SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

OR

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

At January 28, 2002, there were 7,971,078 shares of Common Stock, $.01 par value, outstanding.

PART I - FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

SED International Holdings, Inc.

And Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements.

(Unaudited)

(1) Comprehensive (losses) and earnings for the six months ended December 31, 2001 and 2000 were $(11,878,000) and $56,000, respectively.

See notes to condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

E. Segment Information

Net sales by product category is as follows:

Net sales by product category is as follows:

F. Risks and Uncertainties

Net sales decreased 16.6%, or $22.0 million, to $110.2 million in the second quarter ended December 31, 2001 compared to $132.2 million in the second quarter ended December 31, 2000. Information concerning the Company's domestic and foreign sales is summarized below:

The decrease resulted from a decrease in United States domestic sales, a decrease in sales to customers for export principally to Latin America, and a decrease in sales to customers in Latin America. The decrease in sales in Latin America was principally due to lower sales to customers in Brazil associated with more stringent credit standards and a change in sales pricing policies.

The decrease in sales in the United States was primarily due to lower sales of printers, printer consumables, computer processors, and wireless products. The decrease in the U.S. export sales was due primarily to lower sales of printers and printer consumables. Sales of microcomputer products represented approximately 95.5% of the Company's second quarter net sales compared to 93.7% for the same period last year. Sales of wireless telephone products accounted for approximately 4.5% of the Company's second quarter net sales compared to 6.3% for the same period last year.

Gross profit decreased to $6.5 million in the second quarter ended December 31, 2001 compared to $8.6 million in the second quarter ended December 31, 2000. Gross profit as a percentage of net sales decreased to 5.9% in the second quarter ended December 31, 2001 from 6.5% in the second quarter ended December 31, 2000. The change in gross profit as a percentage of sales was due to an increase in lower margin sales in the United States. Overall, the Company continues to experience pricing pressures in selling products.

Selling, general and administrative expenses, decreased $1.8 million to $6.2 million in the second quarter ended December 31, 2001, compared to $8.0 million in the second quarter ended December 31, 2000. These expenses as a percentage of net sales were 5.6% in the second quarter ended December 31, 2001 compared to 6.0% in the second quarter ended December 31, 2000. The decrease resulted primarily from the Company's coordinated efforts to reduce employee costs and general overhead expenses.

Net interest expense was $.2 million in the second quarter ended December 31, 2001 compared to interest expense of $.3 million in the second quarter ended December 31, 2000.

The income tax expense relates to tax on income generated by certain of the Company's Latin America subsidiaries, while the remaining operations contributed losses with no corresponding tax benefits.

Net sales decreased 11.9%, or $31.6 million, to $234.1 million in the six months ended December 31, 2001 compared to $264.7 million in the six months ended December 31, 2000. Information concerning the Company's domestic and foreign sales is summarized below:

The overall decrease resulted from an increase in United States domestic net sales, offset by declines in net sales to customers in Latin America as well as to customers for export principally to Latin America. The decrease in sales in Latin America was principally due to lower sales to customers in Brazil associated with more stringent credit standards and a change in sales pricing policies.

The increase in sales in the United States was primarily due to an increase in sales of mass storage products which was offset by lower sales of printers, printer consumables, computer processors, and wireless products. The decrease in the U.S. export sales was due primarily to lower sales of printers and printer consumables. Sales of microcomputer products represented approximately 95.5% of the Company's six months net sales compared to 92.3% for the same period last year. Sales of wireless telephone products accounted for approximately 4.5% of the Company's six months net sales compared to 7.7% for the same period last year.

Gross profit decreased to $13.0 million in the six months ended December 31, 2001 compared to $16.8 million in the six months ended December 31, 2000. Gross profit as a percentage of net sales decreased to 5.6% in the six months ended December 31, 2001 from 6.3% in the six months ended December 31, 2000. The change in gross profit as a percentage of sales was due to an increase in lower margin sales in the United States. Overall, the Company continues to experience pricing pressures in selling products.

Selling, general and administrative expenses decreased $.3 million to $15.5 million in the six months ended December 31, 2001, compared to $15.8 million in the six months ended December 31, 2000. These expenses as a percentage of net sales were 6.6% in the six months ended December 31, 2001 compared to 6.0% in the six months ended December 31, 2000. The decrease resulted primarily from lower employee costs and overhead costs, which was offset by bad debt expenses in Latin America.

Net interest expense was $.4 million in the six months ended December 31, 2001 and 2000.

The income tax expense relates to tax on income generated by certain of the Company's Latin America subsidiaries, while the remaining operations contributed losses with no corresponding tax benefits.

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 Wachovia Bank N.A. credit agreement, subsidiary bank credit agreements, and vendor lines of credit. The Company derives all of its operating income and cash flow from its subsidiaries and relies on such cash flows to satisfy its obligations on a consolidated basis. As the Company continues operations in Latin America, management believes that domestic banking agreements may restrict the ability of the Company to make inter-company transfers of cash on a consolidated basis.

Operating activities used $5.1 million in the six months ended December 31, 2001. The Company's reduction of $8.4 million in accounts receivable and $6.4 million in inventories provided sources of operating cash. The Company used sources of cash to reduce accounts payable by $17.2 million. Also, the Company's net loss of $9.6 million less non-cash charges of $7.6 million used cash. Operating activities provided $.9 million in the six months ended December 31, 2000.

Investing activities used $.3 million and $.5 in the six months ended December 31, 2001 and 2000, respectively, to purchase equipment and computer software.

Financing activities provided $6.9 million and used $1.6 million in the six months ended December 31, 2001 and 2000, respectively, resulting from net bank borrowings and repayments.

Management believes that the Wachovia Bank N.A. credit agreement, subsidiary bank credit agreements together with vendor lines of credit, and internally generated funds will be sufficient to satisfy its working capital needs.

Presently, the Company's principal credit agreement expires in November 2002. Management is presently negotiating with lenders to obtain financing prior to the November 2002 expiration of its existing bank credit agreement. Management believes the Company will be successful in obtaining renewal or replacement financing. However, there can be no assurances that the Company will be able to obtain an extension of the existing credit agreement or alternate sources of financing.

Forward-Looking Information

This report contains certain statements that are not based on historical facts and which may be considered forward-looking statements as defined in the Private Securities Litigation Act of 1995. These statements may differ materially from actual future events or results, and by their nature they involve substantial risks and uncertainties, certain of which are beyond the Company's control. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect Management's judgment only as of the date hereof. Factors that might cause the Company's actual results to differ from those described in the forward-looking statements are referred to in the sections under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" which are contained in the Company's Registration Statement on Form S-3 (SEC File No. 333-35069) and these factors include the Company's ability to maintain profitability, cash flow, revenue growth, business prospects, foreign currency fluctuations, a dependence upon and/or loss of key vendors or customers, customer demand, product availability, competition (including pricing and availability). The Company undertakes no obligation to update forward-looking statements contained herein.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the Company's market risk exposures relating to interest rate risk and foreign currency risk that would significantly affect the quantitative and qualitative disclosures presented in the Company's Form 10-K filing for the year ended June 30, 2001 other than those currency risks which may come about as a result of the events described in the following paragraph. 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. The Company is not involved in hedging transactions at the current time related to its currency risks.

At the beginning of November 2001, The Argentine Government announced that it would attempt to restructure its existing external public indebtedness with its Argentine and internal creditors in order to obtain interest savings and relief from principal repayments in the next several years. The restructuring or default by the Argentine Government of its external public indebtedness may have an adverse effect on the Argentine economy and on the availability of capital flows to companies headquartered or operating in Argentina. In addition, the failure of the Argentine Government to successfully restructure its indebtedness could have an adverse effect on the Argentine economy, including devaluation of the Argentine peso against the U.S. dollar. The devaluation which commenced in January 2002 could make it more difficult for Argentine companies to service their commercial and financial obligations due in U.S. dollars or tied to the U.S. dollar. Any of the foregoing events and a continuation of the Argentine recession may have a material adverse effect the Company's business, results of operations, financial condition, ability to make payments on our indebtedness and on the market price of our common stock. The information included in the Company's financial statements, and other related documentation, does not contain the potential impact that might derive from the situation described above and, accordingly, should be analyzed considering that circumstance.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable

Item 2. Changes in Securities and Use of Proceeds

None

Item 3. Default Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

b) Reports on Form 8-K

SIGNATURES

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