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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission file number 0-16345

SED International Holdings, Inc.

Company’s telephone number, including area code:

Securities registered pursuant to Section 12(g) of the Act:

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Company’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.     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 þ

      The aggregate market value of the voting stock held by non-affiliates of the Company was approximately $2.8 million as of September 11, 2003 based upon the last sale price of the Common Stock as reported on the Over the Counter Bulletin Board on that day. There were 3,875,155 shares of Common Stock, $.01 par value, outstanding at September 11, 2003.

DOCUMENTS INCORPORATED BY REFERENCE:

      Part III incorporates information by reference from portions of the Company’s definitive proxy statement for its 2003 annual meeting of shareholders scheduled to be held on December 10, 2003, which will be filed no later than 120 days after the close of the Company’s fiscal year ended June 30, 2003.

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PART I

Item 1.     Business

(a) General Development of Business

      SED International Holdings, Inc., a Georgia corporation, and its wholly-owned operating subsidiary, SED International, Inc., a Georgia corporation (“SED International”), were incorporated in 1986 to take over the operations of the business of the Company’s predecessor, Southern Electronics Distributors, Inc., which was engaged in the wholesale distribution of consumer electronic products. In fiscal 1999, the Company, formerly a Delaware corporation, reincorporated as a Georgia corporation. As used herein, the term “Company” or the “Registrant” means SED International Holdings, Inc. and its subsidiaries, including SED International, unless the context otherwise indicates.

      The Company is a distributor of microcomputer products, including mass storage, imaging, display and wireless products throughout the United States and Latin America. The Company offers to an active base of over 6,500 reseller customers a broad inventory of more than 3,500 products from approximately 170 vendors (direct and indirect), including such market leaders as Hewlett-Packard, Intel, Maxtor, Creative Labs, Acer, Epson, Microsoft, LG Electronics, Envision, and IBM, through a dedicated and highly motivated sales force. The Company distributes products in the United States from its strategically located warehouses in Atlanta, Georgia; Miami, Florida; City of Industry, California; Richardson, Texas; and San Juan, PR. The Company services Latin America through its wholly-owned subsidiaries SED International de Colombia Ltda. in Bogota, Colombia and Intermaco S.R.L. in Buenos Aires, Argentina.

      The Company also distributes wireless telephone products in the United States and to Latin America. The Company is a direct distributor of wireless telephone products for LG Infocomm and Audiovox and an indirect distributor for other leading wireless telephone product vendors such as Motorola, Nokia, and Samsung. In fiscal 2003, the Company’s net sales of microcomputer products generated approximately 88.0% of the Company’s total net sales and wireless telephone products represented the remaining 12.0%.

      The shareholders of the Company approved a one-for-two reverse stock split in a special meeting of shareholders held on April 26, 2002. As a result of the reverse split, all holders of the Company’s common stock returned their current share certificates and received new certificates which reduced the number of shares held on a 1 for 2 basis. The new certificates have the same terms as the old certificates. All applicable amounts reflected herein give retroactive effect to the reverse stock split.

      Subsequent to June 30, 2002, the Company terminated its credit facility with Wachovia Bank, NA, and IBM Global Finance. In October 2002, the Company entered into a new credit facility with Fleet Capital Corporation which provides access by the Company to additional credit capacity and liquidity. Additional information about the agreement with Fleet Capital Corporation may be found in the Liquidity and Capital Resources section of this document.

      In February 2003, the Company approved a plan to discontinue commercial operations of its Brazilian subsidiary, SED International do Brasil Distribuidora, Ltda. As a result, SED International do Brasil Distribuidora, Ltda. was reported as a disposal of a business in the third quarter 2003. Accordingly, the operating results of SED International do Brasil Distribuidora, Ltda. have been classified as a discontinued operation for all periods presented in the Company’s consolidated statements of operations. Additionally, the Company has reported all of SED International do Brasil Distribuidora, Ltda. assets at their estimated net realizable values in the Company’s condensed consolidated balance sheet as of June 30, 2003 in accordance with Accounting Principles Board Opinion No. 30. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — “Discontinued Operations” and Note 19 of the Company’s Consolidated Financial Statements.

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(b) Financial Information about Industry Segments

      The Company operates in only one business segment.

(c) Narrative Description of Business

      The Company offers its customers a broad inventory of more than 3,500 products from approximately 170 vendors (direct and indirect), including such market leaders as Hewlett-Packard, Intel, Maxtor, Creative Labs, Acer, Microsoft, Envision, and LG Electronics. The Company is a direct distributor of wireless telephone products for LG Infocomm and Audiovox and an indirect distributor for other leading wireless telephone product vendors such as Motorola, Nokia, and Samsung. Microcomputer related products accounted for $364.6 million or 88.0% of the Company’s net sales for fiscal 2003, $399.9 million or 94.0% of net sales in fiscal 2002, and $411.8 million or 92.0% of net sales in fiscal 2001. Approximately $48.5 million or 12.0% of the Company’s net sales for fiscal 2003, $24.0 million or 6.0% of net sales for fiscal 2002, and $33.8 million or 8.0% of net sales for fiscal 2001, consisted of wireless handsets and accessories. The Company continually evaluates its product mix and inventory levels and maintains flexibility by adjusting its product offerings based on demand. The Company’s vendors generally warrant the products distributed by the Company and allow the return of defective products. Generally, the Company’s authorized distributor agreements with its microcomputer and wireless telephone products vendors permit the Company to sell these vendors’ products in the United States and in designated countries in Latin America.

      As a distributor, the Company incurs the risk that the value of its inventory will be affected by industry-wide forces. Rapid technological change is commonplace in the microcomputer and wireless industries and can quickly diminish the marketability of certain items, whose functionality and demand decline with the appearance of new products. These changes, coupled with price reductions by vendors, may cause rapid obsolescence of inventory and corresponding valuation reductions in that inventory. Accordingly, the Company seeks provisions in its vendor agreements common to industry practice which provide price protections or credits for declines in inventory value and the right to return unsold inventory. No assurance can be given, however, that the Company can negotiate such provisions in each of its agreements or that such industry practice will continue.

      The Company purchases goods from approximately 170 vendors (directly and indirectly) and has negotiated favorable terms from certain vendors by purchasing a substantial volume of those vendors’ products. In fiscal 2003, 2002, and 2001, Maxtor accounted for 44.4%, 40.0%, and 27.9%, respectively, Hewlett Packard accounted for 8.6%, 10.1% and 10.9%, respectively, of the Company’s purchases.

      There can be no assurance that the Company will be able to maintain its existing vendor relationships or secure additional vendors as needed. The Company’s vendor relationships typically are non-exclusive and subject to annual renewal, terminable by either party on short notice, and contain territorial restrictions that limit the countries in which the Company is permitted to distribute the products. The loss of a major vendor, the deterioration of the Company’s relationship with a major vendor, the loss or deterioration of vendor support for certain Company-provided services, the decline in demand for a particular vendor’s product, or the failure of the Company to establish good relationships with major new vendors or other Virtual Vendor Model distributors could have a material adverse effect on the Company’s business, financial condition and results of operations.

      Product orders typically are processed and shipped from the Company’s distribution facilities on the same day an order is received or, in the case of orders received after customary cutoff time, on the next business day. The Company relies almost entirely on arrangements with independent shipping companies for the delivery of its products to United States customers. Products sold within the Latin American markets are either picked up by the customer, or delivered to the customers or their agents from the Company’s Colombia and Argentina facilities. Generally, the Company’s inventory level of products has been adequate to permit the Company to be responsive to its customers’ purchase requirements. From time to time, however, the Company experiences temporary shortages of certain products as its vendors experience increased demand or manufac-

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      The Company’s sales are generated by a telemarketing sales force, which, on June 30, 2003, consisted of approximately 112 people in sales offices located in Atlanta, Georgia; Miami, Florida; City of Industry, California; Richardson, Texas; San Juan, Puerto Rico; Bogota, Colombia and Buenos Aires, Argentina. Of the total number of salespersons on June 30, 2003, 49 people focused on sales to customers for export to Latin America and on sales in Colombia and Argentina. Substantially all of the export and Latin American based salespeople are fluent in Spanish or Portuguese. The Company’s Atlanta sales office maintains a separate telemarketing sales force for the sale of wireless telephone products to retailers and wireless telephone carriers and their authorized agents located throughout the United States and Latin America.

      Members of the sales staff are trained through intensive in-house sales training programs, along with vendor-sponsored product seminars. This training allows sales personnel to provide customers with product information and to use their marketing expertise to answer customers’ questions about important new product considerations, such as compatibility and capability, while offering advice on which products meet specific performance and price criteria. The Company’s salespeople are able to analyze quickly the Company’s extensive inventory through a sophisticated management information system and recommend the most appropriate solution for each customer, whether that customer is a full-line retailer or an industry-specific reseller.

      The Company’s domestic sales force is organized in teams generally consisting of two to four people. The Company believes that teams provide superior customer service because customers can contact one of several people. Moreover, the long-term nature of the Company’s customer relationships is better served by teams that increase the depth of the relationship and improve the consistency of service. It has been the Company’s experience that the team approach results in superior customer service and better employee morale.

      Compensation incentives are provided to the Company’s salespeople, thus encouraging them to increase their product knowledge and to establish long-term relationships with existing and new customers. Customers can telephone their salespersons using a toll-free number provided by the Company. In addition, salespeople initiate calls to introduce the Company’s existing customers to new products and to solicit orders. Salespeople also seek to develop new customer relationships by using targeted mailing lists, vendor leads and telephone directories of various cities.

      The telemarketing salespersons are supported by a variety of marketing programs. For example, the Company regularly sponsors shows for its resellers where it demonstrates new product offerings and discusses industry developments. Also, the Company’s in-house marketing staff prepares catalogs that list available microcomputer and wireless telephone products and routinely produces marketing materials and advertisements. In addition, the in-house marketing staff promotes products and services through the Company’s Internet web page (www.sedonline.com) providing 24-hour access to on-line order entry. The Company’s web page provides customers secured access to place orders and review product specifications at times that are convenient to them. Customers also can determine on a real-time basis inventory availability, pricing, and verify the status of previously placed orders through hyperlinks to certain independent shipping companies.

      The Company prides itself on being service oriented and has a number of on-going value-added services intended to benefit both the Company’s vendors and reseller customers. For example, the Company is committed to training its salespeople to be technically knowledgeable about the products they sell. This core competency supplements the sophisticated technical support and configuration services also provided by the Company. The Company believes that its salesperson’s ability to listen to a reseller’s needs and recommend a cost-efficient solution strengthens the relationship between the salesperson and his or her reseller and promotes customer loyalty to the Company. In addition, the Company provides such other value-added services as new product demonstrations and technical education programs for resellers, configuration services for computer and wireless products, order fulfillment and electronic ordering, and informational assistance through the Company’s web page (www.sedonline.com).

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      Management continually evaluates the Company’s product mix and the needs of its customers in order to minimize inventory obsolescence and carrying costs. The Company’s rapid delivery terms are available to all of its customers, and the Company seeks to pass through its shipping and handling costs to its customers.

      The Company offers various credit terms including, open account, prepay, credit card, and COD to qualifying customers. The Company closely monitors customers’ creditworthiness through its on-line computer system, which contains detailed information on each customer’s payment history and other relevant information. In addition, the Company participates in national and international credit associations that exchange credit rating information on customers. The Company reviews customers credit worthiness based on sales trends, industry trends in a geography, and other factors. The Company establishes reserves for estimated credit losses in the normal course of business and carries credit insurance for larger customers.

      The Company serves an active, nonexclusive customer base of over 6,500 resellers of microcomputer and wireless handset products. Resellers include value-added resellers, corporate resellers and retailers. The Company believes the multi-billion dollar microcomputer and wireless telephone wholesale distribution industries serve customers primarily on a nonexclusive basis, which provides the Company with significant growth opportunities. During fiscal 2003, no single customer accounted for more than 10% of the total company net sales of the Company. The Company believes that most of its customers rely on distributors as their principal source of microcomputer and wireless telephone products.

      The microcomputer and wireless telephone distribution industries are highly competitive, both in the United States and in Latin America. Competition in these industries is typically characterized by pricing pressures, product availability and potential obsolescence, speed and accuracy of delivery, effectiveness of sales and marketing programs, credit availability, ability to tailor specific solutions to customer needs, quality of product lines and services, and availability of technical support and product information. Additionally, the Company’s ability to compete favorably is principally dependent upon its ability to manage inventory and accounts receivable and to control other operating costs. Successful management of the Company also requires the Company to react quickly and appropriately to short and long-term trends, price its products competitively, increase its net sales and maintain economies of scale.

      The Company’s competitors include regional, national and international microcomputer and wireless distributors, many of which have substantially greater technical, financial and other resources than the Company, as well as vendors that sell directly to resellers and large resellers that sell to other resellers. Major competitors include Ingram Micro, Inc., Tech Data Corporation, D&H, ASI, Brightpoint, Inc., Cellstar Corporation, and Synnex Information Technologies, Inc. in the United States; and Tech Data Corporation, Ingram Mico, Inc., and Intcomex Holdings, L.L.C. in Latin America. From time to time, these competitors may be used as vendors.

      The Company’s sales currently are not subject to material seasonal fluctuations although no assurance can be given that seasonal fluctuations will not develop, especially during the holiday season in the United States and Latin America. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Quarterly Data; Seasonality.”

      As of June 30, 2003, the Company had 287 full-time employees, 112 of whom were engaged in telemarketing and sales, 99 in administration and 76 in warehouse management and shipping. Management believes the Company’s relations with its employees are good and the Company has never experienced a strike or work stoppage. There are no collective bargaining agreements covering any of the Company’s employees.

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      A copy of Form 10-K will be provided upon written request and without charge. Please send your requests to the attention of Barbara Gay, SED International, Inc., 4916 North Royal Atlanta Drive, Tucker, Georgia 30084.

      During the fiscal year ended June 30, 1998, the Company began selling directly to customers in Colombia through the Company’s facilities in Bogota, Colombia. During the fiscal year ended June 30, 1999, the Company also began selling directly to customers in Argentina through the Company’s facilities in Buenos Aires. Sales are denominated in the respective local currencies of these countries. For the fiscal year ended June 30, 2003, 2002 and 2001, approximately 22.5%, 26.6% and 33.6%, respectively, of the Company’s net sales were to customers for export principally into Latin America and direct sales to customers in Colombia and Argentina. See Item 8 and Notes 13, 17 and 19 to the consolidated financial statements of the Company for additional information concerning the Company’s domestic and foreign operations.

Item 2.     Properties

      The Company maintains its executive offices at 4916 North Royal Atlanta Drive in Atlanta, Georgia, where 42 of its sales employees are also located. The Company leases its executive, administrative and sales office from Diamond Chip Group, L.L.C., a Georgia limited liability company comprised of certain minority shareholders and officers of the Company, previously doing business as Royal Park Company, a Georgia general partnership. The lease commenced in April 1999 and expires in September 2006. The facility consists of approximately 30,000 square feet, with an annual rental of approximately $277,000 effective October 1, 2002, with annual increases of three percent through September 30, 2006. The Company has a right of first refusal to purchase the facility should it be offered for sale. The Company believes that the lease of its executive offices is on terms no less favorable than those available from unaffiliated parties.

      The Company maintains warehouse facilities in Atlanta, Georgia; City of Industry, California; Miami, Florida, Richardson, Texas; San Juan, Puerto Rico; Bogota, Colombia and Buenos Aires, Argentina. The Company’s distribution facility in Atlanta, Georgia consists of approximately 100,000 square feet subject to a lease expiring January 31, 2004. Rental payments for this facility are approximately $293,000 per annum. The Company believes there is sufficient additional warehouse and sales office space available for lease at reasonable prices near its principal facility in the event the Company’s growth plans so require.

      The Company leases its sales and distribution facility in Miami, Florida under a lease expiring March 31, 2004. This facility consists of approximately 61,000 square feet at an annual rental of approximately $463,000 effective April 1, 2002 and increasing to $478,800 effective April 1, 2003.

      The Company also leases an approximately 50,000 square foot facility in City of Industry, California. The City of Industry facility serves as a distribution center and sales center for the Company. Annual rental under the lease is approximately $237,000. Pursuant to its terms, the lease will expire on March 31, 2005.

      On April 1, 1998, the Company began leasing an approximately 102,000 square foot distribution facility in Harrisburg, Pennsylvania. The Company was obligated for lease payments of approximately $408,000 per year through March 31, 2003. From June 1, 2000 through December 31, 2000 the Company sublet approximately 51,000 square feet of the facility for approximately $222,000 per year. The Company entered into a sublease for the entire building beginning on October 1, 2001 to cover the entire cost of this facility through the end of the lease on March 31, 2003.

      On December 1, 1997, the Company began leasing an approximately 33,000 square foot administrative center and sales office in Bogota, Colombia. The Bogota center serves as a sales office and distribution facility for SED International de Colombia Ltda., a wholly owned subsidiary of the Company. Annual payments total approximately $60,000 per year. The lease will expire on November 30, 2003.

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      On November 1, 1998, the Company assumed the lease obligations for several small facilities in Buenos Aires, Argentina. These facilities consist of various spaces in the Galeria business complex and are utilized for sales offices, administrative offices and warehouses by Intermaco S.R.L., a wholly owned subsidiary of the Company. Aggregate space is approximately 5,500 square feet. Payments total approximately $36,000 annually. The leases expire at various dates until May 2004.

      On May 1, 2003, the Company began leasing an approximately 25,700 square foot facility in Richardson, Texas. The facility serves as a sales office and distribution center to service the Company’s customers in the Dallas area. The Company is obligated for lease payments of approximately $115,700 per year through April 30, 2006.

      On January 1 2001, the Company began leasing approximately 3,900 square foot sales and distribution facility in Hato Rey, Puerto Rico. The space was expanded to approximately 5,500 square feet in October 2002 and the Company is obligated for lease payments of approximately $39,000 through December 31, 2003.

Item 3.     Legal Proceedings

      The Company is involved in litigation relating to claims arising out of its operations in the normal course of business. The Company is not currently engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company.

      No matters were submitted to a vote of the Company’s shareholders during the fourth quarter of fiscal 2003.

PART II

      Until October 4, 2002 the Company’s common stock was traded over the counter and quoted on the Nasdaq National Market System under the symbol “SECX”. The Company received notification on September 27, 2002 from Nasdaq that the Company’s common stock would be delisted from the Nasdaq National Market due to noncompliance with the value of public float requirement of $5,000,000.00 for continued listing on Nasdaq National Market. The Company’s stock price also has fallen below the $1.00 minimum necessary for continued listing on the Nasdaq National Market and Nasdaq Small Cap. The Company does not presently intend to take actions to regain compliance with the Nasdaq National Market or Small Cap listing standards. The Company’s common stock is now traded on the Over-the Counter Bulletin Board (OTCBB). The OTCBB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter (OTC) equity securities. OTCBB securities are traded by a community of market makers that enter quotes and trade reports. The Company expects that SED’s ticker symbol (SECX) will remain the same.

      The following table sets forth the high and low sales prices for Company’s common stock as reported for each quarter of fiscal 2003 and 2002 as adjusted for the 1 for 2 recapitalization on April 26, 2002. The

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      There were 3,875,155 shares of common stock outstanding and approximately 3,000 beneficial owners of the common stock of the Company (including individual participants in securities position listings) as of September 11, 2003.

      The Company has never declared or paid cash dividends on its common stock. The Company currently intends to retain earnings to finance its ongoing operations and it does not anticipate paying cash dividends in the foreseeable future. Future policy with respect to payment of dividends on the common stock will be determined by the Board of Directors based upon conditions then existing, including the Company’s earnings and financial condition, capital requirements and other relevant factors. SED International, the earnings of which would be the primary source of any dividend payments, and the Company are parties to a revolving credit agreement which contains certain financial covenants that may impact the Company’s ability to pay dividends in the event the Company should change its policy and choose to issue dividends. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

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      All periods presented have been restated in connection with the February 2003 discontinuance of operations of SED International do Brasil Distribuidora, Ltda. If the non–amortization provisions of SFAS No. 142 had been applied to all periods presented, the 2001, 2000 and 1999 net income would have increased or net loss would have decreased by $433,000, $373,000, and $888,000. 2000 and 1999 have been reclassified in connection with the fiscal 2001 adoption of a new accounting pronouncement.

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Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

      The following discussion should be read in conjunction with the consolidated financial statements of the Company and the notes thereto and the Selected Consolidated Financial Data included elsewhere herein. Historical operating results are not necessarily indicative of trends in operating results for any future period.

Overview

      The Company is an international distributor of microcomputer products, including personal computers, printers and other peripherals, supplies, and networking products throughout the United States and Latin America. In fiscal 2003, the Company’s net sales to customers in the United States represented approximately 77.5% of total net sales. Net sales for export principally into Latin America and in-country net sales in Colombia and Argentina represented approximately 22.5% of total net sales for fiscal 2003. Net sales of microcomputer products generated approximately 88.0% of total net sales and wireless telephone products represented the remaining 12.0% for fiscal 2003.

      The Company incurred a net loss of $3.1 million on net sales of $413.1 million in fiscal 2003. Net sales during fiscal 2002 and 2001 were $423.9 million and $445.6 million, respectively. The gross profit as a percentage of net sales was relatively flat at 4.7% for fiscal year 2003 as compared to 4.7% in fiscal 2002 and was 5.6% in fiscal 2001. Selling, general and administrative expenses as a percentage of net sales were 6.0% in fiscal 2003, 4.9% in fiscal 2002, and 5.4% in fiscal 2001.

      The Company has incurred a decline in net sales in the United States from fiscal 1999 to 2003. Although net sales in the United States in 2003 compared to 2002 increased by $8.2 million, the net sales improvement in the United States was offset by a $19.0 million decrease in net sales to export and Latin America. The Company has incurred operating losses in both its domestic or certain of its foreign operations at various times during the past five fiscal years. Company management is continuing to focus on increasing profit margins and reducing administrative and overhead costs. There is no assurance the Company will be successful in its efforts. Failure to improve margins and reduce overhead could adversely affect the Company’s profitability and financial condition.

      Numerous factors and conditions impact the Company’s ability to adequately achieve its profit goals, including, but not limited to, the following:

	•	Continuation of distribution agreements — The Company operates under formal but cancelable distribution agreements with certain of its suppliers. If these agreements were cancelled, the Company would be forced to obtain its products through wholesalers. This would reduce the Company’s profit margin on the affected products.
	•	Availability of certain products — From time to time, due to production limitations or heavy demand, the Company may only be able to purchase a limited amount of popular products from its suppliers.
	•	Product margins — The Company operates in a very competitive business environment. Accordingly, product margins are continually under pricing pressure.
	•	Vendor credit — The Company significantly relies on its suppliers for trade credit. Changes by the suppliers in their credit terms could force the Company to obtain less favorable financing for its purchases.
	•	Product obsolescence — The Company offers a broad line of products that are subject to fast technological obsolescence, which increases the risk of inventory markdown. Through its vendor agreements, the Company has certain stock return privileges, which vary from supplier to supplier.
	•	Credit decisions and losses — The Company maintains an experienced customer credit staff and relies on customer payment history and third party data to make customer credit decisions. Nevertheless, the Company may experience customer credit losses in excess of its expectations. The Company also maintains credit insurance for customers located in the United States and Latin America (subject to certain terms and conditions).

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	•	Proportionate control of general and administrative costs — The Company attempts to control its overhead costs to keep such costs in line with its sales volume. As sales volumes fluctuate, the Company must continually monitor its overhead costs and make adjustments timely and appropriately.
	•	Uncertain and possibly volatile economic and political environment in Latin America — The general economic and political environment in the countries in which the Company operates in Latin America is uncertain and, at times, volatile. As a result of these conditions, the Company could experience unexpected costs from its operations in these countries.
	•	Availability of credit facilities — The Company operated under a formal credit facility with a bank for many years that was subject to certain collateral limitations and contained certain covenants. During October 2002 a new credit facility was obtained. The new credit facility provides more flexibility compared to the prior agreement but also includes covenants and other provisions. The Company from time to time violated the financial covenants associated with the previous credit agreement, but was successful in negotiating waivers of such violations. No assurance can be given that the Company will be able to maintain compliance with financial covenants, or obtain waivers in the event of non-compliance, in the future. Failure to maintain compliance with the financial covenants could adversely affect the Company’s ability to obtain vendor credit and the overall business operations. The credit facilities are further described in Note 8.
	•	Cash flows — While not presently anticipated, the Company’s continued operation in Latin America may require additional capital infusion in the form of loans from the parent company or other debt borrowings by the subsidiary. The October 2002 credit facility places certain restrictions on the future funding of Latin American operations (See Note 8 to the audited consolidated financial statements).

      For the Company’s domestic operations, all purchases and sales are denominated in United States dollars. For the Company’s operations in Colombia and Argentina, in-country transactions are conducted in the respective local currencies of these two locations while import purchases are generally denominated in United States dollars.

Discontinued Operations

      In February 2003, the Company resolved to discontinue commercial operations of its Brazilian subsidiary, SED International do Brasil Distribuidora, Ltda.. As a result, SED International do Brasil Distribuidora, Ltda. was reported as a disposal of a segment of business in the third quarter 2003. Accordingly, the operating results of SED International do Brasil Distribuidora, Ltda. have been classified as a discontinued operation for all periods presented in the Company’s consolidated statements of operations. Additionally, the Company has reported all of SED International do Brasil Distribuidora, Ltda. assets at their estimated net realizable values in the Company’s consolidated balance sheet as of June 30, 2003 in accordance with Accounting Principles Board Opinion No. 30. See Note 19 of the Company’s Consolidated Financial Statements.

      During 2003, the Company recorded a loss from discontinued operations of approximately $4.7 million related to the discontinuance of SED International do Brasil Distribuidora, Ltda. This loss consisted of operating losses incurred in the segment of $1.4 million and an estimated loss on disposal of the segment of $3.3 million which includes charges for the following: (i) the write-off of foreign currency translation losses of $2.6 million previously recorded as a component of shareholders’ equity, (ii) equipment, (iii) customer accounts receivable, (iv) employee termination costs, (v) inventory, and (vi) facility exit and lease termination costs.

      At June 30, 2003, SED International do Brasil Distribuidora, Ltda. had assets of $51,000 and third party liabilities of $848,000. The assets include cash of $22,000 and prepaid taxes of $20,000 and deposits of $9,000. Liabilities include accounts payable related to inventory purchases of $751,000, bank obligations of $15,000 and other miscellaneous accrued liabilities of $82,000.

      SED International do Brasil Distribuidora, Ltda. has been transitioned from a commercial operating company into dormancy. During the dormancy period, the Company will incur ongoing operating expenses for attorney fees, statutory bookkeeping and reporting services, document storage and inventory storage cost until

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Results of Continuing Operations

      The following table sets forth, for the years presented, the percentage of net sales represented by certain items in the Company’s consolidated statements of operations:

      Net sales from continuing operations decreased 2.5%, or $10.8 million, to $413.1 million in fiscal 2003 compared to $423.9 million in fiscal 2002. Information concerning the Company’s domestic and foreign sales is summarized below:

      Domestic sales were $320.1 million and $311.3 million in fiscal 2003 and fiscal 2002, respectively. The increase in domestic sales was due primarily to an increase in wireless product sales of $24.5 million offset by a decline in the sales of printers, printer consumables, computer processors and mass storage products. The overall sales decline resulted from a decrease in net sales to customers for export principally to Latin America.

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      Sales of microcomputer products represented approximately 88.0% of the Company’s net sales in fiscal 2003 compared to 94.0% for fiscal 2002. Sales of wireless telephone products accounted for approximately 12.0% of the Company’s net sales in fiscal 2003 compared to 6.0% for fiscal 2002.

      Gross profit decreased $0.7 million to $19.4 million in fiscal 2003, compared to $20.1 million in fiscal 2002. Gross profit as a percentage of net sales remained flat at 4.7% for fiscal 2003 and 2002. Overall, the Company continues to experience pricing pressure in selling products.

      Selling, general and administrative expenses for fiscal 2003 increased 21.0% to $25.0 million, compared to $20.6 million in fiscal 2002. These expenses as a percentage of net sales increased to 6.0% in 2003 compared to 4.9% in fiscal 2002. The increase in selling, general and administrative expenses was primarily due to an increase in bad debt expenses of $0.7 million, professional fees $0.2 million, sales tax liabilities of $1.2 million, and obligations of $3.4 million that arose under the terms of Mr. Gerald Diamond’s employment agreement as a result of his June 2003 death. See Note 18 of the Company’s Consolidated Financial Statements.

      The 2002 cumulative effect adjustment was determined based on an analysis of the Company’s goodwill and the estimated future cash flows of operations associated with such impairment. See Note 3 to the Company’s 2003 consolidated financial statements.

      Depreciation was $1.6 million in fiscal 2003 as compared to $2.1 million in fiscal 2002.

      The results of operations of the Company were adversely affected by the continuing inflationary conditions in Latin America and the fluctuations of the Argentine and Colombian currencies. Since the Company has significant U.S. dollar denominated liabilities in Latin American subsidiaries, the devaluation resulted in foreign currency transaction losses totaling approximately $606,000 in fiscal 2003 as compared to approximately $400,000 in fiscal 2002. See Item 7A for further discussion.

      Net interest expense was $.5 million in fiscal 2003 compared to interest expense of $.3 million in fiscal 2002. This net change resulted primarily from a increase in working capital requirements in fiscal 2003 which in turn resulted in additional borrowings under the Company’s credit facility.

      Other income was $10.5 million at June 30, 2003, and included $10.0 million in proceeds due under two key man life insurance policies held on the life of Gerald Diamond, the Company’s founder and former Chairman and Chief Executive Officer. The insurance proceeds were received in July and August of 2003. Additionally, in December of 2002, the Company entered into a confidential settlement agreement for claims arising out of a disagreement with a former insurance broker. The net proceeds of $512,932 were recorded net of attorneys’ fees of $96,420.

      Income tax expense was approximately $613,000 in fiscal year 2003 compared to a benefit of $1.4 million in 2002. In 2002, the Company realized an income tax benefit of $1.9 million resulting from the adjustment of certain income tax liabilities and refunds received in the fourth quarter of 2002 related to recent United States tax legislation which provided for an extension of the period in which net operating losses could be carried back, offset in part by income taxes in Colombia and Argentina. At June 30, 2003, the Company has a gross net operating loss carried forward for U.S. federal tax purposes of approximately $28.7 million and state tax purposes of approximately $34.3 million; expiring at various dates through 2023 and gross net operating loss carry forwards for foreign income tax purposes of approximately $12 million in Brazil, which generally do not expire. At June 30, 2003 and 2002, the Company has recorded valuation allowances for principally all deferred tax assets, except for those relating to Intermaco S.R.L. (Argentina), as there is no assurance that these assets will be realized.

      Net sales from continuing operations decreased 4.9%, or $21.7 million, to $423.9 million in fiscal 2002 compared to $445.6 million in fiscal 2001.

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      Information concerning the Company’s domestic and foreign sales from continuing operations is summarized below:

      The overall sales decline resulted from an increase in United States domestic net sales and a decline in net sales to customers for export principally to Latin America and a decrease in in-country net sales in Colombia (commenced operations in May 1998 and operating as SED International de Colombia Ltda.) and Argentina (Intermaco S.R.L. acquired in November 1998). In addition, the 74.2% decrease in the value of the Argentine peso and the 4.2% decline in the value of the Colombian peso contributed to the decline in net sales.

      The increase in sales in the United States was primarily due to an increase in sales to large system integrators and the addition of 1,700 new customers. The decrease in U.S. export sales was due primarily to lower sales of printers and printer consumables. Sales of microcomputer products represented approximately 94.0% of the Company’s net sales in fiscal 2002 compared to 92.0% for fiscal 2001. Sales of wireless telephone products accounted for approximately 6.0% of the Company’s net sales in fiscal 2002 compared to 8.0% for fiscal 2001.

      Gross profit decreased $5.0 million to $20.1 million in fiscal 2002, compared to $25.1 million in fiscal 2001. Gross profit as a percentage of net sales decreased to 4.7% in fiscal 2002 from 5.6% in fiscal 2001. The change in gross profit as a percentage of sales was primarily due to lower margins on sales in Latin America and the change in the mix of products sold. Overall, the Company continues to experience pricing pressure in selling products.

      Selling, general and administrative expenses decreased 14.6% to $20.6 million, compared to $24.2 million in fiscal 2001. These expenses as a percentage of net sales decreased to 4.9% in 2002 compared to 5.4% in fiscal 2001.

      The 2002 cumulative effect adjustment and the 2001 non-cash impairment charges were determined based on an analysis of the Company’s goodwill and long-lived assets and the estimated future cash flows of operations associated with such impairment. See Notes 3 and 7 to the Company’s 2003 consolidated financial statements.

      Depreciation and amortization expense was $2.1 million in fiscal 2002 compared to $2.7 million in fiscal 2001.

      The Company recorded a non-cash impairment charge of $6.1 million in fiscal 2001. The non-cash accounting charge was determined based on a detailed analysis of the Company’s long-lived assets and their estimated future cash flows. The analysis resulted in the identification and measurement of an impairment loss of $5,947,000 in goodwill and approximately $200,000 in property and equipment. Substantially all of the goodwill impairment related to the Company’s acquired export distribution rights in connection with the fiscal 1996 acquisition of substantially all of the net assets of U.S. Computer of North America, Inc. This impairment resulted from a gradual, but, significant, decline in sales volumes and adverse changes in the competitive environment for the distribution of the corresponding product lines. The goodwill was not considered recoverable through other means. The impairment loss of approximately $200,000 related to the Company’s property and equipment in certain domestic assets. Management estimated the undiscounted cash

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      The results of operations in fiscal 2001 were adversely affected by inflationary conditions in Latin America. In fiscal 2001, the company recorded transaction losses of $220,000 related to U.S. denominated liabilities.

      Net interest expense was $0.3 million in fiscal 2002 compared to interest expense of $60,000 in fiscal 2001. This net change resulted primarily from an increase in working capital requirements in fiscal 2002.

      In fiscal 2002, the Company realized an income tax benefit of $1.9 million resulting from the adjustment of certain income tax liabilities and refunds received in the fourth quarter of 2002 related to recent United States tax legislation which provided for an extension of the period in which net operating losses could be carried back, offset in part by income taxes in Colombia and Argentina. At June 30, 2001 and 2002, the Company had a gross net operating loss carried forward for U.S. federal tax purposes of approximately $23 million and state income tax purposes of $28 million expiring at various dates through 2022 and gross net operating loss carry forwards for foreign income tax purposes of approximately $10 million in Brazil, which generally do not expire. At June 30, 2002 and 2001, the Company has recorded valuation allowances for principally all deferred tax assets, except for those relating to Intermaco S.R.L., as there is no assurance that these assets will be realized. Income tax expense was $0.3 million in fiscal 2001 and was primarily related to income taxes in the Company’s Latin American operations.

      The following table sets forth certain unaudited quarterly historical consolidated financial data for each of the Company’s last eight fiscal quarters ended June 30, 2003. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere herein and, in the Company’s opinion, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the selected quarterly information. The Company’s interim financial statements for the quarter ended September 30, 2001 have been restated in connection with the Company’s adoption of Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, subsequent to the issuance of the September 30, 2001 interim financial statements. The net loss as reported was $3,137,000 as compared to a net loss of $9,434,000 as restated. In addition, all per share amounts in the following table give retroactive effect to the one-for-two reverse stock split on April 26, 2002. This information should be read in conjunction

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      In the fourth quarter of fiscal 2003, the Company recorded certain expense adjustments related to changes in estimates of obligations related to sales and use tax liabilities of $1.2 million; bad debt expense of $2.1 million, $3.4 million related to benefits due under Mr. Diamond’s employment agreement (See Note 18 of the Company’s Consolidated Financial Statements) and income for insurance proceeds of $10.0 million. These fourth quarter adjustments resulted in a decrease to the net loss of approximately $.86 per share for fiscal year 2003.

      In the fourth quarter of fiscal 2002, the Company recorded certain adjustments related to changes in estimates associated with unclaimed property liabilities ($1.2 million), and the adjustment of income tax liabilities and the accrual of refunds receivable under recently enacted tax legislation ($1.9 million). These fourth quarter adjustments resulted in a reduction of the net loss of approximately $777,000 or $.20 per share for fiscal year 2002.

Liquidity and Capital Resources

      The Company’s liquidity requirements arise primarily from the funding of working capital needs, including inventories and trade accounts receivable. Historically, the Company has financed its liquidity needs largely through internally generated funds, borrowings under its credit agreement and vendor lines of credit. The Company derives all of its operating income and cash flow from its subsidiaries and relies on payments from its subsidiaries to generate the funds necessary to meet its obligations. As the Company continues operations in Latin America, management believes that capital requirements in Latin America may limit the ability of the Company’s subsidiaries in those countries to make payments to the Company.

      Operating activities used, ($.6) million of cash in fiscal 2003 and provided $1.0 million and $2.3 million of cash in fiscal 2002 and 2001, respectively. The cash used in operating activities in fiscal 2003 resulted primarily from an increase in other receivables of $10.0 million, other assets of $.1 million, and accounts payable and accrued liabilities of $.7 million which were partially offset by decreases in restricted cash of $.8 million, trade receivables of $1.2 million, inventories of $3.1 million, other non-cash items of $6.9 million and the net loss of $3.1 million. In fiscal year 2002, the Company had net cash flows from operating activities in spite of the $10.8 million loss which was the result of a non-cash impairment charge of $6.4 million affecting fiscal 2002, while the net effect of changes in operating accounts provided an additional $5.8 million

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      Investing activities used $.2 million, $.3 million and $2.3 million of cash in fiscal 2003, 2002 and 2001, respectively. The primary use of cash in fiscal 2003 and 2002 was for the purchase of equipment for $.2 million and $.3 million respectively. The use of cash in fiscal 2001 was primarily for the purchase of computer equipment for $.8 million and for additional payments related to the purchase of Intermaco S.R.L. amounting to $1.5 million.

      Financing activities provided $5.9 million of cash in fiscal 2003, provided $4.5 million of cash in fiscal 2002 and used $.4 million of cash in fiscal 2001. The net cash provided in fiscal 2003 and 2002 was primarily related to bank borrowings on the revolving line of credit. The net cash used in financing activities in fiscal 2001 primarily related to repayment of short-term borrowings by subsidiaries.

      The Company’s cash flows were adversely affected by the unfavorable changes in exchange rates in the Latin American countries in which the Company does business in fiscal years 2003, 2002 and 2001. The exchange rate changes had the effect of using approximately $4.5 million in cash for the year ended June 30, 2003 as compared to using $5.1 million in fiscal 2002 and $2.0 million in fiscal 2001.

      Subsequent to June 30, 2002, the Company terminated its credit agreement with Wachovia Bank N.A. (“Wachovia”), as amended, from time to time, which provided for borrowing under a line of credit of up to $25 million ($35 million at June 30, 2001). At June 30, 2002 and 2001, the Company had borrowings of $4.9 million and no borrowings, respectively, outstanding under this facility. Maximum borrowings under the Wachovia credit agreement were generally based on eligible accounts receivable and inventory (as defined in the credit agreement) less a $9.5 million reserve. This reserve could be drawn upon, if necessary, to finance obligations to IBM Credit Corporation (“IBM”), which financed the Company’s purchases from certain vendors. Available borrowings under this agreement, based on collateral limitations at June 30, 2002 and 2001 were $9.9 million and $23.5 million, respectively ($9.5 million of which would only be available to finance obligations due to IBM for both years, if necessary).

      The Wachovia agreement was secured by accounts receivable and inventory of SED International, Inc. and required maintenance of certain minimum working capital and other financial ratios and had certain dividend restrictions. The Company was able to borrow at Wachovia’s prime rate (4.75% as of June 30, 2002) plus .50% or the Company was able to fix the interest rate for periods of 30 to 180 days under various interest rate options. The credit agreement required a commitment fee of .50% of the unused commitment and would have expired on November 1, 2002. Average borrowings, maximum borrowings, and the weighted average interest rate for fiscal 2002 were $5.0 million, $19.1 million, and 5.67%, respectively. Average borrowings, maximum borrowings, and the weighted average interest rate for fiscal 2001 were $1.2 million, $10.0 million, and 6.75%, respectively. At June 30, 2002, the Company was not in compliance with certain agreement covenants; however, the Company was not negatively affected because the Company was successful in negotiating a new $35 million credit facility with Fleet Capital Corporation and replaced the credit agreement with Wachovia.

      On October 7, 2002, the Company entered into a three year, $35 million credit facility with Fleet Capital Corporation (the “Fleet Agreement”). The Fleet Agreement provides for revolving borrowings up to $35 million based upon the Company’s eligible domestic accounts receivable and inventory as defined therein. Borrowings under the Fleet Agreement accrue interest based upon a variety of interest rate options depending upon the computation of availability as defined therein. The interest rates range from the prime rate to the prime rate plus a margin of .5% or LIBOR plus a margin ranging from 2% to 2.75%. The Company is also subject to a commitment fee ranging from .25% to .5% on the unused portion of the facility. Interest is payable monthly. Borrowings under the Fleet Agreement are secured by substantially all domestic assets of the Company and 65% of each of the Company’s shares in its foreign subsidiaries, respectively.

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      The Fleet Agreement also contains certain covenants which, among other things, requires that if the Company’s availability is less than $5.0 million at anytime during the agreement, the Company must restrict or limit capital expenditures and advances to the Company’s Latin American subsidiaries. Also, if the $5.0 million threshold is breached the Fleet Agreement requires the maintenance of certain levels of earnings before interest, taxes, depreciation, and amortization, requires maintenance of minimum fixed charge coverage ratio beginning in the second quarter of fiscal 2004, and requires the maintenance of minimum tangible net worth, as defined, of negative $5 million. The Company has maintained at least $5 million in availability under the Fleet Agreement since its inception on October 7, 2002. The Company’s availability under the Fleet Agreement net of reserves of $2.1 million for outstanding Letters of Credit was $9.6 million on October 3, 2003. Average borrowings, maximum borrowings, and weighted average interest rate for fiscal 2003 were $14.1 million, $23.7 million and 3.85% respectively.

      At June 30, 2003, the Company would not have been in compliance with certain financial covenants under the Fleet Agreement had it breached the $5.0 million availability threshold. In the future, if the Company were to breach the $5.0 million threshold and fail to comply with the required financial covenants, Fleet may declare an event of default and could demand repayment of all outstanding borrowings and discontinue the agreement. If Fleet were to declare an event of default, the Company’s liquidity and business operations could be adversely affected.

      The Company’s subsidiary, SED International do Brasil Distribuidora Ltda., operations of which have been discontinued, operated under line of credit agreements with several Brazilian banks. Interest rates on borrowings were negotiated at the time of borrowing. The credit agreements were secured by the subsidiary’s accounts receivable and require the maintenance of certain financial ratios. At June 30, 2003, the Company had $15,000 of borrowings outstanding under these facilities. For the year ended June 30, 2003, average borrowings, maximum borrowings and the weighted average monthly interest rate under these loan agreements for fiscal 2003 were $.9 million, $2.5 million, and 25.8% respectively.

      At June 30, 2003, the Company’s subsidiary, SED International de Colombia Ltda. had no bank borrowings. In addition, the Colombian subsidiary had no significant borrowings at any time during fiscal 2003.

      The carrying value of all bank debt at June 30, 2003 and 2002 approximates its fair value based on floating market interest rates under these debt agreements.

      Future rent obligations under operating leases is approximately $2.4 million over the next four years. See Note 10 to the 2003 consolidated financial statements.

      Management believes that its credit agreements together with vendor lines of credit and internally generated funds, will be sufficient to satisfy its working capital needs during fiscal 2004. However, no assurance can be given that the Company will be able to remain in compliance with the financial covenants associated with the Fleet Agreement, or that the Company will be able to continue to obtain credit from its vendors in the future. Failure to maintain compliance under the Fleet Agreement or obtain vendor lines of credit could significantly and adversely affect the Company’s business operations.

     Critical Accounting Policies and Estimates

     Allowance for Doubtful Accounts — Methodology

      An allowance for uncollectible accounts has been established based on collection experience and an assessment of the collectibility of specific accounts. Management evaluates the collectibility of accounts receivable based on a combination of factors. Initially, management estimates an allowance for doubtful accounts as a percentage of accounts receivable based on historical collections experience. This initial estimate is periodically adjusted when management becomes aware of a specific customer’s inability to meet its financial obligations (e.g., bankruptcy filing) or as a result of changes in the overall aging of accounts receivable. Management does not believe the estimate of the allowance for doubtful accounts is likely to be adversely affected by any individual customer, since the Company is protected by credit insurance on its

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     Inventories — Slow Moving and Obsolescence

      Most of the Company’s vendors allow for either return of goods within a specified period (usually 90 days) or for credits related to price protection. However, for other vendor relationships and inventories, the Company is not protected by vendors from the risk of inventory loss. Therefore, in determining the net realizable value of inventories, management identifies slow moving or obsolete inventories that (1) are not protected by vendor agreements from risk of loss, and (2) are not eligible for return under various vendor return programs. Based upon these factors, management estimates the net realizable value of inventories and records any necessary adjustments as a charge to cost of sales. If inventory return privileges were discontinued in the future, or if vendors were unable to honor the provisions of certain contracts which protect the Company from inventory losses, including price protections, the risk of loss associated with obsolete or slowing moving inventories would increase. The Company’s reserve for obsolete and slowing moving inventories was approximately $1,052,000 at June 30, 2003 or 3.08% of gross inventories.

     Accrued Liabilities

      The Company has recorded liabilities for certain sales tax liabilities, escheat liabilities, and employment agreement obligations. The recording of these liabilities requires the Company to make judgments and estimates. Certain of the estimates are highly subjective and may be subject to change in the future. At June 30, 2003 the Company has accrued its best estimate of the amounts which will ultimately be required to be paid in connection with such matters.

     Financial Instruments

      The functional currency for the Company’s international subsidiaries is the local currency for the country in which the subsidiaries own their primary assets. The translation of the applicable currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. Any related translation adjustments are recorded directly to shareholders’ equity as a component of comprehensive income.

      In January 2001, the Company entered into non-deliverable forward contracts covering Brazilian R$2,047,000, or US $1,000,000. These contracts were accounted for as speculative forward contracts. These contracts were settled in March 2001 at a gain of $33,000. The Company has no future plans to enter into foreign exchange forward or option contracts to hedge foreign currency transactions. These were isolated transactions. Generally, it is the Company’s policy not to enter into derivative contracts for speculative trading purposes.

     Inflation and Price Levels

      Inflation has not had a significant impact on the Company’s business because of the typically decreasing costs of products sold by the Company. The Company also receives vendor price protection for a significant portion of its inventory. In the event a vendor reduces its prices for goods purchased by the Company prior to the Company’s sale of such goods, the Company generally has been able either to receive a credit from the vendor for the price differential or to return the goods to the vendor for a credit against the purchase price.

      The Latin American countries in which the Company operates have experienced high rates of inflation and hyperinflation from time to time in the past. At this time, management estimates that inflation may have a material impact on the Company’s Latin American business operations in the immediate future (See Item 7A).

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     Forward-Looking Statements

      The matters discussed herein and in the Letter to Shareholders accompanying this Annual Report on Form 10-K contain certain forward-looking statements that represent the Company’s expectations or beliefs, including, but not limited to, statements concerning future revenues and future business plans. When used by or on behalf of the Company, the words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company’s control. The Company cautions that various factors, including the factors described under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Company’s Registration Statement on Form S-3 (SEC File No. 333-35069) as well as general economic conditions and industry trends, foreign currency fluctuations, the level of acquisition opportunities available to the Company and the Company’s ability to negotiate the terms of such acquisitions on a favorable basis, a dependence upon and/or loss of key vendors or customers, the transition to indirect distribution relationships for some products, the loss of strategic product shipping relationships, customer demand, product availability, competition (including pricing and availability), concentrations of credit risks, distribution efficiencies, capacity constraints and technological difficulties could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements of the Company made by or on behalf of the Company. The Company undertakes no obligation to update any forward-looking statement.

      The Company is subject to market risk arising from adverse changes in interest rates and foreign exchange. The Company does not enter into financial investments for speculation or trading purposes and is not a party to any financial or commodity derivatives.

Interest Rate Risk

      The Company’s cash equivalents and short-term investments and its outstanding debt bear variable interest rates which adjust to market conditions. Changes in the market rate affects interest earned and paid by the Company. The Company does not use derivative instruments to offset the exposure to changes in interest rates. Changes in the interest rates are not expected to have a material impact on the Company’s results of operations.

Foreign Currency Exchange

      The functional currency for the Company’s international subsidiaries is the local currency for the country in which the subsidiaries own their primary assets. The translation of the applicable currencies into U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate during the period. Any related translation adjustments are recorded directly to shareholders’ equity as a component of comprehensive income. As a result of the change in currency, the Company recorded foreign currency translation gain as a component of comprehensive income of approximately $0.2 million for the fiscal year ended June 30, 2003.

      The Company distributes many of its products in foreign countries, primarily in Latin America. Approximately 22.5% of the Company’s total net sales were generated from sales made to resellers located in Latin American countries during the twelve-month period ended June 30, 2003. The Company manages its risk to foreign currency rate changes by maintaining foreign currency bank accounts in currencies in which it regularly transacts business. Additionally, the Company’s foreign subsidiaries procure inventory payable in U.S. dollars for resale in their respective countries. Upon settlement of the payables, the Company may be required to record transaction gains or losses resulting form currency fluctuations from the time the subsidiary entered into the agreement to settlement date of the liability. During the year ended June 30, 2003, the Company recorded transaction losses of approximately $581,000. At June 30, 2003, the Company’s foreign subsidiaries had approximately $2.4 million in U.S. dollar denominated liabilities. In the aggregate, if the

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      The information included in the Company’s financial statements, and other documentation, does not include the potential impact that might arise from any decline in foreign currency in Latin American after June 30, 2003 or those declines which may occur in the future and, accordingly, should be analyzed considering that circumstance.

      Since January 1, 2002, Argentina has experienced annual inflation rates of approximately 10.0%. While the Argentine government together with the International Monetary Fund is seeking remedies, no assurance can be given that the economic situation in Argentina will stabilize. The devaluation, which commenced in January 2002, could make it more difficult for Argentine companies to service their commercial and financial obligations due in or tied to the USD. Any of the foregoing events and a continuation of the Argentine recession may have a material adverse effect on the Company’s business, results of operations, financial condition, and ability to make payments on the Company’s indebtedness and on the Company’s common stock market price. The information included in the Company’s financial statements, and other documentation, does not contain the potential impact that might arise from the situation described above and, accordingly, should be analyzed considering that circumstance. Please refer to Note 17 of the Company’s Consolidated Financial Statements.

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Board of Directors

      We have audited the accompanying consolidated balance sheets of SED International Holdings, Inc. and subsidiaries as of June 30, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended June 30, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SED International Holdings, Inc. and subsidiaries as of June 30, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 2003, in conformity with accounting principles generally accepted in the United States of America.

      As discussed in Note 3, effective July 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

	/s/ ERNST & YOUNG LLP

Atlanta, Georgia

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SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

See notes to consolidated financial statements.

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SED INTERNATIONAL HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS