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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the transition period from __________ to __________

Commission File No. 000-12739

AESP, INC.

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

      The number of shares of the registrant’s Common Stock outstanding as of May 12, 2003 is 5,984,211 shares.

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AESP, Inc. and Subsidiaries

INDEX

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; 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)

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)

See accompanying notes to condensed consolidated financial statements.

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AESP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(UNAUDITED)
(IN THOUSANDS)

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)

See accompanying notes to condensed consolidated financial statements.

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AESP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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AESP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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AESP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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AESP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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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 the 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 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 March 31, 2003, and 2002 are shipping and handling fees of $213,000 and $191,000, 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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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 income 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 income 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):

      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 three months ended March 31, 2003: no dividend yield percent; expected volatility of 111.6%; weighted average risk-free interest rates of approximately 4.8%; and expected lives of 5-9 years. The following assumptions were used for grants in the three months ended March 31, 2002: no dividend yield percent; expected volatility of 115.0%; weighted average risk-free interest rates of approximately 4.8%; and expected lives from 5-9 years.

Results of Operations

      For the three months ended March 31, 2003, the Company recorded net sales of $8.1 million, an increase of approximately $617,000 or 8.0%, compared to net sales of $7.5 million for the three months ended March 31, 2002. The most significant factor in the sales increase was the lower value of the U.S. dollar during the three months ended March 31, 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 $827,000 in the current quarter, compared to the first quarter 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 $99,000, $156,000 and $32,000, respectively. The Company’s Norwegian and Swedish offices recorded sales declines of $414,000 and $83,000, respectively, net of the currency conversion. In the United States, sales to the Company’s Russian distributor, which is its largest customer, increased $110,000 during the quarter ended March 31, 2003, compared to the quarter ended March 31, 2002, from $1.2 million to $1.3 million. Otherwise, sales in the U.S. were relatively flat quarter to quarter 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 quarter 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 three months ended March 31, 2003 was $5.4 million, compared to cost of sales of $5.0 million for the three months ended March 31, 2002. Consistent with the rise in sales, this increase of $355,000 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 $560,000 solely related to the change in exchange rates from the first 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 $262,000 and a slight rise in gross profit percentage, from 32.7% for the three months ended March 31, 2002 to 33.5% for the three months ended March 31, 2003. On a local office level, significant changes in gross profit percentage (net of currency conversion differences) was recorded by the German operations. The German gross profit percentage declined from 42.3% last year to 28.9% 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. Other markets, including the U.S., were largely able to offset the sales price declines with reductions in product costs, thereby maintaining or slightly increasing gross profit percentages. No provisions for inventory obsolescence were recorded in the quarters ended March 31, 2003 and 2002.

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      Selling, general and administrative (“S,G & A”) expenses increased from $2.4 million in the three months ended March 31, 2002 to $2.7 million in the three months ended March 31, 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 first quarter of 2003, that effect led to an increase in S,G & A expenses of approximately $290,000 when compared to the first 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 first 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 the rules.

      As a result of the above factors, the loss from operations for the three months ended March 31, 2003 was $18,000, compared to income from operations of $70,000 for the three months ended March 31, 2002.

      Interest, net for the three months ended March 31, 2003 was relatively unchanged from the amount recorded for the first quarter last year. For the current quarter, the Company recorded interest expense of $56,000 and interest income of $18,000. For the three months ended March 31, 2002, the Company posted interest expense of $51,000 and interest income of $5,000.

      Other income increased from $19,000 for the three months ended March 31, 2002 to $39,000 for the three months ended March 31, 2003. The increase of $20,000 consisted of several factors, including an additional $7,000 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.

      The loss before income taxes for the three months ended March 31, 2003 was $17,000, compared to income before income taxes of $43,000 for the three months ended March 31, 2002.

      The provision for income taxes has been recorded for the three months ended March 31, 2003 and 2002 on those European subsidiaries that recorded profitable operations for those periods, the Czech Republic in 2003 and Norway and the Czech Republic in 2002. 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 our 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 $69,000 for the three months ended March 31, 2003, compared to net income of $5,000 for the three months ended March 31, 2002. After preferred stock dividends, the net loss applicable to common shareholders for the three months ended March 31, 2003 was $81,000. For the three months ended March 31, 2003, the loss per common share, both basic and diluted was $.01, compared to basic and diluted income per common share of $.00 for the three months ended March 31, 2002. Weighted average shares outstanding were 5,761,000 (basic and diluted) for the three months ended March 31, 2003 and 4,440,000 (basic) and 4,613,000 (diluted) for the three months ended March 31, 2002.

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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 March 31, 2003, the Company’s working capital was $1.7 million, which is unchanged from working capital of $1.7 million at December 31, 2002. Similarly, the Company’s current ratio was 1.19 at March 31, 2003, compared to 1.18 at December 31, 2002. The balance sheet accounts with the most significant changes from December 31, 2002 to March 31, 2003 were the following (in thousands):

      Cash declined as funds were used during the first quarter of 2003 to finance increases in U.S. accounts receivable and inventory of $87 and $178, respectively. Funds were also used during the quarter to pay down the U.S. line of credit by $86.

      In the first quarter of 2003, approximately $450 of advance payments received in 2002 from a customer were applied to current quarter 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.

      The decrease at March 31, 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 recorded to accounts payable. 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 the first quarter, the tax generated by the vendor invoice is offset by the tax due from the customer

      For the three months ended March 31, 2003, $314,000 of cash was used in operations. The primary reason for the use of cash in 2003 was the reduction of customer deposits and other of $505,000 offset by a reduction in accounts receivable of $252,000. Net cash provided by investing activities was $42,000, primarily due to collections on a note receivable of $25,000. Cash of $67,000 was used in financing activities, primarily as a result of a net paydown on the U.S. line of credit of $86,000. As a result of the foregoing, the Company’s cash position decreased $339,000 between December 31, 2002 and March 31, 2003. That decrease, combined with a decline of $25,000 attributable to the effects of exchange rate changes on cash, produced an overall decrease in cash of $364,000. 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 matures on July 22, 2003, bear interest at the rate of prime plus two percent (increasing to prime plus three percent in April 2003 until maturity). 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 March 31, 2003, the Company was not in compliance with the tangible net worth covenant. A waiver has been granted by the financial institution. Additionally, the Company will likely 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.

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      The Company was not in violation of any of the affirmative or negative covenants contained in the agreement at March 31, 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 will 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 March 31, 2003, $1,807,000 was outstanding under the line of credit line and $93,000 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 March 31, 2003, an aggregate of $601,000 was outstanding under these lines of credit and $1,286,000 was available for borrowing under these agreements.

      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. 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 to be 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 July 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. The standard requires companies to recognize costs associated with exit (including restructuring) or disposal activities at fair value when the related liability is incurred rather than at the date of a commitment to an exit or disposal plan under current practice. Costs covered by the standard include certain contract termination costs, certain employee termination benefits and other costs to consolidate or close facilities and relocate employees that are associated with an exit activity or disposal of long-lived assets. The new requirements are effective prospectively for exit or disposal activities initiated after December 31, 2002 and was adopted by the Company effective January 1, 2003. The adoption of SFAS No. 146 will impact the timing of recognition of costs associated with any future exit and disposal activities.

      In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” This interpretation addresses the disclosures required to be made by a guarantor in its interim and annual financial statements. It also clarifies that a guarantor is required to recognize at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This interpretation was effective for disclosure purposes as of December 31, 2002 and the recognition provisions are effective for all guarantees issued or modified after December 31, 2002. As of March 31, 2003, the Company had no material guarantees.

      Interpretation No. 46, “Consolidation of Variable Interest Entities”, 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. Interpretation No. 46 is applicable immediately for variable interest entities created after January 31, 2003. For variable interest entities created prior to January 31, 2003, the provisions of Interpretation No. 46 are applicable no later than July 1, 2003. The Company does not expect this Interpretation to have an effect on the Company’s consolidated financial statements.

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Item 3.  QUANTITATIVE AND QUALITATIVE 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 March 31, 2003 and 2002, the Company’s interest expense and loss before taxes would have increased by $12,000 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 March 31, 2003 and 2002 in the value of the dollar would have resulted in reduced revenues of $413,000 and $364,000 for the three months ended March 31, 2003 and 2002, respectively. A uniform 10% strengthening as of March 31, 2003 and 2002 in the value of the dollar would have resulted in a reduction of the Company’s consolidated net worth of $185,000 and $200,000, 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) Within 90 days of filing this report on Form 10-Q (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-14(c) and 15d-14(c) 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 have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of the most recent evaluation.

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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

      On March 26, 2003, the Company held a special meeting of shareholders. The results of that meeting are described in the Company’s 2002 Form 10-K.

Item 5.  OTHER INFORMATION

      None

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

      (a) Exhibits

99.1

Certificates of Slav Stein, President and Chief Executive Officer and John F. Wilkens, Chief Financial Officer, are filed pursuant to Section 302 of the Sarbanes-Oxley Act.

99.2

Certificates of Slav Stein, President and Chief Executive Officer and John F. Wilkens, Chief Financial Officer, are being furnished pursuant to Section 906 of the Sarbanes-Oxley Act.

      (b) Reports on Form 8-K

      The Company filed a Form 8-K on January 27, 2003, to report the Company executed a Fourth Amendment to its Loan Agreement with its current lender, Commercebank, N.A. and the appointment of a new chief financial officer.

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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.

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