Item 201(d) of Regulation S-K appears in Part III, Item 12 hereof and in Note 7 to SED’s Consolidated Financial Statements.

FIVE YEAR PERFORMANCE GRAPH

     The following graph presents a comparison of the cumulative total shareholder return on SED’s common stock with the Russell Microcap Index and the average performance of a group consisting of SED’s peer corporations on a line of business basis. The companies comprising the peer issuers group are Arrow Electronics, Inc; Avnet, Inc.; Ingram Micro Inc.; Merisel, Inc.; and Tech Data Corporation. This graph assumes that $100 was invested, on June 30, 2002, on SED’s common stock and in the other indices and that all dividends were reinvested. The peer corporations were weighted on a market capitalization basis at the time of each reported data point. The stock price performance shown below is not necessarily indicative of future price performance.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among SED International Holdings, Inc., The Russell MicroCap Index
And A Peer Group

		Base
		Period				Return				Return				Return				Return				Return
		6/02				6/03				6/04				6/05				6/06				6/07
SED INTERNATIONAL HOLDINGS, INC.			100.00				73.72				156.11				36.43				85.00				138.77
RUSSELL MICROCAP			100.00				104.78				145.62				151.71				173.37				198.00
PEER GROUP			100.00				69.92				110.01				110.85				118.91				160.68

Item 6. Selected Financial Data Five Year Financial Summary

		Year ended June 30,
		2007				2006				2005				2004				2003
Statement of operations data:
Net sales		$	408,435,000			$	412,371,000			$	380,864,000			$	371,741,000			$	413,148,000
Cost of sales			386,515,000				390,968,000				364,091,000				355,168,000				393,724,000
Gross profit			21,920,000				21,403,000				16,773,000				16,573,000				19,424,000
Selling, general and administrative expenses			20,254,000				17,958,000				17,195,000				18,536,000				24,961,000
Depreciation and amortization expense			413,000				422,000				868,000				1,233,000				1,614,000
Foreign currency transaction (gain) loss			(876,000	)			512,000				(244,000	)			14,000				581,000
Loss (gain) on disposal of assets			—				—				31,000				(30,000	)			(3,000	)
Impairment charges			—				—				—				—				39,000
Operating income (loss)			2,129,000				2,511,000				(1,077,000	)			(3,180,000	)			(7,768,000	)
Interest expense — net			1,574,000				1,389,000				691,000				246,000				470,000
Other income — net			—				—				—				—				10,513,000
Income (loss) before income taxes from continuing operations			555,000				1,122,000				(1,768,000	)			(3,426,000	)			2,275,000
Income tax expense			1,368,000				931,000				680,000				801,000				613,000
(Loss) income from continuing operations			(813,000	)			191,000				(2,448,000	)			(4,227,000	)			1,662,000
(Loss) income from discontinued operations			(70,000	)			193,000				(154,000	)			(42,000	)			(4,742,000	)
Net (loss) income		$	(883,000	)		$	384,000			$	(2,602,000	)		$	(4,269,000	)		$	(3,080,000	)
Basic and diluted (loss) income per share:
From continuing operations		$	(.21	)		$	.05			$	(.63	)		$	(1.10	)		$	0.43
From discontinued operations			(.02	)			.05				(.04	)			(.01	)			(1.24	)
Basic and diluted (loss) income per share		$	(.23	)		$	.10			$	(.67	)		$	(1.11	)		$	(0.81	)
Weighted average number of shares outstanding:
Basic			3,877,000				3,872,000				3,871,000				3,856,000				3,816,000
Diluted			3,877,000				3,884,000				3,871,000				3,856,000				3,816,000

		At June 30,
		2007				2006				2005				2004				2003
Balance sheet data:
Working capital		$	21,055,000			$	20,528,000			$	20,632,000			$	22,001,000			$	25,514,000
Total assets			93,222,000				75,315,000				70,783,000				69,219,000				86,170,000
Shareholders’ equity			22,159,000				21,469,000				21,823,000				23,606,000				27,716,000

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 SED 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

     During fiscal 2007, SED’s consolidated net sales decreased approximately 1.0% when compared to fiscal 2006. This can be attributed to a 9.1% decrease in domestic sales offset by a 14.7% increase in Latin America and export sales. Sales in Latin America and export sales from the United States represented 39.5% of sales in fiscal 2007 compared to 34.1% in fiscal 2006.

     The revenue increase in Latin America and export sales from fiscal 2006 along with product mix changes resulted in an improvement of in gross profit during fiscal 2007. Gross profit as a percentage of net sales increased to 5.4% in fiscal 2007, compared to 5.2% in fiscal 2006.

     Selling, general and administrative expenses, excluding depreciation and amortization expense, increased to $20.3 million or 5.0% of net sales in 2007 compared to $18.0 million or 4.4% in fiscal 2006.

     SED had a net loss of $.9 million in fiscal 2007, compared to a net income of $.4 million in fiscal 2006. SED had a loss from discontinued operations of $70,000 in fiscal 2007 compared to a gain of $193,000 in fiscal 2006. Operating income in Latin American subsidiaries was $3.2 million in fiscal 2007 and $2.1 million in fiscal

2006 while operating loss in the United States was $1.1 million in fiscal 2007 compared to operating income of $.4 million in fiscal 2006.

     SED experienced a slight decline in net sales in fiscal 2007 compared to fiscal 2006 and recognized operating income in both fiscal 2007 and 2006. SED incurred an operating loss in fiscal 2005. Company management is continuing to focus on increasing sales and profit margins and reducing administrative and overhead costs. There is no assurance SED will be successful in its efforts. Failure to improve margins and reduce overhead could adversely affect SED’s profitability and financial condition.

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

	§		Continuation of distribution agreements — SED operates under formal but cancelable distribution agreements with certain of its suppliers. If these agreements were cancelled, SED would be forced to obtain its products through wholesalers. This would reduce SED’s profit margin on the affected products.
	§		Availability of certain products — From time to time, due to production limitations or heavy demand, SED may only be able to purchase a limited amount of popular products from its suppliers.
	§		Product margins — SED operates in a very competitive business environment. Accordingly, product margins are continually under pricing pressure. From time to time, SED receives price protection and other considerations from its vendors. While SED has no reason to believe such vendor consideration will not continue, no assurance can be given that such price protection and other considerations will continue to be received in the future.
	§		Vendor credit — SED significantly relies on its suppliers for trade credit. Changes by the suppliers in their credit terms could force SED to obtain less favorable financing for its purchases.
	§		Product obsolescence — SED offers a broad line of products that are subject to fast technological obsolescence, which increases the risk of inventory markdown. Through its vendor agreements, SED has certain stock return privileges, which vary from supplier to supplier. SED believes stock return programs will continue in the future, but can give no assurance about whether these programs will continue.
	§		Consumer Electronics – SED has entered into the distribution of consumer electronics in fiscal 2004, which is highly competitive. Some of SED’s competitors have substantially greater financial, marketing and distribution resources than SED and SED may be unable to successfully compete with these companies. Failure to successfully penetrate this market could have an adverse impact on SED’s cash flows, financial position and operating results.
	§		Credit decisions and losses — SED maintains an experienced customer credit staff and relies on customer payment history and third party data to make customer credit decisions. Nevertheless, SED may experience customer credit losses in excess of its expectations. From time to time, depending on credit risk assessment and coverage costs, SED maintains credit insurance for customers located in the United States and maintains insurance in many Latin American countries (subject to certain terms and conditions). However, the terms of the credit insurance agreement require SED to maintain certain minimum standards and policies with respect to extending credit to customers. If SED does not adhere to such policies, the insurance companies may not pay claims submitted by SED.
	§		Proportionate control of general and administrative costs — SED attempts to control its overhead costs to keep such costs in line with its sales volume. As sales volumes fluctuate, SED 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 SED operates in Latin America is uncertain and, at times, volatile. As a result of these conditions, SED could experience unexpected costs from its operations in these countries.
	§		Availability of credit facilities — SED operates under a formal credit facility with a bank obtained in

			September 2005. The agreement was amended in March 2007 to extend the maturity to September 2011. This credit facility is subject to certain collateral limitations and certain covenants. SED from time to time has violated the financial covenants associated with previous credit agreements, but was successful in negotiating waivers of such violations. No assurance can be given that SED 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 SED’s ability to obtain vendor credit and the overall business operations. The principal credit facility, which expires in September 2011, is further described in Note 4 to SED’s Consolidated Financial Statements.
	§		Cash flows — While not presently anticipated, SED’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 September 2005 credit facility places certain restrictions on the future funding of Latin American operations (see Note 4 to SED’s Consolidated Financial Statements).

     For SED’s domestic operations, all purchases and sales are denominated in United States dollars. For SED’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.

Results of Continuing Operations

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

		Year Ended June 30,
		2007				2006				2005
Net sales			100.00	%			100.00	%			100.00	%
Cost of sales, including buying and occupancy expense			94.63	%			94.81	%			95.60	%
Gross profit			5.37	%			5.19	%			4.40	%
Selling, general and administrative expenses			4.96	%			4.35	%			4.51	%
Depreciation and amortization expense			.10	%			.10	%			.23	%
Foreign currency transactions (gain) loss			(.21	)%			.13	%			(.06	)%
Operating income (loss)			.52	%			.61	%			(.28	)%
Interest expense			.38	%			.34	%			.18	%
Income (loss) before income taxes from continuing operations			.14	%			.27	%			(.46	)%
Income tax expense			.34	%			.22	%			.18	%
(Loss) income from continuing operations			(.20	)%			.05	%			(.64	)%

Fiscal 2007 Compared to Fiscal 2006

     Net sales from continuing operations decreased 1.0%, or $4.0 million, to $408.4 million in fiscal 2007 compared to $412.4 million in fiscal 2006. Microcomputer product sales, excluding handling revenue, increased 1.3% to $353.6 million compared to $349.1 million in fiscal 2006 due to an increase in Hewlett Packard product sales. Consumer electronics sales in fiscal 2007 increased 42.2% to $46.2 million compared to $32.5 million in fiscal 2006 due to an increase in sales of Westinghouse product and the addition of other consumer product lines. Wireless revenues in fiscal 2007 declined 74.1% to $7.6 million compared to $29.5 million in fiscal 2006 due to a decrease in LG Infocomm and Audiovox products available to SED.

     Net sales from continuing operations decreased 1.0%, or $4.0 million, to $408.4 million in fiscal 2007 compared to $412.4 million in fiscal 2006. Information concerning SED’s domestic and foreign sales is summarized below:

		Year Ended
		June 30,								Change
		2007				2006				Amount				Percent
		($ in Millions)
United States:
Domestic		$	247.1			$	271.8			$	(24.7	)			(9.1	%)
Export			73.9				64.1				9.8				15.3	%
Latin America			90.0				76.5				13.5				17.6	%
Elimination			(2.6	)			—				(2.6	)			N/A
Consolidated		$	408.4			$	412.4			$	(4.0	)			(1.0	%)

     Domestic sales were $247.1 million and $271.8 million in fiscal 2007 and fiscal 2006, respectively. The decrease in domestic sales was due to a $20.8 million decrease in cellular products and an $11.0 million decrease in computer products offset by a $7.1 million increase in consumer electronics products. Latin America and export sales were $161.3 million and $140.6 million in fiscal 2007 and fiscal 2006, respectively. The increase in Latin America and export sales was due to an increase in sales of computer products, printers and consumable printer products.

     Sales of microcomputer products, including handling revenue, represented approximately 86.8% of SED’s net sales in fiscal 2007 compared to 85.0% for fiscal 2006. Sales of consumer electronics products accounted for approximately 11.3% of SED’s net sales in fiscal 2007 compared to 7.9% for fiscal 2006. Sales of wireless telephone products accounted for approximately 1.9% of SED’s net sales in fiscal 2007 compared to 7.1% for fiscal 2006. Sales of wireless telephone products declined due to LG product availability issues caused by a discontinued vendor relationship with LG.

     Gross profit increased $.5 million to $21.9 million in fiscal 2007, compared to $21.4 million in fiscal 2006. Gross profit as a percentage of net sales increased to 5.4% from 5.2% for fiscal 2007 compared to 2006. The gross profit increase resulted from a more favorable mix of products sold in the United States which offset a margin decline in Latin America. Gross profit in Latin America declined principally due to changes in product cost related to unfavorable exchange rates which caused product cost to rise. Overall, SED continues to experience pricing pressure in selling products.

     Selling, general and administrative expenses, excluding depreciation and amortization expense, for fiscal 2007 increased 12.8% to $20.3 million, compared to $18.0 million in fiscal 2006. These expenses as a percentage of net sales increased to 5.0% in 2007 compared to 4.4% in fiscal 2006. The increase in selling, general and administrative expenses was primarily due to several factors including (i) an increase of approximately $130,000 in employee and contract labor, (ii) an increase of $550,000 in credit and collection expense, (iii) an increase of $440,000 in occupancy and security expense, and (iv) an increase of $260,000 in professional fees. Other general expenses increased in fiscal 2007 compared to fiscal 2006 due to the non-recurrence of credits totaling $600,000 recorded in fiscal 2006 for sales tax and escheat credit settlements.

     Depreciation and an amortization was $.4 million in both fiscal 2007 and fiscal 2006.

     SED has significant U.S. dollar denominated liabilities in Latin American subsidiaries. The revaluation resulted in foreign currency transaction gains totaling approximately $.9 million in fiscal 2007 as compared to a loss of approximately $.5 million in fiscal 2006. See Item 7A for further discussion.

     Interest expense was $1.6 million in fiscal 2007 compared to $1.4 million in fiscal 2006. This change resulted primarily from rising interest rates and a higher average loan balance.

     Income tax expense was approximately $1.4 million in fiscal 2007 compared to $.9 million in fiscal 2006. At June 30, 2007, SED has a gross net operating loss carried forward for U.S. federal tax purposes of approximately $63.0 million and state tax purposes of approximately $53.6 million; expiring at various dates through 2027. At

June 30, 2007 and 2006, SED has recorded valuation allowances for principally all deferred tax assets, except for those relating to Intermaco S.R.L. (Argentina), as it is not more likely than not that these assets will be realized.

Fiscal 2006 Compared to Fiscal 2005

     Net sales from continuing operations increased 8.3%, or $31.5 million, to $412.4 million in fiscal 2006 compared to $380.9 million in fiscal 2005. Microcomputer product sales, excluding handling revenue, increased 12.4% to $349.1 million compared to $310.7 million in fiscal 2005 due to an increase in Acer and Hewlett Packard product sales. Wireless revenues in fiscal 2006 declined 35.2% to $29.5 million compared to $45.5 million in fiscal 2005 due to a decrease in LG Infocomm and Audiovox products available to SED. Consumer electronics sales in fiscal 2006 increased 38.9% to $32.5 million compared to $23.4 million in fiscal 2005 due to an increase in sales of Panasonic product and the addition of other consumer product lines.

     Information concerning SED’s domestic and foreign sales is summarized below:

		Year Ended
		June 30,								Change
		2006				2005				Amount				Percent
		($ in Millions)
United States:
Domestic		$	271.8			$	267.5			$	4.3				1.6	%
Export			64.1				59.5				4.6				7.7	%
Latin America			76.5				53.9				22.6				41.9	%
Consolidated		$	412.4			$	380.9			$	31.5				8.3	%

     Domestic sales were only slightly higher in fiscal 2006 compared to fiscal 2005. The increase in U.S. export sales was primarily due to an improvement in the sale of desktops, notebooks, printers and printer consumables while sales in our Latin American subsidiaries increased due to the slightly improving economies in Argentina and Colombia.

     Sales of microcomputer products represented approximately 85.0% of SED’s net sales in fiscal 2006 compared to 81.9% for fiscal 2005. Sales of wireless telephone products accounted for approximately 7.1% of SED’s net sales in fiscal 2006 compared to 12.0% for fiscal 2005. Sales of consumer electronics products accounted for approximately 7.9% of SED’s net sales in fiscal 2006 compared to 6.1% for fiscal 2005.

     Gross profit increased $4.6 million to $21.4 million in fiscal 2006, compared to $16.8 million in fiscal 2005. Gross profit as a percentage of net sales increased to 5.2% in fiscal 2006 compared to 4.4% in 2005. The increase in gross profit margin is primarily a result of volume and higher margin sales. SED’s margins may be affected by several factors including (i) the mix of products sold, (ii) the price of products sold and provided and (iii) increased competition. Overall, SED continues to experience pricing pressure in selling products.

     Selling, general and administrative expenses for fiscal 2006 increased 4.4% to $18.0 million, compared to $17.2 million in fiscal 2005. These expenses as a percentage of net sales decreased to 4.4% in 2006 compared to 4.5% in fiscal 2005. The increase in expense from the prior year is attributed to several factors including (i) approximately $.9 million in employee related expenses for salaries and commissions related to increased sales volumes and margins, and (ii) a net decline of $.1 million in other expenses.

     The results of operations of SED are subject to and can be adversely affected by the inflationary conditions in Latin America and the fluctuations of the Argentine and Colombian currencies. Since SED has significant U.S. dollar denominated liabilities in Latin American subsidiaries, the devaluation resulted in foreign currency transaction losses totaling approximately $.5 million in fiscal 2006 as compared to gains of approximately $.2 million in fiscal 2005. See Item 7A for further discussion.

     Net interest expense was $1.4 million in fiscal 2006 compared to $.7 million in fiscal 2005 resulting from increased borrowings and rising interest rates.

     Income tax expense was approximately $.9 million in fiscal year 2006 compared to $.7 million in 2005. The income tax expense is primarily related to income generated by SED’s Latin American subsidiaries. At June 30, 2006, SED has a gross net operating loss carried forward for U.S. federal tax purposes of approximately $58.5 million and state tax purposes of approximately $52.1 million; expiring at various dates through 2026. At June 30, 2006 and 2005, SED has recorded valuation allowances for principally all deferred tax assets, except for those relating to Intermaco S.R.L. (Argentina), as it is uncertain that these assets will be realized.

Discontinued Operations

     In February 2003, SED resolved to discontinue commercial operations of its Brazilian subsidiary, SED International do Brasil Distribuidora, Ltda. (the “Brazil Operation”). Accordingly, the operating results of SED International do Brasil Distribuidora, Ltda. have been classified as a discontinued operation for all periods presented in SED’s consolidated statements of operations. See Note 12 to SED’s Consolidated Financial Statements.

     SED International do Brasil Distribuidora, Ltda. has been transitioned from a commercial operating company into dormancy. During the dormancy period, SED may incur ongoing operating expenses for attorney fees, statutory bookkeeping and reporting services. Please refer to Note 12 to SED’s Consolidated Financial Statements for further information regarding the results of operations for the reporting periods.

     SED International do Brasil Distribuidora Ltda. has various litigations related to additional income taxes and social taxes allegedly due from the fiscal years 1998 through 2004. These legal claims were filed during the years 2002 and 2003. The legal claims range from $3,000 to $219,000 each or $522,000 in the aggregate. During fiscal 2007 SED incurred $70,000 in costs related to Brazil. After recording this cost, SED has an accrued liability of $270,000 at June 30, 2007 to cover potential losses related to these claims.

Quarterly Data

     The following table sets forth certain unaudited quarterly historical consolidated financial data for each of SED’s last eight fiscal quarters ended June 30, 2007. This unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere herein and, in SED’s opinion, includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the selected quarterly information. This information should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein. The operating results for any quarter shown are not necessarily indicative of results for any future period.

		Quarter Ended
		Sept 30,				Dec 31,				Mar 31,				June 30,				Sept 30,				Dec 31,				Mar 31,				June 30,
		2005				2005				2006				2006				2006				2006				2007				2007
		(In thousands, except per share data)
Net sales		$	102,298			$	102,986			$	109,557			$	97,530			$	96,621			$	93,009			$	107,692			$	111,113
Gross profit			4,484				5,275				5,666				5,978				5,124				5,364				6,030				5,402
Operating income (loss)			1				756				1,069				685				760				750				825				(206	)
(Loss) income from continuing operations			(459	)			158				441				51				113				27				21				(974	)
(Loss) income from discontinued operations			(7	)			—				—				200				—				—				—				(70	)
Net (loss) income		$	(466	)		$	158			$	441			$	251			$	113			$	27			$	21			$	(1,044	)
(Loss) income per share:
From continuing operations		$	(.12	)		$	.04			$	.11			$	.02			$	.03			$	.01			$	—			$	(.25	)
From discontinued operations			—				—				—				.05				—				—				—				(.02	)
Total (loss) income per share		$	(.12	)		$	.04			$	.11			$	.07			$	.03			$	.01			$	—			$	(.27	)

Contractual Obligations

     The following table summarized SED’s contractual obligations, as discussed in the Notes to the Consolidated Financial Statements as of June 30, 2007.

		Payments Due By Period
Contractual Obligations		TOTAL				2008				2009				2010				2011				2012
Operating Leases		$	3,589,000			$	1,119,000			$	1,113,000			$	755,000			$	392,000			$	210,000

Off-Balance Sheet Arrangements

     An off-balance sheet arrangement is any contractual arrangement involving an unconsolidated entity under which a company has (a) made guarantees, (b) a retained or a contingent interest in transferred assets, (c) any obligation under certain derivative instruments or (d) any obligation under a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk, or credit risk support to SED, or engages in leasing, hedging, or research and development services within SED.

     SED does not have any off-balance sheet financing arrangements or unconsolidated special purpose entities.

Liquidity and Capital Resources

     SED’s liquidity requirements arise primarily from the funding of working capital needs, including inventories and trade accounts receivable. As a percentage of total assets exclusive of other receivables, accounts receivable and inventories were approximately 89.9% and 91.0% in fiscal 2007 and 2006, respectively. It has been SED’s experience that in periods of revenue growth, investments in accounts receivable and inventories grow, and SED’s need for financing may increase. In the periods in which revenue declines, investments in accounts receivable and inventories generally decrease and cash is generated. At June 30, 2007, accounts receivable and inventories, net of payables, increased by $8.6 million, or 24.8%, compared with June 30, 2006. In fiscal 2006, accounts receivable and inventories, net of payables, increased by 2.3%, or $.8 million, compared with fiscal 2005.

     Historically, SED has financed its liquidity needs largely through internally generated funds, borrowings under its credit agreement and vendor lines of credit. SED derives a substantial portion of its operating income and reported cash flows from its foreign subsidiaries and, due to certain bank and regulatory regulations, relies on such cash flows to satisfy its foreign obligations. While SED continues operations in Latin America, management believes that domestic banking agreements and international monetary restrictions may limit SED’s ability to transfer cash between its domestic and international subsidiaries.

     At June 30, 2007, SED had cash and cash equivalents of $3.4 million, of which $1.9 million is held in Latin American banks by SED’s subsidiaries in Argentina and Colombia. The funds held in Latin American banks are generally not available for use domestically without withholding taxes. At June 30, 2007, SED’s principal source of liquidity is its $3.4 million of cash, and its revolving credit facility. SED’s availability under the Wachovia Agreement was $8.4 million at June 30, 2007, net of $3.6 million in reserves for outstanding stand-by letters of credit.

     The net amount of cash used in SED’s operating activities in fiscal 2007 was $8.4 million, principally as a result of changes in working capital requirements. The net amount of cash used in investing activities in fiscal 2007 was $.5 million. The net amount of cash provided by financing activities in fiscal 2007 was $7.0 million.

     The net amount of cash used in operating activities in fiscal 2006 was $2.0 million, principally reflecting changes in working capital requirements. The net amount of cash used in investing activities in fiscal 2006 was $.2 million. The net amount of cash provided by financing activities in fiscal 2006 was $3.9 million and reflects additional borrowings under our short-term revolving credit.

     The net amount of cash used in SED’s operating activities in fiscal 2005 was $3.7 million, principally as a result of changes in working capital requirements. The net amount of cash used for investing activities in fiscal 2005 was $.5 million. The net amount of cash provided by financing activities in fiscal 2005 was $2.7 million reflecting additional borrowings under our revolving credit facility.

     SED’s cash flows in fiscal 2007 were positively affected by the favorable changes in exchange rates in the Latin American countries in which SED does business. The exchange rate changes had the effect of providing approximately $.8 million in cash for the year ended June 30, 2007 as compared to using $.4 million in fiscal 2006 and providing $.4 million in fiscal 2005.

     On March 1, 2007, SED signed a three-year extension on a credit facility with Wachovia Bank, National Association (the “Wachovia Agreement”) which extended the maturity to September 21, 2011. The Wachovia agreement was originally entered into on September 21, 2005 with a term of three years. On July 17, 2007, SED elected to increase its line of credit to $40.0 million from $35.0 million as allowed under the Wachovia agreement. On August 23, 2007, the Wachovia line of credit was increased temporarily for 60 days to $50.0 million to accommodate a $9.0 million purchase from one vendor for a televised product offering by one of SED’s customers. After the 60 day period, the line of credit will revert back to $40.0 million. The Wachovia agreement provides for revolving borrowings based on SED’s eligible accounts receivable and inventory as defined therein, and the line of credit may be increased to $50.0 million, on a non-temporary basis, in $5.0 million increments at SED’s direction, if certain additional criteria are met.

     Borrowings under the Wachovia 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 LIBOR, plus a margin ranging from 1.25% to 2.00%, to the prime rate. SED is also subject to a commitment fee of .25% on the unused portion of the facility. Interest is payable monthly. Borrowings under the Wachovia Agreement are collateralized by substantially all domestic assets of SED and 65% of each of SED’s shares in its foreign subsidiaries, respectively.

     The Wachovia Agreement contains certain covenants which, among other things, require that SED maintain availability of $5 million or more during the agreement to make advances to SED’s Latin American subsidiaries. SED’s advances to its Latin American subsidiaries are restricted. The Wachovia Agreement also contains a covenant which requires that if SED’s availability is less than $3.5 million ($5.0 million prior to amendment) at any time during the agreement, then maintenance of a minimum fixed charge coverage ratio is required, as defined. The Wachovia Agreement also restricts SED’s ability to distribute dividends.

     Available borrowings under this agreement, based on collateral limitations at June 30, 2007 were $8.4 million. Average borrowings, maximum borrowings and weighted average interest rate for fiscal 2007 were $21.1 million, $26.6 million and 7.1%, respectively. The weighted average interest rate on outstanding borrowings under credit facilities was 7.1% at June 30, 2007. Average borrowings, maximum borrowings and weighted average interest rate for fiscal 2006 were $20.5 million, $25.1 million and 6.6%, respectively.

     The carrying value of all bank debt at June 30, 2007 approximates its fair value based on the variable market rates of interest on such bank debt. Outstanding Letters of Credit under the Wachovia Agreement totaled $ 3.6 million at June 30, 2007.

     On January 26, 2007, the Company entered into a 3 year interest rate swap contract to reduce the impact of the fluctuations in the interest rate on $5.0 million notional amount of the revolving credit facility. The contract effectively converted the variable rate to a fixed rate of 5.20%. On June 8, 2007, the three year swap agreement was amended to a notional amount of $10.0 million with a fixed rate of 5.37%. The Company utilizes derivative financial instruments to reduce interest rate risk. The Company does not hold or issue derivative financial instruments for trading purposes. Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), establishes accounting and reporting standards for derivative instruments and hedging activities. As required by SFAS 133, the Company recognizes all derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value. Changes in the fair value of those instruments are reported in earnings or other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The accounting for gains and losses associated with changes in the fair value of the derivative and the effect on the financial statements will depend on its hedge designation and

whether the hedge is highly effective in achieving offsetting changes in the fair value of cash flows of the asset or liability hedged. The fair value of the interest rate swap contract was not material at June 30, 2007.

     There have been no material changes to obligations and/or commitments since year-end. Purchase orders or contracts for the purchase of inventory and other goods and services are not included in management’s estimates. Management is not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. SED’s purchase orders are based on its current distribution needs and are fulfilled by its vendors within short time horizons. SED does not have significant agreements for the purchase of inventory or other goods specifying minimum quantities or set prices that exceed our expected requirements for the year ended June 30, 2007.

     Management believes that SED’s credit agreements together with vendor lines of credit and internally generated funds will be sufficient to satisfy its working capital needs during fiscal 2008. However, no assurance can be given that SED will be able to remain in compliance with the financial covenants associated with the Wachovia Agreement, or that SED will be able to continue to obtain credit from its vendors in the future. Failure to maintain compliance under the Wachovia Agreement or obtain vendor lines of credit could significantly and adversely affect SED’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. The overall determination of the allowance also considers credit insurance coverage and deductibles, which SED has maintained from time to time. SED maintains credit insurance, which protects SED from credit losses exceeding certain deductibles for certain domestic sales and certain export shipments from the United States. SED maintains credit insurance in many Latin American countries (subject to certain terms and conditions). See Note 11 to SED’s Consolidated Financial Statements for a summary of the movement of the allowance for doubtful accounts.

Inventories — Slow Moving , Obsolescence, and Lower of Cost or Market

     Most of SED’s vendors allow for either return of goods within a specified period (usually 45-90 days) or for credits related to price protection. However, for other vendor relationships and inventories, SED 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 SED from inventory losses, including price protections, the risk of loss associated with obsolete, slow moving or impaired inventories would increase. SED’s reserve for obsolete and slowing moving inventories was approximately $945,000 at June 30, 2007 or 2.2% of gross inventories.

Financial Instruments

     SED’s principal financial instruments consist of cash, accounts receivable, accounts payable and revolving credit facilities. The carrying value of these financial instruments approximate fair value based upon the short-term nature of the instruments, and the variable rates on credit facilities.

     The functional currency for SED’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 accumulated other comprehensive loss. It is SED’s policy not to enter into derivative contracts for speculative trading purposes.

     SED’s revolving credit facility is currently a variable rate facility. During fiscal 2007, SED entered into a three year interest rate swap contract to reduce the impact of the fluctuations in the interest rate on $10.0 million notional amount of the obligation under its revolving credit facility.

Inflation and Price Levels

     Inflation has not had a significant impact on SED’s overall business because of the typically decreasing costs of products sold by SED. SED also receives vendor price protection for a significant portion of its inventory. In the event a vendor or competitor reduces its prices for goods purchased by SED prior to SED’s sale of such goods, SED 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 credit.

     The Latin American countries in which SED 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 SED’s Latin American business operations in the immediate future (See Item 7A).

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     SED is subject to market risk arising from adverse changes in interest rates and foreign exchange rates. SED 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

     SED’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 affect intere