were not included in the computation of diluted
EPS for the three and six months ended June 30, 2003, as they are anti-dilutive due to the Companys loss.

Vested options to purchase 20,000 shares, 91,450 shares, 332,401 shares and 19,000 shares of common stock at $3.69, $2.13, $1.75 and $2.86 per share, respectively, were
outstanding during 2002, but were not included in the computation of diluted EPS as they are anti-dilutive due to the Companys loss.

8



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##### Table of Contents



AESP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

4. Goodwill

The Company adopted the provisions of SFAS No. 142
on January 1, 2002. Upon adoption of SFAS No. 142,
the Company was required to evaluate its existing
intangible assets and goodwill that were acquired in
prior purchase business combinations and to make any
necessary reclassifications in order to conform with
new criteria for recognition apart from goodwill.

In connection with the transitional goodwill
impairment evaluation, SFAS No. 142 required the
Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the
date of adoption. To accomplish this, the Company
identified its reporting units and determined the
carrying value of each reporting unit by assigning
the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting
units as of the date of adoption. Based on projected
future cash flows of each of the Companys reporting
units for which it carried goodwill on its books and
records, and a comparison to each reporting unit
carrying amount as of January 1, 2002, the Company
did not record any goodwill impairment. In addition,
the Company performed its required annual impairment
test of goodwill as of December 31, 2002 and did not
record any goodwill impairment. As of June 30, 2003,
the Company has approximately $643,000 of
unamortized goodwill arising from prior years
acquisitions of its Lanse and Intelek reporting
units, both of which reported net income for the six
months ended June 30, 2003.

5. Common Stock

The Companys common stock is listed on the Nasdaq
SmallCap Market and is required to comply with the
Nasdaq SmallCap Marketplace Rules. One of those
rules requires that the Company obtain shareholder
approval of issuances of more than 20% of the
Companys outstanding shares of common stock before
issuance. The Companys 2002 private placement, in
which shares of the Companys authorized but
unissued common stock equal to 24.8% of the
Companys then outstanding common stock were issued,
did not comply with the Nasdaq Marketplace Rules. In
order to correct the Companys violation of the
rule, the Company, effective January 16, 2003, with
the consent of Nasdaq, exchanged 230,000 shares of
common stock sold in the private placement for an
equal number of the Companys Series A preferred
stock. The preferred stock, which had a 10% per
annum coupon and required the Company to pay a
dividend of at least 5% for such period as it was
outstanding, was automatically converted back into
common stock upon the Companys shareholders
approval of the common share issuances at a special
shareholders meeting held on March 26, 2003.

9



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##### Table of Contents



AESP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

6. Operating Segments

The Companys operations, consisting of sales of
network and connectivity products, are handled by each of its subsidiaries
operating in their respective countries. Accordingly, management operates
its business based on a geographic basis, whereby sales and related data
is attributed to the AESP entity that generates such revenues. Segment
information is presented below for each significant geographic region (in
thousands).

|                                     |                                 |   |               |       |                |   |             |       |       |   |        |   |  |   |        |       | 
|------------------------------------ | ------------------------------- | - | ------------- | ----- | -------------- | - | ----------- | ----- | ----- | - | ------ | - |  | - | ------ | ----- | 
|                                     |                                 |   | United States |       | Western Europe |   | Elimination |       | Total
|                                     |                                 |   |               |       |                |   |             |       |      
|Three months ended June 30, 2003:    |                                 |   |               |       |                |   |             |       |       |   |        |   |  |   |        |      
|Sales to unaffiliated customers      |                                 | $ | 3,663         |       |                | $ | 3,738       |       |       | $ |       |   |  | $ | 7,401  |      
|Transfers between geographical areas |                                 |   | 688           |       |                |   | 48          |       |       |   | (736   | ) |  |   |       |      
|                                     |                                 |   |               |       |                |   |             |       |       |   |        |   |  |   |        |      
|Total sales                          |                                 |   | 4,351         |       |                |   | 3,786       |       |       |   | (736   | ) |  |   | 7,401  |      
|                                     |                                 |   |               |       |                |   |             |       |       |   |        |   |  |   |        |      
|Operating income (loss)              |                                 |   | (332          | )     |                |   | (338        | )     |       |   | (5     | ) |  |   | (675   | )    
|Income (loss) before income taxes    |                                 |   | (334          | )     |                |   | (291        | )     |       |   | (5     | ) |  |   | (630   | )    
|Identifiable assets                  |                                 |   | 7,328         |       |                |   | 7,227       |       |       |   | (1,461 | ) |  |   | 13,094 |      
|                                    
|Three months ended June 30, 2002:    |                                 |   |               |       |                |   |             |       |       |   |        |   |  |   |        |      
|                                     | Sales to unaffiliated customers |   | $             | 3,203 |                |   | $           | 3,592 |       |   | $      |  |  |   | $      | 6,795 | 
|Transfers between geographic areas   |                                 |   | 631           |       |                |   | 494         |       |       |   | (1,125 | ) |  |   |       |      
|                                     |                                 |   |               |       |                |   |             |       |       |   |        |   |  |   |        |      
|Total sales                          |                                 |   | 3,834         |       |                |   | 4,086       |       |       |   | (1,125 | ) |  |   | 6,795  |      
|                                     |                                 |   |               |       |                |   |             |       |       |   |        |   |  |   |        |      
|Operating income                     |                                 |   | (571          | )     |                |   | (118        | )     |       |   | (40    | ) |  |   | (729   | )    
|Income (loss) before income taxes    |                                 |   | (624          | )     |                |   | (16         | )     |       |   | (40    | ) |  |   | (680   | )    
|Identifiable assets                  |                                 |   | 7,386         |       |                |   | 8,120       |       |       |   | (2,031 | ) |  |   | 13,475 |      
|                                    
|Six months ended June 30, 2003:      |                                 |   |               |       |                |   |             |       |       |   |        |   |  |   |        |      
|Sales to unaffiliated customers      |                                 | $ | 7,693         |       |                | $ | 7,811       |       |       | $ |       |   |  | $ | 15,504 |      
|Transfers between geographical areas |                                 |   | 1,403         |       |                |   | 166         |       |       |   | (1,569 | ) |  |   |       |      
|                                     |                                 |   |               |       |                |   |             |       |       |   |        |   |  |   |        |      
|Total sales                          |                                 |   | 9,096         |       |                |   | 7,977       |       |       |   | (1,569 | ) |  |   | 15,504 |      
|                                     |                                 |   |               |       |                |   |             |       |       |   |        |   |  |   |        |      
|Operating income (loss)              |                                 |   | (265          | )     |                |   | (415        | )     |       |   | (13    | ) |  |   | (693   | )    
|Income (loss) before income taxes    |                                 |   | (280          | )     |                |   | (354        | )     |       |   | (13    | ) |  |   | (647   | )    
|Identifiable assets                  |                                 |   | 7,328         |       |                |   | 7,227       |       |       |   | (1,461 | ) |  |   | 13,094 |      
|                                    
|Six months ended June 30, 2002:      |                                 |   |               |       |                |   |             |       |       |   |        |   |  |   |        |      
|Sales to unaffiliated customers      |                                 | $ | 7,133         |       |                | $ | 7,148       |       |       | $ |       |   |  | $ | 14,281 |      
|Transfers between geographic areas   |                                 |   | 1,060         |       |                |   | 716         |       |       |   | (1,776 | ) |  |   |       |      
|                                     |                                 |   |               |       |                |   |             |       |       |   |        |   |  |   |        |      
|Total sales                          |                                 |   | 8,193         |       |                |   | 7,864       |       |       |   | (1,776 | ) |  |   | 14,281 |      
|                                     |                                 |   |               |       |                |   |             |       |       |   |        |   |  |   |        |      
|Operating income                     |                                 |   | (687          | )     |                |   | 53          |       |       |   | (25    | ) |  |   | (659   | )    
|Income (loss) before income taxes    |                                 |   | (734          | )     |                |   | 122         |       |       |   | (25    | ) |  |   | (637   | )    
|Identifiable assets                  |                                 |   | 7,386         |       |                |   | 8,120       |       |       |   | (2,031 | ) |  |   | 13,475 |      

Identifiable assets are those assets that are identified
with the operations based in each geographic area. Foreign
sales, including foreign sales of AESP, for the three
months ended June 30, 2003 and 2002, approximated 64% and
61%, respectively, of consolidated revenues. Foreign sales,
including foreign sales of AESP, for the six months ended
June 30, 2003 and 2002, approximated 65% and 62%,
respectively, of consolidated revenues.

No supplier accounted for more than 10% of
consolidated purchases in the three and six months ended
June 30, 2003 and 2002.

Sales by the Companys United States business segment to
its exclusive distributor in Russia, amounted to
approximately 12% of net sales for the six months ended
June 30, 2003. No other customer accounted for more than
10% of net sales in the three and six months ended June 30,
2003 and 2002.

10



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##### Table of Contents



AESP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

7. Warrant Dividend

In June 2003, the Company distributed, to the
holders of its outstanding common stock (the
Warrant Dividend), as of the record date of
April 10, 2003, on a pro-rata basis, common
stock purchase warrants to purchase one share of
common stock for each share owned as of the
record date (the Warrants). The Warrants are
non-transferable. The Warrant exercise period
will commence on the date following the
effectiveness of a registration statement
registering the sale of the shares of common
stock underlying the Warrants (the Warrant
Effective Date) and will continue for a period
of one-year thereafter. The exercise price of
the Warrants will be as follows:



| |  |  | For the 90 day period following the Warrant
Effective Date, the Warrants will be exercisable
at an exercise price of $1.50 per share,                                          
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | For the subsequent 90 day period following the
completion of the 90 day period referred to
above, the Warrants will be exercisable at an
exercise price of $2.50 per share, and
|
| |  |  | For the balance of the term of the Warrants,
the Warrants will be exercisable at an exercise
price of $5.50 per share.                                                         

The Company reserves the right to reduce the
warrant exercise price or increase the term of
the warrants in the sole discretion of its board
of directors.

Any proceeds received by the Company from the
exercise of the Warrants will be used for
general working capital purposes or for
acquisitions.

The Company has filed a registration statement
with the S.E.C. to register the issuance of
shares upon the exercise of the Warrants. The
Companys registration statement has not yet
become effective.

11



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##### Table of Contents



AESP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8. Stock Based Compensation

The Company has granted stock options to key employees and directors
under stock option plans. The Company accounts for these plans under
the recognition and measurement principles of Accounting Principles
Board Opinion No. 25, Accounting For Stock Issued to Employees.
Stock-based employee compensation cost is not reflected in net loss
as all options granted under those plans had an exercise price
greater than or equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the
effect on net loss and earnings per share if the Company had applied
the fair value recognition provisions of SFAS No. 123, Accounting
For Stock-Based Compensation, to stock-based employee compensation
(in thousands, except per share amounts):

|                                                                |                                                                                                                                      |      |      |      |   |   |      |     |  
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ---- | ---- | ---- | - | - | ---- | --- | -
|THREE MONTHS ENDED JUNE 30,                                     |                                                                                                                                      | 2003 |      | 2002
|                                                                |                                                                                                                                      |      |      |     
|Net income (loss) applicable to common shareholders as reported |                                                                                                                                      | $    | (499 | )    |   | $ | (712 | )  
|                                                                | Total stock-based employee compensation expense determined
under fair value based method for all awards, net of
related tax benefits |      |      | (33  | ) |   |      | (45 | )
|                                                                |                                                                                                                                      |      |      |      |   |   |      |    
|Pro forma net income (loss) applicable to common shareholders   |                                                                                                                                      | $    | (532 | )    |   | $ | (757 | )  
|                                                                |                                                                                                                                      |      |      |      |   |   |      |    
|                                                               
|Basic income (loss) per share as reported                       |                                                                                                                                      | $    | (.08 | )    |   | $ | (.15 | )  
|                                                                |                                                                                                                                      |      |      |      |   |   |      |    
|Basic income (loss) per share  pro forma                       |                                                                                                                                      | $    | (.09 | )    |   | $ | (.16 | )  
|                                                                |                                                                                                                                      |      |      |      |   |   |      |    
|                                                               
|Diluted income (loss) per share as reported                     |                                                                                                                                      | $    | (.08 | )    |   | $ | (.15 | )  
|                                                                |                                                                                                                                      |      |      |      |   |   |      |    
|Diluted income (loss) per share  pro forma                     |                                                                                                                                      | $    | (.09 | )    |   | $ | (.16 | )  
|                                                                |                                                                                                                                      |      |      |      |   |   |      |    

|                                                                |                                                                                                                                      |      |      |      |   |   |        |      |  
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ---- | ---- | ---- | - | - | ------ | ---- | -
|SIX MONTHS ENDED JUNE 30,                                       |                                                                                                                                      | 2003 |      | 2002
|                                                                |                                                                                                                                      |      |      |     
|Net income (loss) applicable to common shareholders as reported |                                                                                                                                      | $    | (580 | )    |   | $ | (707   | )   
|                                                                | Total stock-based employee compensation expense determined
under fair value based method for all awards, net of
related tax benefits |      |      | (284 | ) |   |        | (533 | )
|                                                                |                                                                                                                                      |      |      |      |   |   |        |     
|Pro forma net income (loss) applicable to common shareholders   |                                                                                                                                      | $    | (864 | )    |   | $ | (1,240 | )   
|                                                                |                                                                                                                                      |      |      |      |   |   |        |     
|                                                               
|Basic income (loss) per share as reported                       |                                                                                                                                      | $    | (.10 | )    |   | $ | (.16   | )   
|                                                                |                                                                                                                                      |      |      |      |   |   |        |     
|Basic income (loss) per share  pro forma                       |                                                                                                                                      | $    | (.15 | )    |   | $ | (.28   | )   
|                                                                |                                                                                                                                      |      |      |      |   |   |        |     
|                                                               
|Diluted income (loss) per share as reported                     |                                                                                                                                      | $    | (.10 | )    |   | $ | (.16   | )   
|                                                                |                                                                                                                                      |      |      |      |   |   |        |     
|Diluted income (loss) per share  pro forma                     |                                                                                                                                      | $    | (.15 | )    |   | $ | (.28   | )   
|                                                                |                                                                                                                                      |      |      |      |   |   |        |     

SFAS No. 123 requires the Company to provide pro forma
information regarding net income and net income per share
as if compensation cost for the Companys employee stock
options had been determined in accordance with the fair
value based method in SFAS No. 123. The Company estimates
the fair value of each stock option by using the
Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in the six
months ended June 30, 2003 and 2002, respectively: no
dividend yield percent; expected volatility of 111.6% and
115.0%; weighted average risk-free interest rates of
approximately 4.8% and 4.8%; and expected lives of 5-9 and
5-9 years. There were no stock option grants in the three
months ended June 30, 2003 and 2002.

12



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##### Table of Contents



AESP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

9. Recent Accounting Pronouncements

In January 2003, the Financial
Accounting Standards Board
(FASB) issued FASB
Interpretation No. 46 (FIN
46), Consolidation of
Variable Interest Entities.
FIN 46 clarifies the
application of Accounting
Research Bulletin No. 51,
Consolidated Financial
Statements, to certain
entities in which equity
investors do not have the
characteristics of a
controlling financial interest
or do not have sufficient
equity at risk for the entity
to finance its activities
without additional subordinated
financial support from other
parties. FIN 46 applies
immediately to variable
interest entities (VIEs)
created after January 31, 2003,
and to VIEs in which an
enterprise obtains an interest
after that date. It applies in
the first fiscal year or
interim period beginning after
June 15, 2003, to VIEs in
which an enterprise holds a
variable interest that it
acquired before February 1,
2003. FIN 46 applies to public
enterprises as of the beginning
of the applicable interim or
annual period. The adoption of
FIN 46 is not expected to have
a material impact on the
Companys consolidated
financial position, liquidity
or results of operations.

In April 2003, the FASB issued
SFAS 149 Amendment of
Statement 133 on Derivative
Instruments and Hedging
Activities, effective for
contracts entered into or
modified after June 30, 2003,
except as stated below and for
hedging relationships
designated after June 30, 2003.
In addition, except as stated
below, all provisions of this
Statement should be applied
prospectively. The provisions
of this Statement that relate
to Statement 133 Implementation
Issues that have been effective
for fiscal quarters that began
prior to June 15, 2003, should
continue to be applied in
accordance with their
respective effective dates. In
addition, paragraph 7(a) and
23(a), which relate to forward
purchases or sales of
then-issued securities or other
securities that do not yet
exist, should be applied to
both existing contracts and new
contracts entered into after
June 30, 2003. The Company does
not participate in such
transactions, however, it is
evaluating the effect, if any,
of this new pronouncement and
will adopt SFAS 149 within the
prescribed time.

In May 2003, the FASB issued
SFAS 150 Accounting for
Certain Financial Instruments
with Characteristics of Both
Liabilities and Equity,
effective for financial
instruments entered into or
modified after May 31, 2003,
and otherwise is effective at
the beginning of the first
interim period beginning after
June 15, 2003. This Statement
establishes standards for how
an issuer classifies and
measures certain financial
instruments with
characteristics of both
liabilities and equity. It
requires that an issuer
classify a freestanding
financial instrument that is
within its scope as a liability
(or an asset in some
circumstances). Many of those
instruments were previously
classified as equity. Some of
the provisions of this
Statement are consistent with
the current definition of
liabilities in FASB Concepts
Statement No. 6, Elements of
Financial Statements. The
Company does not participate in
such transactions, however, it
is evaluating the effect, if
any, of this new pronouncement
and will adopt FASB 150 within
the prescribed time.

13



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##### Table of Contents






Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE INFORMATION SET FORTH IN MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS IN THE FORM 10-K.

Critical Accounting Policies

The Companys consolidated financial statements contained in the Form 10-K
includes a summary of the significant accounting policies and methods used in
the preparation of the financial statements. Management believes the following
critical accounting policies affect the significant judgments and estimates
used in the preparation of its financial statements.

Revenue Recognition

The Companys customers include original equipment manufacturers,
distributors and other value added resellers. Sales are generally not made
directly to end-users of the Companys products. Revenues are recognized at the
time of shipment to customers, by which time the customer has agreed to
purchase the merchandise, is obligated to pay the fixed, reasonably collectible
sales price and ownership and risk of loss has passed to the customer.

The Companys sales are not subject to rights of future return. Warranties
are provided on certain of the Companys networking products for periods
ranging from five years to lifetime. Warranty claims have historically been
nominal. The Company estimates provisions for sales returns, allowances,
product warranties and losses on accounts receivable.

The Companys credit policy provides for an evaluation of the credit
worthiness of new customers and for continuing evaluations of existing
customers financial condition and credit worthiness. Although the Company
generally does not require collateral, letters of credit or deposits may be
required from customers.

The Company includes shipping and handling fees billed to customers as
revenues. Costs of sales include outbound freight and preparing customers
orders for shipment. Included in net sales in the accompanying condensed
consolidated statements of operations for the three months ended June 30, 2003,
and 2002 are shipping and handling fees of $236,000 and $167,000, respectively.
Included in net sales in the accompanying condensed consolidated statements of
operations for the six months ended June 30, 2003, and 2002 are shipping and
handling fees of $449,000 and $358,000, respectively.

Use of Estimates

Managements discussion and analysis of financial condition and results of
operations is based upon the Companys consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
require management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, and expenses, and related disclosure
of contingent assets and liabilities. On an ongoing basis, management evaluates
these estimates, including those related to allowances for doubtful accounts
receivable and the carrying value of inventories and long-lived assets.
Management bases these estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying value
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.

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##### Table of Contents



Stock-Based Compensation

The Company has granted stock options to key employees and directors under
stock option plans. The Company accounts for these plans under the recognition
and measurement principles of Accounting Principles Board Opinion No. 25,
Accounting For Stock Issued to Employees. Stock-based employee compensation
cost is not reflected in net loss as all options granted under those plans had
an exercise price greater than or equal to the market value of the underlying
common stock on the date of grant. The following table illustrates the effect
on net loss and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting For Stock-Based
Compensation, to stock-based employee compensation (in thousands, except per
share amounts):

|                                                                |                                                                                                                                      |      |      |      |   |   |      |     |  
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ---- | ---- | ---- | - | - | ---- | --- | -
|THREE MONTHS ENDED JUNE 30,                                     |                                                                                                                                      | 2003 |      | 2002
|                                                                |                                                                                                                                      |      |      |     
|Net income (loss) applicable to common shareholders as reported |                                                                                                                                      | $    | (499 | )    |   | $ | (712 | )  
|                                                                | Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax benefits |      |      | (33  | ) |   |      | (45 | )
|                                                                |                                                                                                                                      |      |      |      |   |   |      |    
|Pro forma net income (loss) applicable to common shareholders   |                                                                                                                                      | $    | (532 | )    |   | $ | (757 | )  
|                                                                |                                                                                                                                      |      |      |      |   |   |      |    
|                                                               
|Basic income (loss) per share as reported                       |                                                                                                                                      | $    | (.08 | )    |   | $ | (.15 | )  
|                                                                |                                                                                                                                      |      |      |      |   |   |      |    
|Basic income (loss) per share  pro forma                       |                                                                                                                                      | $    | (.09 | )    |   | $ | (.16 | )  
|                                                                |                                                                                                                                      |      |      |      |   |   |      |    
|                                                               
|Diluted income (loss) per share as reported                     |                                                                                                                                      | $    | (.08 | )    |   | $ | (.15 | )  
|                                                                |                                                                                                                                      |      |      |      |   |   |      |    
|Diluted income (loss) per share  pro forma                     |                                                                                                                                      | $    | (.09 | )    |   | $ | (.16 | )  
|                                                                |                                                                                                                                      |      |      |      |   |   |      |    

|                                                                |                                                                                                                                      |      |      |      |   |   |        |      |  
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ---- | ---- | ---- | - | - | ------ | ---- | -
|SIX MONTHS ENDED JUNE 30,                                       |                                                                                                                                      | 2003 |      | 2002
|                                                                |                                                                                                                                      |      |      |     
|Net income (loss) applicable to common shareholders as reported |                                                                                                                                      | $    | (580 | )    |   | $ | (707   | )   
|                                                                | Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax benefits |      |      | (284 | ) |   |        | (533 | )
|                                                                |                                                                                                                                      |      |      |      |   |   |        |     
|Pro forma net income (loss) applicable to common shareholders   |                                                                                                                                      | $    | (864 | )    |   | $ | (1,240 | )   
|                                                                |                                                                                                                                      |      |      |      |   |   |        |     
|                                                               
|Basic income (loss) per share as reported                       |                                                                                                                                      | $    | (.10 | )    |   | $ | (.16   | )   
|                                                                |                                                                                                                                      |      |      |      |   |   |        |     
|Basic income (loss) per share  pro forma                       |                                                                                                                                      | $    | (.15 | )    |   | $ | (.28   | )   
|                                                                |                                                                                                                                      |      |      |      |   |   |        |     
|                                                               
|Diluted income (loss) per share as reported                     |                                                                                                                                      | $    | (.10 | )    |   | $ | (.16   | )   
|                                                                |                                                                                                                                      |      |      |      |   |   |        |     
|Diluted income (loss) per share  pro forma                     |                                                                                                                                      | $    | (.15 | )    |   | $ | (.28   | )   
|                                                                |                                                                                                                                      |      |      |      |   |   |        |     

SFAS No. 123 requires the Company to provide pro forma information
regarding net income and net income per share as if compensation cost for the
Companys employee stock options had been determined in accordance with the
fair value based method in SFAS No. 123. The Company estimates the fair value
of each stock option by using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in the six months ended
June 30, 2003 and 2002, respectively: no dividend yield percent; expected
volatility of 111.6% and 115.0%; weighted average risk-free interest rates of
approximately 4.8% and 4.8%; and expected lives of 5-9 and 5-9 years. There
were no stock option grants in the three months ended June 30, 2003 and 2002.

15



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##### Table of Contents



Results of Operations

Three months ended June 30, 2003 and 2002

For the three months ended June 30, 2003, the Company recorded net sales
of $7.4 million, an increase of approximately $606,000 or 8.9%, compared to net
sales of $6.8 million for the three months ended June 30, 2002. The most
significant factor in the sales increase was the lower value of the U.S. dollar
during the three months ended June 30, 2003 compared to the same period in
2002. The conversion of local currency sales in Western Europe to their U.S.
dollar equivalent yielded additional sales of $499,000 in the current
quarter, compared to the second quarter of 2002. After giving effect to the
currency conversion differences, sales increases were posted by the Companys
U.S. and Czech Republic operations in the amounts of $461,000 and $109,000,
respectively. The Companys German, Norwegian and Swedish offices recorded
sales declines of $9,000, $345,000 and $109,000, respectively, net of the
currency conversion. In the United States, sales to the Companys Russian
distributor, which is its largest customer, increased $360,000 during the
quarter ended June 30, 2003, compared to the quarter ended June 30, 2002, from
$566,000 to $926,000. Otherwise, sales in the U.S. were relatively flat from
quarter to quarter as the
Company was able to offset price reductions for competitive reasons by
increasing unit volumes. The Companys Norwegian and Swedish markets were
adversely affected by the weak economy in Scandanavia, which led to reductions
in unit sales. Sales prices in those markets were relatively unchanged.
Further, the Norwegian markets unit volume suffered from a competitive
situation involving former employees who established a competing company.

Cost of sales for the three months ended June 30, 2003 was $5.3 million,
compared to cost of sales of $4.9 million for the three months ended June 30,
2002. Consistent with the rise in sales, this increase of $384,000 in cost of
sales was the result of the weakening U.S. dollar. The conversion of local
currency cost of sales resulted in an increase of approximately $402,000 solely
related to the change in exchange rates from the second quarter of 2002 to the
same period in 2003.

The increases recorded in sales and cost of sales led to an increase in
gross profit in the current quarter of $222,000 and a slight rise in gross
profit percentage, from 28.4% for the three months ended June 30, 2002 to 29.1%
for the three months ended June 30, 2003. In the U.S., the gross profit
percentage increased from 23.4% last year to 28.3% in the current quarter. The
increase was primarily due to a significant reduction in operations at the
Companys Pennsylvania facility, which is expected to yield expense savings of
approximately $400,000 in 2003. On a local European office level, significant
changes in gross profit percentage (net of currency conversion differences)
were recorded by each office. The German gross profit percentage declined from
28.3% last year to 19.6% in the current quarter. This variation was due to
additional products introduced by the new sales team, which carry a lower gross
profit, as well as the general effects of the economic slowdown in Germany ,
which led to reductions in sales prices to counter competitive situations. The
Czech Republic gross profit percentage declined from 32.5% last year to 26.9%
in the current quarter as a result of a change in the sales mix to lower margin
products in the second quarter of 2003. Norways gross profit percentage rose
from 33.5% last year to 39.9% in the current quarter due to reductions in
products costs coupled with steady sales prices. The gross profit in Sweden
declined from 37.9% last year to 30.5% in 2003 as a result of a higher
concentration in 2003 of sales of relatively lower margin items. No
provisions for inventory obsolescence were recorded in the quarters ended June
30, 2003 and 2002.

Selling, general and administrative (S,G & A) expenses increased from
$2.7 million in the three months ended June 30, 2002 to $2.9 million in the
three months ended June 30, 2003. Again, consistent with other lines in the
income statement, the increase in S,G & A expenses was fueled primarily by the
change in the value of the U.S. dollar compared to foreign currencies and the
effect of that change when converting to U.S. dollar equivalents. For the
second quarter of 2003, that effect led to an increase in S,G & A expenses of
approximately $216,000 when compared to the second quarter of 2002. After
accounting for the currency change, S,G & A expenses were relatively constant
on a consolidated and local office level. Generally, increases in insurance
costs and sales and marketing expenses, including the addition of a new sales
team in Germany, were offset by decreases in the non-sales workforce, both in
the U.S. and overseas, along with their related expenses.

Neither second quarter period contains amortization of goodwill. The
amortization of intangible assets was discontinued on January 1, 2002 as the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. SFAS 142 requires, among other things,
that companies no longer amortize goodwill, but instead test goodwill for
impairment at least annually. At December 31, 2002, the Company completed its
annual goodwill impairment test, determining that it had no impairment of
goodwill at that date. The Company will continue to assess the value of its
goodwill during 2003 and future periods in accordance with applicable accounting
rules.

As a result of the above factors, the loss from operations for the three
months ended June 30, 2003 was $675,000, compared to a loss from operations of
$729,000 for the three months ended June 30, 2002.

16



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##### Table of Contents



Interest, net for the three months ended June 30, 2003 was relatively
unchanged from the amount recorded for the second quarter last year. For the
current quarter, the Company recorded interest expense of $50,000 and no
interest income. For the three months ended June 30, 2002, the Company posted
interest expense of $47,000 and interest income of $5,000.

Other income increased from $91,000 for the three months ended June 30,
2002 to $95,000 for the three months ended June 30, 2003. For the second
quarter of 2002, other income consisted primarily of $71,000 recorded as
exchange rate gains due to the weakness of the U.S. dollar against foreign
currencies in the countries where the Company conducts operations, namely
Norway, Sweden, Germany and the Czech Republic. For 2003, other income
consisted primarily of $42,000 in exchange rate gains and $18,000 recorded on
the sale of marketable equity securities.

The loss before income taxes for the three months ended June 30, 2003 was
$630,000, compared to a loss before income taxes of $680,000 for the three
months ended June 30, 2002.

The credit for income taxes recorded for the three months ended June 30,
2003 consists primarily of the resolution of a $155,000 provision recorded in
2002 as a preliminary assessment for an income tax audit at the Companys
German subsidiary. The audit was completed in the second quarter of 2003 and
the final assessment of $25,000, which the Company has paid, was less than
anticipated. For the second quarter of 2002 a tax provision was recorded on
those European subsidiaries that recorded profitable operations for that
period, Norway and the Czech Republic. Realization of substantially all of the
Companys deferred tax assets resulting from the available net operating loss
carryforwards and other net temporary differences is not considered more likely
than not and accordingly a valuation allowance has been provided for the full
amount of such assets. The Company anticipates that its consolidated effective
tax rate in future periods will be impacted by which of its businesses are
profitable in any such future period and if the Company will be able to take
advantage of its U.S. net operating loss carry forwards to affect taxable
income in such periods.

As a result of the foregoing factors, the Company incurred a net loss of
$499,000 for the three months ended June 30, 2003, compared to a net loss of
$712,000 for the three months ended June 30, 2002. For the three months ended
June 30, 2003, the loss per common share, both basic and diluted was $.08,
compared to a basic and diluted loss per common share of $.15 for the three
months ended June 30, 2002. Weighted average shares outstanding were 5,939,000
(basic and diluted) for the three months ended June 30, 2003 and 4,597,000
(basic and diluted) for the three months ended June 30, 2002.

Six months ended June 30, 2003 and 2002

For the six months ended June 30, 2003, the Company recorded net sales of
$15.5 million, an increase of approximately $1.2 million or 8.6%, compared to
net sales of $14.3 million for the six months ended June 30, 2002. The most
significant factor in the sales increase was the lower value of the U.S. dollar
during the six months ended June 30, 2003, compared to the same period in 2002.
The conversion of local currency sales in Western Europe to their U.S. dollar
equivalent yielded additional sales of $1,326,000 in the current six month
period, compared to the same period of 2002. After giving effect to the
currency conversion differences, sales increases were posted by the Companys
U.S., German and Czech Republic operations in the amounts of $560,000, $146,000
and $141,000, respectively. The Companys Norwegian and Swedish offices
recorded sales declines of $758,000 and $192,000, respectively, net of the
currency conversion. In the United States, sales to the Companys Russian
distributor, which is its largest customer, increased $470,000 during the six
months ended June 30, 2003, compared to the six months ended June 30, 2002,
from $1.7 million to $2.2 million. Otherwise, sales in the U.S. were relatively
flat period to period as the Company was able to offset price reductions for
competitive reasons by increasing unit volumes. The Companys German operations
benefited in the current six months from the employment of a new sales team in mid 2002,
thereby increasing its customer base and product line. The Companys Norwegian
and Swedish markets were adversely affected by the weak economy in Scandanavia,
which led to reductions in unit sales. Sales prices in those markets were
relatively unchanged. Further, the Norwegian markets unit volume suffered from
a competitive situation involving former employees who established a competing
company.

Cost of sales for the six months ended June 30, 2003 was $10.6 million,
compared to cost of sales of $9.9 million for the six months ended June 30,
2002. Consistent with the rise in sales, this increase of $739,000 in cost of
sales was the result of the weakening U.S. dollar. The conversion of local
currency cost of sales resulted in an increase of approximately $962,000 solely
related to the change in exchange rates from the first six months of 2002 to
the same period in 2003.

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The increases recorded in sales and cost of sales led to an increase in
gross profit in the current quarter of $484,000 and a slight rise in gross
profit percentage, from 30.6% for the six months ended June 30, 2002 to 31.4%
for the six months ended June 30, 2003. In the U.S., the gross profit
percentage increased from 27.3% last year to 31.0% in the current six month
period. The increase was primarily due to a significant reduction in operations
at the Companys Pennsylvania facility, which is expected to yield expense
savings of approximately $400,000 in 2003. On a local European office level,
significant changes in gross profit percentage (net of currency conversion
differences) were recorded by the German and Czech Republic offices. The German
gross profit percentage declined from 34.1% last year to 24.2% in the current
quarter. This variation was due to additional products introduced by the new
sales team, which carry a lower gross profit, as well as the general effects of
the economic slowdown in Germany , which led to reductions in sales prices to
counter competitive situations. The Czech Republic gross profit percentage
declined from 28.5% last year to 24.6% in the current quarter as a result of a
change in the sales mix to lower margin products in the six months ended June
30, 2003. No provisions for inventory obsolescence were recorded in the six
months ended June 30, 2003 and 2002.

Selling, general and administrative (S,G & A) expenses increased from
$5.0 million in the six months ended June 30, 2002 to $5.6 million in the six
months ended June 30, 2003. Consistent with other lines in the income
statement, the increase in S,G & A expenses was fueled primarily by the change
in the value of the U.S. dollar compared to foreign currencies and the effect
of that change when converting to U.S. dollar equivalents. For the first six
months of 2003, that effect led to an increase in S,G & A expenses of
approximately $504,000 when compared to the first six months of 2002. After
accounting for the currency change, S,G & A expenses were relatively constant
on a consolidated and local office level. Generally, increases in insurance
costs and sales and marketing expenses, including the addition of a new sales
team in Germany, were offset by decreases in the non-sales workforce, both in
the U.S. and overseas, along with their related expenses.

Neither six month period contains amortization of goodwill. The
amortization of intangible assets was discontinued on January 1, 2002 as the
Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. SFAS 142 requires, among other things,
that companies no longer amortize goodwill, but instead test goodwill for
impairment at least annually. At December 31, 2002, the Company completed its
annual goodwill impairment test, determining that it had no impairment of
goodwill at that date. The Company will continue to assess the value of its
goodwill during 2003 and future periods in accordance with the accounting
rules.

As a result of the above factors, the loss from operations for the six
months ended June 30, 2003 was $693,000, compared to a loss from operations of
$659,000 for the six months ended June 30, 2002.

Interest, net for the six months ended June 30, 2003 was ($88,000)
compared to ($88,000) for the six months ended June 30, 2002. For the current
six months, the Company recorded interest expense of $98,000 and interest
income of $10,000. For the six months ended June 30, 2002, the Company posted
interest expense of $98,000 and interest income of $10,000.

Other income increased from $110,000 for the six months ended June 30,
2002 to $134,000 for the six months ended June 30, 2003. For the first six
months of 2002, other income consisted primarily of $105,000 recorded as
exchange rate gains due to the weakness of the U.S. dollar against foreign
currencies in the countries where the Company conducts operations, namely
Norway, Sweden, Germany and the Czech Republic. For 2003, other income
consisted primarily of $65,000 in exchange rate gains and $18,000 recorded on
the sale of marketable equity securities.

The loss before income taxes for the six months ended June 30, 2003 was
$647,000, compared to a loss before income taxes of $637,000 for the six months
ended June 30, 2002.

The credit for income taxes recorded for the six months ended June 30,
2003 of $79,000 consists primarily of the resolution of a $155,000 provision
recorded in 2002 as a preliminary assessment for an income tax audit at the
Companys German subsidiary. The audit was completed in the second quarter of
2003 and the final assessment of $25,000, which the Company has paid, was less
than anticipated. The remainder of the 2003 amount consists of income taxes
recorded on the Companys Czech Republic operations, which posted a profit in
the 2003 period. For the second quarter of 2002 a tax provision was recorded on
those European subsidiaries that recorded profitable operations for that
period, Norway and the Czech Republic. Realization of substantially all of the
Companys deferred tax assets resulting from the available net operating loss
carryforwards and other net temporary differences is not considered more likely
than not and accordingly a valuation allowance has been provided for the full
amount of such assets. The Company anticipates that its consolidated effective
tax rate in future periods will be impacted by which of its businesses are
profitable in any such future period and if the Company will be able to take
advantage of its U.S. net operating loss carryforwards to affect taxable income
in such periods.

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As a result of the foregoing factors, the Company incurred a net loss of
$568,000 for the six months ended June 30, 2003, compared to a net loss of
$707,000 for the six months ended June 30, 2002. After preferred stock
dividends, the net loss applicable to common shareholders for the six months
ended June 30, 2003 was $580,000. For the six months ended June 30, 2003, the
loss per common share, both basic and diluted was $.10, compared to basic and
diluted income per common share of $.16 for the six months ended June 30, 2002.
Weighted average shares outstanding were 5,831,000 (basic and diluted) for the
six months ended June 30, 2003 and 4,509,000 (basic and diluted) for the six
months ended June 30, 2002.

Liquidity & Capital Resources

Historically, the Company has primarily financed its operations with cash
flow from operations, borrowings under available lines of credit and sales of
equity securities.

At June 30, 2003, the Companys working capital was $1.1 million, a
decrease from working capital of $1.7 million at December 31, 2002. Similarly,
the Companys current ratio was 1.07 at June 30, 2003, compared to 1.18 at
December 31, 2002. The balance sheet accounts with the most significant changes
from December 31, 2002 to June 30, 2003 were the following (in thousands):

|     |  |      |     |      |  |   |       | 
|---- |  | ---- | --- | ---- |  | - | ----- | 
|     |  | 2003 |     | 2002
|     |  |      |     |     
|Cash |  | $    | 584 |      |  | $ | 1,226 | 

Cash declined as funds were used during the first half of 2003 to fund the
Companys operating losses and to finance increases in U.S. inventory of
$170. Funds were also used during 2003 to pay down the U.S. line of credit by
$202.

|                    |  |      |       |      |  |   |       | 
|------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                    |  | 2003 |       | 2002
|                    |  |      |       |     
|Accounts receivable |  | $    | 3,900 |      |  | $ | 4,347 | 

The decrease in accounts receivable was primarily due to the drop in worldwide
sales from the fourth quarter of 2002 ($8,495), compared to the second quarter
of 2003 ($7,401).

|             |  |      |     |      |  |   |     | 
|------------ |  | ---- | --- | ---- |  | - | --- | 
|             |  | 2003 |     | 2002
|             |  |      |     |     
|Other assets |  | $    | 396 |      |  | $ | 122 | 

The increase in other assets was due to a security deposit of $263 paid by the
Companys Norwegian subsidiary to its landlord in 2003.

|                            |  |      |       |      |  |   |       | 
|--------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                            |  | 2003 |       | 2002
|                            |  |      |       |     
|Accounts payable            |  | $    | 5,314 |      |  | $ | 4,499 | 
|Customer deposits and other |  | $    | 227   |      |  | $ | 820   | 

In the first half of 2003, approximately $450 of advance payments received in
2002 from a customer were applied to current year shipments. These deposits had
been utilized in 2002 to reduce accounts payable, therefore the application of
such funds to shipments resulted in an increase in accounts payable as supplier
invoices were received and recorded. Further, in the U.S., accounts payable
increased due to increased purchases of inventory.

|                 |  |      |     |      |  |   |     | 
|---------------- |  | ---- | --- | ---- |  | - | --- | 
|                 |  | 2003 |     | 2002
|                 |  |      |     |     
|Accrued expenses |  | $    | 682 |      |  | $ | 928 | 

The decrease at June 30, 2003 is primarily due to two items. First, in the
U.S., accruals for professional fees were reduced by $130 as related invoices
were received and paid. Secondly, there was a decrease in the liability for the
value-added tax (V.A.T.) in Germany. This V.A.T. liability is offset by a
like asset in accounts receivable due to the goods that are generating the tax
being classified as resale items and therefore, when settled with the local
government in 2003, the tax generated by the vendor invoice is offset by the
tax due from the customer.

|                     |  |      |    |      |  |   |     | 
|-------------------- |  | ---- | -- | ---- |  | - | --- | 
|                     |  | 2003 |    | 2002
|                     |  |      |    |     
|Income taxes payable |  | $    | 28 |      |  | $ | 233 | 

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The decrease in income taxes payable is primarily due to two factors. First in
2002, the Company recorded a provision of $155 as a result of a preliminary
assessment on a tax audit at its German subsidiary. In the second quarter of
2003, the audit was completed and the assessment, which the Company has paid,
was less than anticipated. Accordingly, the provision was adjusted at June 30,
2003. Second, the Companys Czech Republic subsidiary, Intelek, made an
approximately $60 payment in 2003 for income taxes due on 2002 income.

For the six months ended June 30, 2003, $832,000 of cash was used in
operations. The primary reason for the use of cash in 2003 was the net loss of
$568,000, the payment of the Norwegian security deposit of $263,000 and a
reduction of customer deposits and other of $594,000 offset by a decrease in
accounts receivable of $647,000. Net cash provided by investing activities was
$23,000, primarily due to collections on a note receivable of $30,000. Cash of
$184,000 was provided by financing activities, primarily due to line of credit
drawdown by the Companys Norwegian subsidiary offset by a net paydown on the
U.S. line of credit of $202,000. As a result of the foregoing, the Companys
cash position decreased $625,000 between December 31, 2002 and June 30, 2003.
That decrease, combined with a decline of $17,000 attributable to the effects
of exchange rate changes on cash, produced an overall decrease in cash of
$642,000. The Company is continuing efforts to improve its cash position
through personnel and other expense reductions, increasing sales and
collections of accounts receivable and selected inventory reductions.

In January 2003, the Company obtained an extension of a $1.9 million U.S.
based line of credit from a financial institution. Borrowings available under
the line of credit, which matured on July 22, 2003, bear interest at the rate
of prime plus three percent. On July 21, 2003, the Company reached an
agreement in principle with the financial institution to extend the maturity
date of the loan until September 30, 2003, with an additional extension until
November 30, 2003 if certain milestones regarding minimum paydowns are
achieved. The extension agreement is expected to be signed shortly and will be
retroactive to July 22, 2003. See Note 2 of Notes to condensed Consolidated
Financial Statements for information regarding the terms of the most recent
extension. Borrowings under the line of credit are based on specific
percentages of receivables and inventories. The line of credit is secured by a
lien on the Companys U.S. assets, including accounts receivable and
inventories. The line of credit is also guaranteed by the Companys principal
shareholders, who have pledged a portion of the shares of the Companys common
stock that they own to secure their respective guarantees. Under the terms of
the loan agreement, the Company is required to comply with certain affirmative
and negative covenants and to maintain certain financial benchmarks and ratios
during future periods. As of June 30, 2003, the Company was not in compliance
with the tangible net worth and leverage covenants. We do not anticipate,
however that such failure to comply with those financial covenants will prevent
the Company from signing the extension agreement with the financial
institution, and the Company expects to modify those covenants in the extension
agreement such that the Company will not violate those covenants at June 30,
2003. Additionally, the Company may not meet its financial covenants in future
periods unless its results of operations substantially improve.

The Company is obligated to meet certain affirmative, negative and
financial covenants under the agreement with its lender. Affirmative covenants
include a requirement that the Company deliver quarterly and annual financial
statements and borrowing base reports to its lender within prescribed time
periods and provide prompt notice of any material legal proceeding that is
brought against the Company. Negative covenants include an obligation that the
Companys lender approve the creation of new subsidiaries, any liquidations,
any change of control including mergers and disposition of significant assets,
any additional indebtedness for borrowed money over a certain limit, any liens
on assets or any loan guarantees, any acquisitions and any transfers of assets
or loans and advances to an affiliate that would have a material adverse
effect. Financial covenants require the Company to meet a minimum tangible net
worth and a maximum debt to tangible net worth ratio at the end of each fiscal
quarter.

The Company was not in violation of any of the affirmative or negative
covenants contained in the agreement at June 30, 2003. However, the Company
has, in a significant number of recent quarters violated one or both of the
required financial covenants, and anticipates that it may continue to violate
such financial covenants in future quarters if its results of operations do not
substantially improve. While there can be no assurance, the Company believes
that our lender will continue to waive such future financial covenant
violations during future periods. If the Companys lender does not waive such
future covenant violations, and seeks to foreclose on the assets securing the
line of credit, it would have a material and adverse effect on the Companys
business. As of June 30, 2003, $1,691,000 was outstanding under the line of
credit line and $209,000 was available for borrowing based on applicable
borrowing base formulas.

The Companys foreign subsidiaries also have various lines of credits
available for their operations. At June 30, 2003, an aggregate of $1,016,000
was outstanding under these lines of credit and $855,000 was available for
borrowing under these agreements.

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The Company believes that revenue growth requires working capital to
support the increased levels of inventory necessary to meet customer demands
and to support accounts receivable generated from increased sales. The Company
further believes that its internally generated cash flow from operations
combined with the proceeds of the recent private placement of common stock,
combined with borrowings available under its lines of credit, will be
sufficient to fund current operations for the next twelve months, provided the
Companys efforts to increase its working capital and to obtain a replacement
U.S. line of credit are successful. As a result of reducing operations at its
facility in Pennsylvania during the latter part of 2002, the Company expects to
realize expense savings of approximately $400,000 during 2003. Further, the
Company recently announced additional U.S. expense reductions effective July 1,
2003, including across-the-board salary reductions, which are expected to
reduce U.S. overhead by more than $500,000 per annum. The Company may also
consider selling debt or equity securities in order to meet its current and
future working capital requirements or to fund future acquisitions, including
shares issuable upon the exercise of the warrants issued in the Warrant
Dividend (see Note 7 of Notes to Condensed Consolidated Financial Statements
for a description of the Warrant Dividend). If the Company is unable to
generate sufficient cash flow from operations or in some other fashion, or
reduce its expenses, its operations will be materially and adversely affected.

The Company does not believe that inflation has had a material effect on
its financial condition or operating results for the last several years, as the
Company has historically been able to pass along increased costs in the form of
adjustments to the prices it charges to its customers.

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. FIN 46 clarifies the application of Accounting Research Bulletin No.
51, Consolidated Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 applies immediately to variable interest entities (VIEs)
created after January 31, 2003, and to VIEs in which an enterprise obtains an
interest after that date. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to VIEs in which an enterprise holds a variable
interest that it acquired before February 1, 2003. FIN 46 applies to public
enterprises as of the beginning of the applicable interim or annual period. The
adoption of FIN 46 is not expected to have a material impact on the Companys
consolidated financial position, liquidity or results of operations.

In April 2003, the Financial Accounting Standards Board (FASB) issued
SFAS 149 Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designated after
June 30, 2003. In addition, except as stated below, all provisions of this
Statement should be applied prospectively. The provisions of this Statement
that relate to Statement 133 Implementation Issues that have been effective for
fiscal quarters that began prior to June 15, 2003, should continue to be
applied in accordance with their respective effective dates. In addition,
paragraph 7(a) and 23(a), which relate to forward purchases or sales of
then-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June
30, 2003. The Company does not participate in such transactions, however, it is
evaluating the effect, if any, of this new pronouncement and will adopt SFAS
149 within the prescribed time.

In May 2003, the FASB issued SFAS 150 Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, effective for
financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a freestanding
financial instrument that is within its scope as a liability (or an asset in
some circumstances). Many of those instruments were previously classified as
equity. Some of the provisions of this Statement are consistent with the
current definition of liabilities in FASB Concepts Statement No. 6, Elements
of Financial Statements. The Company does not participate in such
transactions, however, it is evaluating the effect, if any, of this new
pronouncement and will adopt FASB 150 within the prescribed time.

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Item 3. QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk from changes in interest rates, and
as a global company, the Company also faces exposure to adverse movements in
foreign currency exchange rates.

The Companys earnings are affected by changes in short-term interest
rates as a result of its lines of credit. If short-term interest rates averaged
2% more in the three months ended June 30, 2003 and 2002, the Companys
interest expense and loss before taxes would have increased by $12,000 and
$15,000, respectively. If short-term interest rates averaged 2% more in the six
months ended June 30, 2003 and 2002, the Companys interest expense and loss
before taxes would have increased by $24,000 and $28,000, respectively. The
currently contracted increase in the interest rate on the Companys U.S. line
of credit during 2003 will increase the Companys interest expense and decrease
its income before taxes by approximately $31,000, compared to interest expense
and income before taxes under the prior interest rate.

The Companys revenues and net worth are affected by foreign currency
exchange rates due to having subsidiaries in Norway, Sweden, Germany and the
Czech Republic. While the Companys sales to its subsidiaries are denominated
in U.S. dollars, each subsidiary owns assets and conducts business in its local
currency. Upon consolidation, the subsidiaries financial results are impacted
by the value of the U.S. dollar compared to the value of the currency in the
jurisdiction where the subsidiaries do business. A uniform 10% strengthening as
of June 30, 2003 and 2002 in the value of the dollar would have resulted in
reduced revenues of $368,000 and $393,000 for the three months ended June 30,
2003 and 2002, respectively. . A uniform 10% strengthening as of June 30, 2003
and 2002 in the value of the dollar would have resulted in reduced revenues of
$781,000 and $757,000 for the six months ended June 30, 2003 and 2002,
respectively. A uniform 10% strengthening as of June 30, 2003 and 2002 in the
value of the dollar would have resulted in a reduction of the Companys
consolidated net worth of $177,000 and $321,000, respectively. The Company
finds it impractical to hedge foreign currency exposure and, as a result, will
continue to experience foreign currency gains and losses.




Item 4. CONTROLS AND PROCEDURES

(a)  As of the end of the period covered by this Quarterly Report (the
Evaluation Date), the Companys Chief Financial Officer and Chief Executive
Officer evaluated the Companys disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act
of 1934, as amended (the Exchange Act)). Based on that evaluation, these
officers have concluded that as of the Evaluation Date, the Companys
disclosure controls and procedures were effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Companys reports filed or
submitted by the Company under the Exchange Act.

(b)  There has been no change in the Companys internal control over
financial reporting during the quarter ended June 30, 2003 that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.

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PART II. OTHER INFORMATION




Item 1. LEGAL PROCEEDINGS

None




Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable




Item 3. DEFAULTS UPON SENIOR SECURITIES

None




Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

None.




Item 5. OTHER INFORMATION

On June 9, 2003, the Company received a letter from the NASDAQ SmallCap
Market advising the Company that as a consequence of its common stock having
traded below $1.00 for a consecutive 30-day trading period, the Company was not
in compliance with the NASDAQ continued listing maintenance standards. Under
the NASDAQ rules, the Company is subject to delisting of its common stock if
the closing bid price of its common stock is not $1.00 per share or more for a
minimum of ten consecutive trading days between this date and December 8, 2003.
As a result, there can be no assurance that the Company will be able to
maintain its listing on the NASDAQ SmallCap Market.




Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

|     |  |                                                                                                                                                                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Slav Stein, President and Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
302 of Sarbanes-Oxley Act of 2002.
|     |  |                                                                                                                                                                         
|31.2 |  | Certification of John F. Wilkens, Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 302 of
Sarbanes-Oxley Act of 2002.         
|     |  |                                                                                                                                                                         
|32.1 |  | Certification of Slav Stein, President and Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of Sarbanes-Oxley Act of 2002.
|     |  |                                                                                                                                                                         
|32.2 |  | Certification of John F. Wilkens, Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.     

(b)  Reports on Form 8-K

The Company filed a Form 8-K on June 10, 2003, to report the Company
received a letter from the NASDAQ Small-Cap Market advising the Company that,
as a consequence of its common stock having traded below $1.00 for a
consecutive 30-day trading period, the Company is not in compliance with the
NASDAQ continued listing maintenance standards.

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

|                       |  |                                       
|---------------------- |  | --------------------------------------
|                       |  | AESP, INC.                            
|                      
|                       |  |                                       
|                       |  | By: /s/ SLAV STEIN                    
|                       |  |                                       
|                       |  | Slav Stein                            
|                       |  | President and Chief Executive Officer 
|                      
|                      
|                       |  |                                       
|                       |  |                                       
|                       |  | By: /s/ JOHN F. WILKENS               
|                       |  |                                       
|                       |  | John F. Wilkens                       
|                       |  | Chief Financial and Accounting Officer
|                      
|                      
|Dated: August 13, 2003 |  |                                       

24