Edgar Filing: ALL AMERICAN SEMICONDUCTOR INC

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

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
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Commission File Number: 0-16207

ALL AMERICAN SEMICONDUCTOR, INC.
(Exact name of registrant as specified in its charter)

Delaware 59-2814714
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

16115 N.W. 52nd Avenue, Miami, Florida 33014
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (305) 621-8282

Securities registered pursuant to Section 12(b) of the Act: None

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

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 [ ]

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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

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

As of June 30, 2004, the last business day of the Registrant's most recently
completed second fiscal quarter, the aggregate market value of the common stock
of ALL AMERICAN SEMICONDUCTOR, INC. held by non-affiliates was $32,600,000.

As of March 18, 2005, 3,919,011 shares of the common stock of ALL AMERICAN
SEMICONDUCTOR, INC. were outstanding.

Documents Incorporated by Reference:
Pursuant to Instruction G(3) of Form 10-K, portions of the definitive proxy
statement to be filed within 120 days after the end of the Registrant's fiscal
year are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III.

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ALL AMERICAN SEMICONDUCTOR, INC.

FORM 10-K - 2004

Table of Contents

Part Item Page
No. No. Description No.
---- ---- ----------- ----

I 1 Business.................................................... 1
2 Properties.................................................. 12
3 Legal Proceedings........................................... 12
4 Submission of Matters to a Vote of Security Holders......... 12

II 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities......... 13
6 Selected Financial Data..................................... 15
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 16
7A Quantitative and Qualitative Disclosures about Market Risk.. 31
8 Financial Statements and Supplementary Data................. 32
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 32
9A Controls and Procedures..................................... 32

III 10 Directors and Executive Officers of the Registrant.......... 32
11 Executive Compensation...................................... 32
12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................ 32
13 Certain Relationships and Related Transactions.............. 32
14 Principal Accountant Fees and Services...................... 32

IV 15 Exhibits and Financial Statement Schedules.................. 33

PART I

ITEM 1. Business
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General
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All American Semiconductor, Inc. and its subsidiaries (collectively, the
"Company"; sometimes referred to herein as "Registrant") is a distributor of
electronic components manufactured by others. The Company distributes a full
range of semiconductors (active components), including transistors, diodes,
memory devices, microprocessors, microcontrollers, other integrated circuits,
active matrix displays and various board-level products, as well as
passive/electromechanical components. Passive products include capacitors,
resistors and inductors. Electromechanical products include power supplies,
cable, switches, connectors, filters and sockets. These products are sold
primarily to original equipment manufacturers in a diverse and growing range of
industries, including manufacturers of computers and computer-related products;
office and home office equipment; cellular and portable products; wireless
products; networking, satellite and other communications products; Internet
infrastructure equipment and appliances; automobiles and automotive subsystems;
consumer goods; voting and gaming machines; point-of-sale equipment; robotics
and industrial equipment; defense and aerospace equipment; home entertainment;
security and surveillance equipment; and medical instrumentation. The Company
also sells products to contract electronics manufacturers, or electronics
manufacturing services, or EMS, providers who manufacture products for companies
in all electronics industry segments. Through the Aved Memory Products division
of its subsidiary, Aved Industries, Inc., the Company also designs and has
manufactured by third parties under the label of its subsidiary's division,
certain memory modules which are sold to original equipment manufacturers.

While the Company reincorporated in Delaware in 1987, it and its predecessors
have operated since 1964. The Company was recognized by industry trade
publications as the 4th largest distributor of semiconductors and the 9th
largest electronic components distributor overall in North America, out of an
industry group that numbers more than 1,000 distributors.

The Company's principal executive office is located at 16115 N.W. 52nd Avenue,
Miami, Florida 33014. Our headquarters for sales and marketing functions and the
office of our President and Chief Executive Officer are located at 230 Devcon
Drive, San Jose, California 95112. Our telephone number in Florida is (305)
621-8282.

THIS REPORT (PARTICULARLY "ITEM 1. BUSINESS" AND "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS")
CONTAINS STATEMENTS THAT ARE FORWARD-LOOKING WITHIN THE MEANING OF SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. SEE "ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FORWARD-LOOKING
STATEMENTS; BUSINESS RISKS AND UNCERTAINTIES."

The Electronics and Electronics Distribution Industries
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The electronics industry is one of the largest industries in the United States.
Industry associations estimated that worldwide consumption of semiconductors was
$141 billion in 2002, $166 billion in 2003 and $213 billion in 2004. While
worldwide consumption of semiconductors grew significantly (28%) during 2004 as
compared to 2003, the Company believes that the increase primarily resulted from
growth outside of North America due to the increasing amount of procurement and
manufacturing moving offshore. The growth of the electronics and the electronics
distribution industries has been driven by increased demand for new products
incorporating sophisticated electronic components, such as cellular phones,
handheld and PDA products, security and surveillance equipment, laptop
computers, home office and portable equipment, wireless products, networking and
communications products, satellite products, infrastructure equipment and
appliances for the Internet, voting and gaming machines, point-of-sale equipment
and

multimedia products; as well as the increased utilization of electronic
components in a wide range of industrial, automotive, consumer and military
products.

The three product groups included in the electronic components subsegment of the
electronics industry are semiconductors, passive/electromechanical components,
and systems and computer products (such as PCs, servers, disk drives, terminals
and computer peripherals). The Company believes that semiconductors and
passive/electromechanical products currently account for approximately
two-thirds of the electronic components distribution marketplace, while systems
and computer products account for the remainder. The Company only participates
in the distribution of semiconductors and passive/electromechanical products
which account for two of the three industry product groups.

Distributors are an integral part of the electronics industry. The Company
estimates that between $27 and $32 billion of electronic components were sold
through distribution in North America during 2004. Original equipment
manufacturers and most of the smaller contract electronics manufacturers which
utilize electronic components continue to outsource their procurement, inventory
and materials management processes to third parties in order to concentrate
their resources (including management talent, personnel costs and capital
investment) on their core competencies, which include product development, sales
and marketing. Large distribution companies not only fill these procurement and
materials management roles, but further serve as a single supply source for
original equipment manufacturers and contract electronics manufacturers,
offering a much broader line of products, rapid or scheduled deliveries,
incremental quality control measures and more support and supply chain
management services than individual electronic component manufacturers.
Management believes that original equipment manufacturers and most of the
smaller contract electronics manufacturers will continue to demand greater
service and to increase quality requirements, and that original equipment
manufacturers, contract electronics manufacturers and electronic component
manufacturers will continue to be dependent on distributors in the future.

Electronic component manufacturers are under similar pressure to allocate a
larger share of their resources to research, product development and
manufacturing capacity as technological advances continue to shorten product
lifecycles. Electronic component manufacturers sell directly to only a small
number of their potential customers. This small segment of their customer base
accounts for a large portion of the total available revenues. It is not
economical for component manufacturers to provide a broad range of sales support
services to handle the large amount of customers that account for the balance of
available revenues. As stocking, marketing, and financial intermediaries,
distributors relieve component manufacturers of a portion of the costs
associated with stocking and selling their products while providing
geographically dispersed selling, order processing and delivery capabilities.
With their expanded technology and service capabilities, large distributors have
now become a reliable means for component manufacturers to outsource their
sales, marketing, customer service and distribution functions. This trend
particularly benefits larger distributors with nationwide distribution
capabilities such as the Company, as manufacturers continue to allocate a larger
amount of their customer base to a more limited number of full service
distribution companies.

A prevalent trend in the electronics distribution industry has been the
consolidation of distribution companies. The Company believes that this
consolidation has to date created, and will continue in the future to create,
growth opportunities for the Company. Consolidation among distributors causes
customers to experience an increased concentration in their approved vendor
base. As a result, the Company believes that some customers will either replace
a consolidated distributor with a different distributor or redistribute a
portion of their purchasing across their distribution network. Accordingly,
through consolidation the Company has increasing opportunities to add customers
and/or do more business with existing customers. Similarly, as a result of
consolidation, many suppliers have either lost a distributor or become a much
less significant supplier to the consolidated distribution company. As a result
of this impact from consolidation, the Company believes that suppliers have
recently added, and will continue in the future to add, new distributors to
their distribution networks. Management believes that the Company has benefited
from, and will continue to benefit in the future from, the consolidation that
has occurred and any additional consolidation that may occur.

Business Strategy
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The Company's long-term strategy is to achieve growth by expanding its markets,
increasing its customer base and selling more to its existing customers. The
Company began seeing signs that a recovery of the electronics industries in
North America was underway in the third quarter of 2003 as supplier pricing
began to firm, component lead times began to stretch out and customer backlog
began to grow. These signs of improvement continued through the second quarter
of 2004. Since the end of the second quarter of 2004 industry conditions have
softened and we have experienced a decline in our sales levels. Management
believes that in the third quarter of 2004 customers began reducing their
purchasing in response to increased inventory levels at the customer base and a
slight slowdown in end markets. Based on current market conditions and our sales
results thus far in 2005, we expect that softness may continue. Accordingly, the
Company's strategy is to gain market share by: (i) taking advantage of industry
consolidation, (ii) increasing the number of customers it sells to, (iii)
increasing sales to existing customers by selling more of its current product
offerings and by continuing to add new suppliers and expand its product
offerings and service capabilities and (iv) expanding to markets outside North
America. While management believes that it may be able to increase market share
and profitability in the future, there can be no assurance that these goals will
be achieved, particularly since their achievement depends to a large extent on
market conditions outside the Company's control.

Expansion

During 2003 as part of its plan to expand its markets and provide enhanced
services beyond the boundaries of North America, the Company began operations in
the United Kingdom including a stocking location in the London area; began sales
operations in Northern Asia with the opening of an office in Seoul, South Korea
and started operations in Southeast Asia as well. During 2004, the Company
further expanded its offshore presence with the addition of operations in
Hungary and added people in China and the United Kingdom. However, based on
current staffing and locations, the Company believes that its offshore presence
is still developing.

Increasing Product Offerings

The Company intends to continue its efforts to increase the number and breadth
of its product offerings, thereby allowing it to attract new customers and to
represent a larger percentage of the purchases being made by its existing
customers. The Company believes that some suppliers have recently added, and
will continue in the future to add, new distributors to their distribution
networks. New supplier relationships generally require up-front investments that
could take substantial time to provide a return.

Service Capabilities

During the past several years, customers have been reducing their approved
vendor base in an effort to place a greater percentage of their purchases with
fewer, more capable distributors. As part of its overall strategy to increase
market penetration, the Company has endeavored to develop and expand its
state-of-the-art service capabilities. The Company refers to these service
capabilities as "distribution technology." The Company believes that it has
developed service capabilities comparable to some of the largest distributors in
the industry, which service capabilities the Company believes are not yet
readily available at many distributors of comparable size to the Company. The
Company further believes that these capabilities are not generally made
available by the largest distributors to middle market customers, which
represent the vast majority of the Company's customer base. See "Competition."
Management believes that smaller distributors generally do not have the ability
to offer as broad an array of services as the Company. The Company
differentiates itself from its competition by making state-of-the-art
distribution technology available to both large and middle market customers.
Although the Company believes that this differentiation will assist the
Company's growth, there can be no assurance that such differentiation exists to
the extent that the Company currently believes or that it will continue in the
future.

The Company's distribution technology incorporates nationwide access to
real-time inventory and pricing information, electronic order entry and rapid
order processing. Over the years, the Company expanded its service capabilities
for just-in-time deliveries, bar coding, bonded inventory programs, kitting and
turnkey services, in-plant stores, in-plant terminals, electronic data
interchange programs, automatic inventory replenishment programs and complete
supply chain management solutions.

In order to further enhance its service capabilities, the Company also expanded
its Field Application Engineer Program. Additionally, the Company opened the All
American Technical Center, which is staffed with design specialists that can
assist our sales force and our field application engineers when a higher level
of expertise is needed. The All American Technical Center staff also works on
creating reference designs and design tools to assist customers and suppliers.
These programs are intended to generate sales by providing customers with
engineering support and increased service at the design and development stages.
These programs are also intended to enhance the technical capabilities of the
Company's entire sales force through regular training sessions. Management
believes that this capability is helpful in increasing sales and attracting new
suppliers.

Another important segment of electronics distribution is the sale of
programmable semiconductor products. Programmable semiconductors enable
customers to reduce the number of components they use by highly customizing one
semiconductor to perform a function that otherwise would require several
components to accomplish. This saves space and enables customers to reduce the
size and cost of their products. In order to effectively sell programmable
products, most major distributors have established their own semiconductor
programming centers. To participate in this segment of the industry, the Company
has a 20,000 square foot facility in Fremont, California (near San Jose) which
incorporates a programming and a distribution center. In addition to enabling
the Company to address the market for programmable products, the Company expects
that this capability will allow the Company to attract new product lines that
require programming capabilities.

The Company believes that in the upcoming years an increasing amount of
transactions in its industry will be processed over the Internet. In this
regard, the Company designed and developed its own web site. In order to further
expand its utilization of and functionality on the Internet, the Company has its
own web development team. Additionally, to further its e-commerce strategies the
Company is engaged with multiple third party Internet/e-commerce companies to
expand the visibility of the Company and the ways in which customers can conduct
commerce with the Company.

The Company also provides value-added services relating to its
passive/electromechanical business.

Quality Controls and ISO Certification

The Company has a total quality management program. Our operations are performed
within the confines of increasing strictness in quality control programs and
traceability procedures. As a result, the Company's Miami and Fremont
distribution centers and its Fremont programming center have all successfully
completed a procedure and quality audit that resulted in their certification
under the international quality standard of ISO 9001. This quality standard was
established by the International Standards Organization, or ISO, created by the
European Economic Community, or EEC. The ISO created uniform standards of
measuring a company's processes, traceability procedures and quality control in
order to assist and facilitate business among the EEC.

Products
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Active and Passive/Electromechanical Products

The Company markets semiconductor, passive and electromechanical products.
Semiconductors, which are active components, respond to or activate upon receipt
of electronic current. Active products include transistors, diodes, memory
devices, microprocessors, microcontrollers, other integrated circuits, active
matrix displays and various board-level products. Passive/electromechanical
components, on the other hand, are designed to facilitate completion of
electronic functions. Passive products include capacitors,

resistors and inductors. Electromechanical products include power supplies,
cable, switches, connectors, filters and sockets. Virtually all of the Company's
customers purchase both active and passive/electromechanical products.

Flat Panel Display Products

The Company believes that one of the faster growing segments of the electronics
industry will result from the expanded utilization of flat panel displays. Flat
panel displays are commonly used in laptop computers, computer monitors and
televisions and are rapidly replacing standard cathode ray tubes in a variety of
applications, including medical, industrial and commercial equipment, as well as
personal computers, televisions, automated teller machines, gaming machines and
video monitors. In addition to replacing cathode ray tubes in traditional
applications, as a result of the lower power requirements and reduced space
needs of flat panel displays, the advent of flat panels is enabling the
implementation of display applications that were not achievable with cathode ray
tubes, such as laptop and palmtop computers, handheld and portable products,
voting machines, point-of-sale equipment and advertising displays.

In order to properly function in any application, flat panel displays need
certain electronic impulses. One solution for generating these electronic
impulses is the use of board level products that control and regulate the
electronic input that drives the flat panel display. These products are commonly
referred to as driver boards. In addition to the driver board, flat panel
displays require a back-light inverter to run the back-light, and cable
assemblies to connect the display, inverter and the driver board to each other
and to the equipment of which it is a part.

The Company has addressed the flat panel display market in several ways. First,
the Company has assembled a comprehensive offering of flat panel display
products, including products from manufacturers of flat panel displays, as well
as manufacturers of the necessary support products such as back-light inverters,
driver boards, cabling and touch-screen filaments. The second aspect in
addressing the flat panel display market is to develop the technical support
necessary to assist customers with integrating flat panel displays into their
applications. In response to the growing need for support of flat panel display
business the Company has created a Display Solutions Group which is a separate
group within the Company dedicated entirely to the support of flat panel display
opportunities. Through its Display Solutions Group, the Company has expanded its
internal staff as well as developed relationships with independent
subcontractors, referred to as integrators, in many different geographic
locations. This strategy enables the Company to offer a broad selection of
products, services and solutions needed to service the varying levels of support
required by the customer base.

To broaden its participation in the display market, the Company recently created
a Portable Products Group to address the rapidly growing market for portable
products such as cellular phones, PDAs, scanners and navigation equipment.
Additionally, to further enhance our support for flat panel display applications
as well as to address other markets, the Company has recently expanded its staff
and integration services support and added multiple suppliers of single-board
computers, referred to as embedded computer solutions, to its product offering.
These single-board computer products simplify the design process for companies
that are utilizing flat panel displays and for other OEM applications as well.
The investments related to the expansion of our support for display
applications, integration services support and expanded product offering could
take time to provide a return. The investments for our support for flat panel
displays are predominantly additions to staff.

Memory Modules

The Company also sells memory modules under the Aved Memory Products label.
These modules, which are designed by the Company, are manufactured by third
party companies. Memory products, which include the memory module subsegment,
represent one of the larger product sectors of semiconductor revenues. Memory
modules facilitate the incorporation of expanded memory in limited space. In
addition to Aved Memory Products, the Company has other suppliers of memory
module products.

Customers
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The Company markets its products primarily to original equipment manufacturers
in a diverse and growing range of industries. The Company's customer base
includes manufacturers of computers and computer-related products; office and
home office equipment; cellular and portable products; wireless products;
networking, satellite and other communications products; Internet infrastructure
equipment and appliances; automobiles and automotive subsystems; consumer goods;
voting and gaming machines; point-of-sale equipment; robotics and industrial
equipment; defense and aerospace equipment; security and surveillance equipment;
and medical instrumentation. The Company also sells products to contract
electronics manufacturers, or electronics manufacturing services providers, who
manufacture products for companies in all electronics industry segments. The
Company's customer list includes approximately 12,000 accounts. During 2004, no
customer accounted for more than 7% of the Company's sales and the Company does
not believe that the loss of any one customer would have a material adverse
impact on its business. However, the loss of, or significant disruption in
relationships with, more than one of the Company's larger customers or a
significant number of other customers in a short period of time could have a
material adverse impact on the Company's financial condition and results of
operations. See "Revenue Recognition" in Note 1 to Notes to Consolidated
Financial Statements for a general discussion regarding customer payment terms,
return policies and consignment arrangements.

Sales and Marketing
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Overall Strategy

The Company differentiates itself from its competitors in the marketplace by the
combination of products and services that it can provide to its customers. The
Company is a broad-line distributor offering over 65,000 different products
representing approximately 85 different manufacturers. In addition, the Company
employs a decentralized management philosophy whereby branch managers are given
latitude to run their operations based on their experience within their
particular regions and the needs of their particular customer base. This
decentralization results in greater flexibility and a higher level of customer
service. Thus, the Company believes it can provide the broad product offering
and competitive pricing normally associated with the largest national and global
distributors, while still providing the personalized service levels usually
associated only with regional or local distributors. As a result of its size and
capabilities, the Company brings to the middle market customers a level of
service capabilities that the smaller distributor cannot provide.

The Company's marketing strategy is to be a preferred and more significant
distribution partner for all middle market customers. The Company is achieving
this by providing a broader range of products and services than is available
from smaller and comparably sized distributors, and a higher level of attention
than these customers receive from the larger distributors. In addition, the
Company continues its efforts to become a more significant distribution partner
for the top tier customers by focusing on a niche of suppliers and products not
emphasized by the larger distributors while providing the high level of quality,
service and technical capabilities required to do business with these accounts.

The Company's marketing strategy also includes its e-commerce capabilities
through its web site functionality and its portal capabilities to enable its
customers to utilize the services available from the Company's strategically
selected e-commerce partners.

Marketing Techniques

As part of the Company's marketing strategy, the marketing department is based
in Silicon Valley near the headquarters of the vast majority of the industry's
supplier base. The Company uses various techniques in marketing its products
which include: (i) direct marketing through personal visits to customers by
management, field salespeople and sales representatives, supported by a staff of
inside sales personnel who handle the quoting, accepting, processing and
administration of sales orders; (ii) advertising in various national industry
publications and trade journals; (iii) general advertising, sales referrals and
marketing support from component manufacturers; (iv) the Company's telemarketing
efforts; and (v) a

web site and portals on the Internet. The Company also uses its expanded service
capabilities, its Field Application Engineer Program, Display Solutions Group,
Supply Chain Management capabilities and its status as an authorized distributor
as marketing tools. See "Business Strategy-Service Capabilities", "Flat Panel
Display Products" and "Suppliers."

Sales Personnel

As of March 1, 2005, the Company employed 338 people in sales on a full-time
basis, of whom 117 are field salespeople, 122 are inside salespeople, 61 are in
management, 18 are in administration and 20 are engineers in the Field
Application Engineer Program. The Company also had 8 sales representatives
covering various territories where the Company does not have sales offices.
Salespeople are generally compensated by a combination of salary and commissions
based upon the gross profits obtained on their sales. Each branch is run by a
general manager who reports to a regional manager. The regional managers report
either to an area manager or directly to the Company's Senior Vice President of
Sales and Marketing. The area managers report directly to the Company's Senior
Vice President of Sales and Marketing. Area, regional and general managers are
compensated by a combination of salary and incentives based on achieving gross
profit goals.

Sales Locations

In North America, the Company currently operates 33 sales offices in 21 states,
Canada and Mexico. The locations of the sales offices are in each of the
following geographic markets: Huntsville, Alabama; Phoenix, Arizona; Orange
County, Sacramento, San Diego, San Fernando Valley, San Jose and Tustin,
California; Toronto, Canada; Denver, Colorado; Fort Lauderdale, Miami, Orlando
and Tampa, Florida; Atlanta, Georgia; Chicago, Illinois; Kansas City, Kansas;
Baltimore, Maryland; Boston, Massachusetts; Guadalajara, Mexico; Detroit,
Michigan; Minneapolis, Minnesota; Long Island and Rochester, New York; Raleigh,
North Carolina; Cleveland, Ohio; Portland, Oregon; Philadelphia, Pennsylvania;
Austin and Dallas, Texas; Salt Lake City, Utah; Seattle, Washington and
Milwaukee, Wisconsin. The Company also retains field sales representatives to
market other territories throughout the United States, Canada, Puerto Rico and
Mexico. The Company may consider opening branches in these other territories if
the representatives located there achieve certain sales levels.

As part of its plan to expand its markets and provide enhanced services beyond
the boundaries of North America, the Company began operations in Scotland,
England, South Korea, Malaysia, China and Hungary. See "Business
Strategy-Expansion."

Transportation

All of the Company's products are shipped through third party carriers. Incoming
freight charges are generally paid by the Company, while outgoing freight
charges are typically paid by the customer.

Seasonality and Cyclicality

The Company's sales have not historically been materially greater in any
particular season or part of the year, however, there is some seasonality to our
industry. The electronic components and the electronics distribution industries
have historically been cyclical with significant volatility in the cycles.
Management believes that this cyclicality and volatility will continue in the
future.

Foreign Sales

Sales to customers' locations in foreign countries aggregated approximately
$69.7 million, $41.2 million, and $35.4 million for 2004, 2003 and 2002. Due to
the Company's global expansion initiatives, sales to customers' locations in
foreign countries may increase in the future. See "Business Strategy-Expansion."
Also see Note 14 to Notes to Consolidated Financial Statements which provides a
breakdown of the Company's sales by geographic area and location of the
Company's long-lived assets.

Backlog
-------

As is typical of distributors, the Company has a backlog of customer orders.
These orders are generally cancelable by the customer. At December 31, 2004, the
Company had a backlog of $69 million, compared to a backlog of $68 million at
December 31, 2003 and $44 million at December 31, 2002. During periods when
product is readily available, or when product excesses exist, customers keep
much lower levels of product on order as delivery times are short and prices are
often declining. As lead times begin to stretch and certain product groups start
becoming allocated by suppliers, customers begin increasing the amount of their
scheduled orders. Conditions of tight supply often result in customers placing
scheduled orders for more product than they actually need (referred to in the
industry as double booking). When product availability improves, customers begin
to have more inventory than they require and the industry typically experiences
backlog cancellations and inventory corrections.

A growing amount of the Company's customers are managing their business through
forecasts in lieu of placing hard orders with the Company. As a result, the
correlation between backlog and future sales is changing. In addition, the
Company has increased its practices of electronic data interchange transactions
where the Company purchases inventory based on electronically transmitted
customer forecasts that may not become an order until the date of shipment and,
therefore, may not be reflected in the Company's backlog.

The Company believes that a substantial portion of its backlog represents
products due to be delivered within the next three months. Historically,
approximately 30% of the backlog relates to purchase orders which call for
scheduled shipments of inventory over a period of time, with the balance
representing products that are on back-order with suppliers. The scheduled
shipments enable the Company to plan purchases of inventory over extended time
periods to satisfy such requirements. For the reasons stated above, the
correlation of backlog to future sales is less of an indicator than
historically. The Company's backlog was $69 million at December 31, 2004 and
increased to $74 million at February 28, 2005. The Company's backlog was $85
million at February 29, 2004.

Suppliers
---------

The Company generally purchases products from component manufacturers pursuant
to non-exclusive distribution agreements. Such suppliers generally limit the
number of distributors they will authorize in a given territory in order to
heighten the distributor's focus on their products as well as to prevent
over-distribution. Suppliers also limit the number of distributors in order to
reduce the costs associated with managing multiple distributors. As a factory
authorized distributor, the Company obtains sales referrals, as well as sales,
marketing and engineering support, from component manufacturers. This support
assists the Company in closing sales and obtaining new customers. The Company's
status as an authorized distributor is a valuable marketing tool as customers
recognize that when dealing with an authorized distributor they receive greater
support from the component manufacturers.

The Company believes that an important factor which suppliers consider in
determining whether to grant or to continue to provide distribution rights to a
certain distributor is that distributor's geographic coverage. The Company is
recognized as a national distributor with offices across North America. To
further strengthen its geographic coverage, the Company recently began to expand
internationally.

Another important factor that suppliers consider is whether the distributor has
in place an engineering staff capable of assisting customers in designing-in the
suppliers' products at the customer base. To address this requirement, the
Company has a Field Application Engineer Program which is currently staffed with
12 engineers.

Almost all distribution agreements are cancelable by either party, typically
upon 30 to 90 days notice. For the year ended December 31, 2004, the Company's
three largest suppliers accounted for 21%, 7% and 4% of consolidated purchases.
See Note 13 to Notes to Consolidated Financial Statements. While most of the
products that the Company sells are available from other sources, the Company's
future success will depend in large part on maintaining relationships with
existing suppliers and developing relationships

with new ones. While the Company believes that the loss of a key supplier,
particularly its largest supplier, could have a material adverse impact on its
business in the short term, the Company would attempt to replace the products
offered by that supplier with the products of other suppliers. However, if the
Company were to lose its rights to distribute the products of any particular
supplier, there can be no assurance that the Company would be able to replace
the products which were available from that particular supplier. The loss of, or
significant disruption in relationships with, any of the Company's larger
suppliers, particularly its largest supplier, or a significant number of other
suppliers in a short period of time could have a material adverse impact on the
Company's financial condition and results of operations. The Company, from time
to time, alters its list of authorized suppliers in an attempt to provide its
customers with a better product mix.

The Company believes that it benefits from technological change within the
electronics industry as new product introductions accelerate industry growth and
provide the Company with additional sales opportunities. The Company believes
its inventory risk due to technological obsolescence is significantly reduced by
certain provisions typically found in its distribution agreements addressing
price protection, stock rotation privileges, obsolescence credits and return
privileges. Price protection is typically provided in the form of a credit to
the Company for any inventory the Company has of products for which the
manufacturer reduces its prices. Stock rotation privileges typically allow the
Company to exchange inventory in an amount up to 5% of a prior period's
purchases. Obsolescence credits allow the Company to return products which a
manufacturer discontinues. Upon termination of a distribution agreement, the
return privileges generally require the manufacturer to repurchase the Company's
inventory at the Company's purchase price, however, if the Company terminates
the distribution agreement, there is generally a 10% to 15% restocking charge.

The vast majority of the Company's inventory is purchased pursuant to its
distribution agreements. The Company does not generally purchase product for
inventory unless it is a commonly sold product, there is an outstanding customer
order or forecast to be filled, a special purchase is available or unless it is
an initial stocking package in connection with a new line of products. As a
result of the Company's strategy in how it has positioned itself in a rapidly
consolidating industry, the Company has been successful in attracting new
suppliers. In connection with adding new suppliers, the Company acquires new
stocking packages. These new stocking packages typically take time to become
productive. While management believes that these new product lines and the
resulting stocking packages should provide growth opportunities in the future,
there can be no assurance that this strategy will be successful.

Facilities and Systems
----------------------

Facilities

The Company's corporate headquarters and main distribution center are located in
a 110,800 square foot facility in Miami, Florida. The Company occupies this
facility through a lease which expires in 2014, subject to the Company's right
to terminate at any time upon twenty-four months prior written notice and the
payment of all outstanding debt owed to the landlord. The lease for this
facility contains three six-year options to renew at the then fair market value
rental rates.

The Company also leases approximately 20,000 square feet of space for its west
coast distribution and semiconductor programming center located in Fremont,
California (near San Jose) and leases a 5,200 square foot facility near Denver,
Colorado which is dedicated to certain value-added services and a regional
distribution center. In 2005, the Company will be transitioning most of these
Denver-based value-added services to its Miami, Florida facility. In Tustin,
California the Company leases a 13,900 square foot facility for its Aved Memory
Products division and certain of its Display Solutions Group operations.

used for corporate sales and marketing operations as well as other corporate
offices including the office of the President and Chief Executive Officer of the
Company; and 8,000 square feet of the space is being utilized for the local
sales operation.

In addition, the Company leases space for its other sales offices, which offices
range in size from approximately 200 square feet to 10,000 square feet. See
"Sales and Marketing-Sales Office Locations."

The Company currently has excess space in its sales offices and excess capacity
in its distribution centers. To the extent that the Company increases sales in
future periods, management expects to realize improved operating efficiencies
and economies of scale as a result of its present excess capacity. There can be
no assurance, however, that any sales growth will be achieved or that any growth
will be enough to accomplish improvements in operating efficiencies or economies
of scale.

Systems

The Company's systems and operations are designed to facilitate centralized
warehousing which allows salespeople across the country to have real-time access
to inventory and pricing information and allows a salesperson in any office to
enter orders electronically, which instantaneously print in the appropriate
distribution facility for shipping and invoicing. The combination of the
centralized distribution centers and the electronic order entry process enables
the Company to provide rapid order processing at low costs. The system also
provides for automatic credit checks, which prohibit any product from being
shipped until the customer's credit has been approved. Additionally, the systems
allow the Company to participate with customers and suppliers in electronic data
interchange and to expand customer services, including just-in-time deliveries,
kitting programs, bar coding, automatic inventory replenishment programs, bonded
inventory programs, in-plant stores and in-plant terminals and complete supply
chain management solutions.

As a result of rapidly increasing advances in technology, the Company has
recognized that its computer and communications systems will be subject to
continual enhancements. In order to meet the increasing demands of customers and
suppliers, to maintain state-of-the-art capabilities and to participate in
e-commerce, the Company has continually been expanding, and in the future will
continue to develop and expand, its systems capabilities, including hardware and
software upgrades. During 2005 a new enterprise resource planning (ERP) system
is expected to be placed into service to meet its computer needs. The Company
believes that these systems enhancements should assist the Company in increasing
sales, improving efficiencies and providing the potential for further
profitability in future periods through increased employee productivity,
enhanced asset management, improved quality control capabilities and expanded
customer service capabilities. See "Business Strategy-Service Capabilities."
There can be no assurance, however, that these benefits will be achieved and
that the Company's new system will be adequate. Furthermore, there can be no
assurance that when the new system is placed into service there will not be a
deterioration in service both to the Company's employees as well as to the
Company's customers and suppliers.

Warranties
----------

The Company generally does not offer express warranties with respect to any of
its products, instead passing on only those warranties, if any, granted by its
suppliers. However, there may be instances where a customer might be able to
enforce an express or implied warranty claim against the Company with respect to
products manufactured by the Company's suppliers. With respect to products
manufactured or assembled by third party companies for Aved Memory Products, the
Company offers a warranty for a period of one year against defects in
workmanship and materials under normal use and service. The Company periodically
evaluates its warranty exposure based upon its review of the experience and
expected obligations associated with the warranty.

Foreign Manufacturing and Trade Regulation
------------------------------------------

A significant number of the products sold by the Company are manufactured by
foreign companies. The vast majority of these products are purchased by the
Company from United States subsidiaries or affiliates of those foreign
manufacturers. The Company purchases a limited amount (less than 7% of total
purchases for 2004) of products offshore. This offshore purchasing activity may
increase in the future.

The Company and its ability to sell at competitive prices could be adversely
affected by increases in tariffs or duties, changes in trade treaties, currency
fluctuations, economic, political or financial turbulence abroad, strikes or
delays in air or sea transportation, and possible future United States
legislation with respect to pricing and import and export quotas on products to
or from foreign countries. The Company's ability to be competitive in or with
the sales of imported components could also be affected by other governmental
actions and policy changes related to, among other things, anti-dumping and
other international anti-trust legislation and currency fluctuations. The
Company believes that these factors may have had an adverse impact on its
business during past years, and there can be no assurance that such factors will
not have a more significant adverse effect on the Company in the future. Since
substantially all of the Company's purchases from foreign companies are still
transacted with United States subsidiaries or affiliates of these foreign
manufacturers, substantially all of the Company's purchases are paid for in U.S.
dollars.

Employees
---------

As of March 1, 2005, the Company employed 566 persons, of whom 338 are involved
in sales and sales management; 69 are involved in marketing; 59 are involved in
the distribution centers and clerical; 39 are involved in operations; 12 are
involved in management; 31 are involved in accounting and credit; and 18 are
involved in information technology. None of the Company's U.S. employees are
covered by collective bargaining agreements. The Company believes that
management's relations with its employees are good.

Competition
-----------

The Company competes with many companies that distribute electronic components
and, to a lesser extent, companies that manufacture such products and sell them
directly. Some of these companies have greater name recognition and assets and
possess greater financial, personnel and other resources than does the Company.
The Company believes that there are over 1,000 electronic components
distributors throughout the United States, ranging in size from less than $1
million in revenues to companies with annual sales that exceed $10 billion
worldwide. These distributors can generally be divided into global distributors
who have operations around the world, national distributors who have offices
throughout the United States, regional distributors with offices in multiple
cities within the United States and local distributors with just one location.
With sales offices in the United States located in 31 cities in 21 states, the
Company generally competes as a national distributor. Additionally, the Company
has operations in Canada, Mexico, Europe and Asia. See "Business Strategy -
Expansion."

The Company, which was recognized by industry sources as the 4th largest
distributor of semiconductors and the 9th largest electronic components
distributor overall in the United States, believes that its primary competition
comes from the top 50 distributors in the industry. The competition in the
electronics distribution industry can be segregated by target customers: major
(or top tier) accounts; middle market accounts; small accounts; and emerging
growth accounts. Competition to be the primary supplier for the major customers
is dominated by the top distributors as a result of the product offerings,
global support structure, pricing and distribution technology offered by these
distributors. The Company competes for a portion of the available business of
these major industry customers by seeking to provide the very best service and
quality and by focusing on suppliers and products that are not emphasized by the
top distributors, or are fill-in or niche products. With its expanded product
offering and service capabilities and its quality assurance procedures in place,
the Company believes that it can compete for a bigger portion of the business at
the top tier customer base, although there can be no assurance that the Company
will be successful in doing so. The Company believes competition from the top
distributors for the middle and

emerging market customer base is not as strong since the largest distributors
focus their efforts and resources on the major account base. For this reason,
the Company has focused strong efforts on servicing this middle and emerging
market customer base. The Company competes for this business by seeking to offer
a broader product base, better pricing and more sophisticated distribution
technology than the regional or local distributors; by seeking to offer a
broader product base and more sophisticated distribution technology than
comparably-sized distributors and by seeking to offer to middle and emerging
market companies a greater level of service than is offered to them by the major
national and global distributors. The Company believes that today the top
distributors continue their efforts to penetrate the middle market customer base
more than they have in the past.

There has also been an increase in competition from brokers, lately being
referred to as independent distributors. Additionally, there has been an
emergence of competition from the advent of third party logistics and
fulfillment companies. There has also been an emergence of businesses commonly
referred to as e-brokers and e-exchanges and several other forms of e-commerce
companies which have grown with the expanded use of the Internet. In addition to
the increased competition from these other groups, some of the total available
distribution market share is being reduced as more and more original equipment
manufacturers transition their procurement into EMS companies and original
design manufacturers. The EMS companies and original design manufacturers
utilize their abilities to aggregate demand from multiple customers to develop
direct purchasing channels with component manufacturers. Furthermore, as more
and more manufacturing moves outside the boundaries of North America the Company
believes that the total available distribution market in North America is being
reduced as procurement channels increase in Asia and Europe. There can be no
assurance that the Company will be able to defend its market share against
existing competition or that new competition will not emerge or that the total
available distribution market will not decline.

ITEM 2. Properties
------- ----------

See "Item 1. Business-Facilities and Systems" and "Sales and Marketing-Sales
Office Locations" and Note 11 to Notes to Consolidated Financial Statements.

ITEM 3. Legal Proceedings
------- -----------------

The Company is from time to time involved in litigation primarily relating to
claims arising out of its operations in the ordinary course of business. Some of
these claims are covered by insurance or, if they relate to products
manufactured by others for which it distributes, the Company would expect that
the manufacturers of such products would indemnify the Company as well as defend
such claims on the Company's behalf to the extent provided for under its
agreement with the manufacturer, although no assurance can be given that any
manufacturer would do so. There has been a recent trend throughout the United
States of increased litigation over various employee and intellectual property
matters. While the Company is presently involved in certain litigation relating
to such matters, the Company believes that none of these claims should have a
material adverse impact on its financial condition or results of operations. The
Company believes, however, that the costs associated with such matters may
increase in the future. There can be no assurance that a particular litigation
will not have a material adverse impact on the Company's financial condition and
results of operations in the future.

ITEM 4. Submission of Matters to a Vote of Security Holders
------- ---------------------------------------------------

On October 15, 2004, the Company held its 2004 annual meeting of shareholders.
The information required to be reported in this Item 4 has been previously
reported and reference is made to Item 4 of Part II of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004.

PART II

ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and
------- ----------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------

Sales Prices of Common Stock
----------------------------

The Company's common stock trades on The Nasdaq Stock Market (Nasdaq National
Market) under the symbol SEMI. The following table sets forth the range of high
and low sale prices for the Company's common stock as reported on The Nasdaq
Stock Market during each of the quarters presented:

Quarter of Fiscal Year High Low
---------------------- ---- ---

2003
----
First Quarter $2.39 $1.86
Second Quarter 3.47 1.80
Third Quarter 4.75 2.65
Fourth Quarter 5.24 3.61

2004
----
First Quarter 7.62 4.31
Second Quarter 11.58 4.94
Third Quarter 9.77 5.27
Fourth Quarter 6.95 5.52

2005
----
First Quarter (through March 18, 2005) 6.97 4.44

As of March 18, 2005, there were approximately 250 holders of record of the
Company's common stock, based on the stockholders list maintained by the
Company's transfer agent. Many of these record holders hold these securities for
the benefit of their customers. The Company believes that, based upon
information provided by its transfer agent, it has over 3,400 beneficial holders
of its common stock.

Common Stock Purchase Rights Plan
---------------------------------

In June 2000, the Board of Directors of the Company adopted a Common Stock
Purchase Rights Plan (the "Rights Plan") and authorized and approved a dividend
distribution of one right (each a "Right" and collectively the "Rights") for
each outstanding share of common stock of the Company to shareholders of record
at the close of business on June 23, 2000. Each share of common stock of the
Company that is issued after June 23, 2000 will also include one Right.

Each Right initially entitles the registered holder to purchase from the
Company, but only when exercisable under the Rights Plan, one share of common
stock at a price of $95.00 per share, subject to certain future adjustments. The
Rights will be exercisable only if a person or group acquires 15% or more of the
Company's common stock (or 10% of such stock under certain circumstances) or
announces a tender offer the consummation of which would result in ownership by
a person or group of 15% or more of the common stock (or 10% of such stock under
certain circumstances). Upon such occurrence, each Right (other than Rights
owned by such person or group) will entitle the holder to purchase from the
Company the number of shares of the Company's common stock having a market value
equal to twice the exercise price of the Right.

If the Company is acquired in a merger or other business combination
transaction, or sells more than 50% of its assets or earning power, after a
person or group has acquired 15% or more of the Company's outstanding common
stock (or 10% of such stock under certain circumstances), each Right (other than

Rights owned by such person or group) will entitle its holder to purchase, at
the Right's then-current exercise price, a number of the acquiring company's
common shares having a market value of twice such price.

Following the acquisition by a person or group of 15% or more of the Company's
common stock (or 10% of such stock under certain circumstances) and prior to an
acquisition of 50% or more of the common stock, the Board of Directors may
exchange the Rights (other than Rights owned by such person or group) at an
exchange ratio of one share of common stock per Right.

Prior to the acquisition by a person or group of beneficial ownership of 15% or
more of the Company's common stock (or 10% of such stock under certain
circumstances), the Rights are redeemable for $.001 per Right at the option of
the Board of Directors. The Rights will expire on June 8, 2010.

Dividend Policy
---------------

The Company has never declared or paid cash dividends. Future dividend policy
will depend on the Company's earnings, capital requirements, financial condition
and other relevant factors. It is not anticipated, however, that the Company
will pay cash dividends on its common stock in the foreseeable future, inasmuch
as it expects to employ all available cash in the Company's operations and
future growth of its business. In addition, the Company's revolving line of
credit facility prohibits the payment of any dividends. See Note 6 to Notes to
Consolidated Financial Statements.

Sales of Unregistered Securities
--------------------------------

The Company has not issued or sold any unregistered securities during the
quarter ended December 31, 2004 except as follows:

Pursuant to the Company's 2000 Nonemployee Director Stock Option Plan, as
amended, the Company granted during the quarter ended December 31, 2004 stock
options to purchase 4,000 shares of the Company's common stock to 4 individuals
at an exercise price of $6.13 per share. The stock options vest over a two-year
period and are exercisable over a ten-year period. The stock options were
granted by the Company in reliance upon the exemption from registration
available under Section 4(2) of the Securities Act. See Note 8 to Notes to
Consolidated Financial Statements.

ITEM 6. Selected Financial Data
------- -----------------------

The following selected consolidated financial data for the Company for and as of
the years 2000 through 2004 has been derived from the audited Consolidated
Financial Statements of the Company. Such information should be read in
conjunction with the Consolidated Financial Statements and related notes
included elsewhere in this report and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations." For the Company's
unaudited quarterly results of operations for the eight quarters ended December
31, 2004, see Note 3 to Notes to Consolidated Financial Statements.

Statement of Operations Data

Years Ended December 31 2004 2003 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------

Net Sales (1) ...................... $ 409,421,000 $ 311,529,000 $ 332,047,000 $ 381,111,000 $ 516,155,000
Cost of Sales (2) .................. (340,612,000) (253,933,000) (271,304,000) (318,363,000) (409,934,000)
------------- ------------- ------------- ------------- -------------
Gross Profit ....................... 68,809,000 57,596,000 60,743,000 62,748,000 106,221,000
Selling, General and
Administrative Expenses (3) ...... (60,613,000) (53,976,000) (56,655,000) (74,213,000) (78,368,000)
Impairment of Goodwill ............. - - - (895,000) -
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations ....................... 8,196,000 3,620,000 4,088,000 (12,360,000) 27,853,000
Interest Expense (4) ............... (3,750,000) (2,648,000) (3,138,000) (8,657,000) (8,642,000)
Other Income - Net (5) ............. 1,081,000 - 2,220,000 - -
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations Before Income Taxes ... 5,527,000 972,000 3,170,000 (21,017,000) 19,211,000
Income Tax (Provision) Benefit ..... (2,320,000) (426,000) (1,287,000) 7,424,000 (8,096,000)
------------- ------------- ------------- ------------- -------------
Income (Loss) from Continuing
Operations Before
Discontinued Operations .......... 3,207,000 546,000 1,883,000 (13,593,000) 11,115,000
Discontinued Operations:
Income from Operations (6) ....... - - - 362,000 84,000
Loss on Disposal (7) ............. - - - (9,344,000) -
------------- ------------- ------------- ------------- -------------
Net Income (Loss) .................. $ 3,207,000 $ 546,000 $ 1,883,000 $ (22,575,000) $ 11,199,000
============= ============= ============= ============= =============

Basic Earnings Per Share (8):
Income (Loss) from
Continuing Operations .......... $ .84 $ .14 $ .49 $(3.52) $ 2.90
Discontinued Operations .......... - - - (2.33) .02
------ ------ ------ ------ ------
Net Income (Loss) ................ $ .84 $ .14 $ .49 $(5.85) $ 2.92
====== ====== ====== ====== ======

Diluted Earnings Per Share (8):
Income (Loss) from
Continuing Operations .......... $ .78 $ .14 $ .49 $(3.52) $ 2.68
Discontinued Operations .......... - - - (2.33) .02
------ ------ ------ ------ ------
Net Income (Loss) ................ $ .78 $ .14 $ .49 $(5.85) $ 2.70
====== ====== ====== ====== ======

Balance Sheet Data

December 31 2004 2003 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------
Working Capital .................... $ 94,132,000 $ 63,212,000 $ 54,670,000 $ 86,569,000 $ 159,644,000
Total Assets ....................... 147,466,000 122,373,000 104,578,000 144,122,000 250,219,000
Long-Term Debt, Including
Current Portion .................. 77,656,000 55,200,000 41,220,000 76,075,000 128,124,000
Shareholders' Equity ............... 23,014,000 19,180,000 18,825,000 17,025,000 39,598,000
Book Value Per Common Share ........ $5.91 $5.10 $4.93 $4.21 $9.80

-------------------------

(1) Net sales including sales generated by the Company's Aved Display
Technologies (ADT) and Integrated Display Technologies (IDT) divisions and
the related turnkey support business which were discontinued in 2001 were
$388,109,000 for 2001 and $522,183,000 for 2000.

(2) 2001 includes non-cash inventory write-offs of $13,375,000.

(3) 2001 includes non-cash write-offs of accounts receivable of $5,220,000.

(4) Interest expense for 2001 includes write-downs of deferred financing fees of
approximately $448,000.

(5) Other income for 2002 reflects the combined value of cash and stock received
by the Company in consideration for releasing the then-existing indebtedness
of a customer, together with lease payments that the Company collected from
certain leases that were pledged to the Company as collateral, all of which
aggregated $2,220,000 after deducting related legal expenses associated with
the transaction. Other income for 2004 represents monies the Company
received as a result of prevailing in a contract litigation initiated in
2001. See Note 10 to Notes to Consolidated Financial Statements.

(6) Reflects income from discontinued operations of $362,000 (net of $208,000
income tax provision) for 2001 and $84,000 (net of $61,000 income tax
provision) for 2000 relating to management's decision to discontinue the ADT
and IDT divisions as well as the related turnkey support business.

(7) Reflects a loss on disposal of $(9,344,000) (net of $5,367,000 income tax
benefit) for 2001 primarily made up of the write-offs of $4,488,000 of
inventory and $7,442,000 of accounts receivable.

(8) Weighted average common shares outstanding for the years ended December 31,
2004, 2003, 2002, 2001 and 2000 were 3,836,002, 3,793,347, 3,849,553,
3,856,813, and 3,828,978 for basic earnings per share and were 4,128,049,
3,882,199, 3,850,002, 3,856,813, and 4,140,579 for diluted earnings per
share.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
------- -----------------------------------------------------------------------
of Operations
-------------

This discussion should be read in conjunction with "Item 6. Selected Financial
Data" and Notes to Consolidated Financial Statements contained in this report.

Overview
--------

The Company began seeing signs that a recovery of the electronics industries in
North America was underway in the third quarter of 2003 as supplier pricing
began to firm, component lead times began to stretch out and customer backlog
began to grow. These signs of improvement continued through the second quarter
of 2004 as sales for the second quarter of 2004 represented the Company's fifth
sequential quarterly sales increase. At the end of the second quarter, however,
the industry began slowing and the Company has experienced sequential declines
in its sales levels. Management believes that in the third quarter of 2004
customers began experiencing increases in inventory levels as end markets were
not growing as fast as expected and product availability was not as tight as
originally anticipated. In response, during the third quarter of 2004 customers
began reducing their purchasing levels. Our backlog of customer orders, which
grew from $68 million at December 31, 2003 to $86 million at June 30, 2004,
began to trend downward during the third quarter of 2004 and was $69 million at
December 31, 2004.

In 2004, the global semiconductor market was $213.0 billion compared to $166.4
billion for 2003, representing a 28% increase. The growth experienced in 2004
was across all regions. The second half of 2004, however, reflected a
deceleration in the growth rate for the global semiconductor industry. The
global semiconductor market grew 32%, 40%, 28% and 15% year over year for each
of the first through the fourth quarters of 2004 as compared to the same periods
of 2003. While we expect that the future growth in global markets will include
growth in the Americas, the Company believes that growth rates will be higher in
foreign markets. To support this trend, the Company is continuing its efforts to
increase its offshore presence. The Company has operations in the United Kingdom
and Hungary to support European markets and in Korea, Malaysia and China to
support Asian markets. The Company expects to expand further into these
territories. Sales to customer locations in European and Asian markets
aggregated $39 million for 2004 compared to $17 million for 2003. There can be
no assurance that the Company will achieve any growth in any particular market
in the future.

Critical Accounting Policies and Estimates
------------------------------------------

The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the Consolidated Financial Statements and accompanying notes. Estimates are used
for, but not limited to, the accounting for the allowance for doubtful accounts,

inventories, income taxes, a postretirement benefit obligation and loss
contingencies. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results could differ from these estimates under different
assumptions or conditions.

The Company believes the following critical accounting policies, among others,
may be impacted significantly by judgement, assumptions and estimates used in
the preparation of the Consolidated Financial Statements:

The Company recognizes revenue in accordance with Securities and Exchange
Commission Staff Accounting Bulletin No. 104, "Revenue Recognition" (SAB 104).
Under SAB 104, revenue is recognized when there is persuasive evidence of an
arrangement, delivery has occurred or services have been rendered, the sales
price is determinable, and collectibility is reasonably assured. Revenue for the
Company is typically recognized at time of shipment as the Company does not have
any performance obligations beyond shipment to its customers. Prices for
purchases are negotiated by the Company with its suppliers. Prices for sales are
negotiated by the Company with its customers. Customers are typically required
to pay the Company for sales within 30 days of shipment to the customer. The
Company offers rebates to certain customers based on the volume of products
purchased. The Company follows Emerging Issues Task Force Issue No. 01-9,
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)" and, accordingly, any rebate obligations are
deducted from revenues. In addition, while substantially all of the Company's
sales are final, a very limited number of customers have contractual rights to
return product based upon a percentage of their purchases. Furthermore, from
time to time as a result of special and/or extenuating circumstances, a very
small amount of sales are returned. As a result, the Company reserves for
returns as a deduction against revenues. The amount of the reserve is primarily
based upon historical experience and is reviewed and adjusted as appropriate.
Most of the Company's product sales come from products that it purchases from a
supplier and holds in inventory. A portion of the Company's business is
drop-shipments which involve shipments directly from its suppliers to its
customers. In all transactions, the Company is responsible for negotiating price
both with the supplier and customer, payment terms by the Company to the
supplier, establishing payment terms with the customer to the Company, and
product returns from the customer to the Company, and the Company has the risk
of loss if the customer does not make payment. As the principal with the
customer, the Company recognizes revenue on a drop-shipment when the Company is
notified by the supplier that the product has been shipped. The Company also
maintains consignment inventory. Under consignment programs product is shipped
to a consignee customer so that such product is available for the consignee's
use when they are required. The consignee may or may not be obligated to
purchase the consigned inventory and in some instances maintains a right to
return unused product that is shipped under the consignment inventory program.
Revenue is not recognized from products shipped on consignment until
notification is received from the Company's consignee customer that the customer
has accepted title of and consumed the inventory that was shipped initially on
consignment. The product shipped on consignment in which title has not been
accepted by the customer is included in the Company's inventories and is not
included in revenue.

The Company's accounts receivable are due from a broad range of customers. The
Company extends credit based on ongoing evaluations of its customers' financial
condition and payment history. Accounts receivable are generally due within 30
days and are stated at amounts due from customers net of an allowance for
doubtful accounts. The allowance for doubtful accounts is maintained to provide
for losses arising from customers' inability to make required payments. If there
is a deterioration of our customers' creditworthiness and/or there is an
increase in the length of time that the receivables are past due greater than
the historical assumptions used, additional allowances may be required.

Inventories are stated at the lower of cost (determined on an average cost
basis) or market. Based on our assumptions about future demand and market
conditions as well as the Company's distribution agreements with its suppliers,
which generally provide for price protection and obsolescence credits,
inventories are written-down to market value. Due to the large number of
transactions and the complexity of managing the process around price protections
and obsolescence credits, estimates, based upon assumptions about future demand,
selling prices and market conditions, are made regarding adjustments to the book
cost of inventories. Actual amounts could be different from those estimated. If
our

assumptions about future demand change, and/or actual market conditions are less
favorable than those projected, additional write-downs of inventories may be
required.

Deferred tax assets are recorded based on the Company's projected future taxable
income and the resulting utilization of the deferred tax assets. To the extent
that the Company would not be able to realize in the future all or part of its
deferred tax assets, which aggregated $2,004,000 at December 31, 2004, an
adjustment to the deferred tax assets would be necessary and charged to income.

The Company calculates a postretirement benefit obligation using actuarial life
expectancy tables and an assumed discount rate. If the assumptions used in this
calculation change, an adjustment to the postretirement benefit obligation may
be required.

The Company is subject to proceedings, lawsuits and other claims related to
labor, product, intellectual property, environmental and other matters which
arise in the ordinary course of business. In determining loss contingencies, we
evaluate the likelihood of the loss or impairment of an asset or the incurrence
of a liability, as well as our ability to reasonably estimate the amount of such
loss. We accrue for an estimated loss contingency when it is probable that a
liability has been incurred or an asset has been impaired and the amount of the
loss can be reasonably estimated.

Results of Operations
---------------------

Overview

The following table sets forth for the years ended December 31, 2004, 2003 and
2002, certain items in the Company's Consolidated Statements of Income expressed
as a percentage of net sales. All percentages are based on net sales.

Items as a Percentage
of Net Sales
------------------------------
Years Ended
December 31
------------------------------
2004 2003 2002
------ ------ ------

Net Sales................................................ 100.0% 100.0% 100.0%
Gross Profit............................................. 16.8 18.5 18.3
Selling, General and Administrative Expenses............. (14.8) (17.3) (17.1)
Income from Operations................................... 2.0 1.2 1.2
Interest Expense......................................... (0.9) (0.9) (0.9)
Other Income - Net....................................... 0.3 - 0.7
Income from Operations Before Income Taxes............... 1.4 0.3 1.0
Income Tax Provision..................................... (0.6) (0.1) (0.4)
Net Income............................................... 0.8 0.2 0.6

-------------------

Comparison of Years Ended December 31, 2004 and 2003
----------------------------------------------------

Sales

Net sales for the year ended December 31, 2004 were $409.4 million, representing
a 31.4% increase from net sales of $311.5 million for 2003. The increase in
sales for 2004 compared to 2003 reflects improved industry conditions. This
improvement in sales was realized by almost all of the Company's locations.
Sales began to slow down during the second half of 2004 compared to sales for
the first half of 2004. Management believes that in the third quarter of 2004
customers began experiencing increases in inventory levels as end markets were
not growing as fast as expected and product availability was not as tight as
originally anticipated. In response, during the third quarter of 2004 customers
began reducing their purchasing levels. Management expects that the current
slowdown may continue for part of 2005.

Gross Profit

Gross profit was $68.8 million for 2004, compared to gross profit of $57.6
million for 2003. The increase in gross profit was primarily due to the increase
in net sales which more than offset the decline in gross profit margins. Gross
profit margins as a percentage of net sales were 16.8% for 2004 compared to
18.5% for 2003. The decrease in gross profit margins reflects long-term
strategic relationships with accounts that require aggressive pricing programs.
Sales to these accounts grew 54.2% for 2004 compared to 2003. The decrease in
gross profit margins also reflects a 55.9% increase in sales associated with
low-margin, large volume transactions for 2004 compared to 2003. Additionally,
profit margins were under downward pressure as a result of slight oversupply
conditions that existed in the market in the second half of 2004. Downward
pressure on our gross profit margins was further impacted by a change in our
product mix. For 2004, sales of active products, which historically sell at
lower margins than passive/electromechanical products, grew 36% from 2003 and
represented 88% of total sales for 2004 compared to 85% of total sales in 2003.
Management expects that the downward pressure on gross profit margins will
continue as a result of the anticipation of a greater number of low-margin,
large volume transactions in the future, the anticipation of an increase in
sales to accounts that require aggressive pricing programs and the possibility
that slight oversupply conditions may still exist.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) increased to $60.6 million
for 2004 from $54.0 million for 2003. The increase in SG&A reflects an increase
in variable compensation expenses of $2.0 million in 2004 over 2003 associated
with the growth in sales and gross profit dollars as well as an increase in
fixed compensation expenses of $1.8 million in 2004 over 2003. Additionally, the
increase for 2004 over 2003 includes an increase in travel and entertainment
expenses of $1.2 million. As industry conditions began improving in the third
quarter of 2003, the Company strategically increased its personnel in North
America in an effort to drive expansion and internal growth. Additionally, the
Company added people to expand its support for display products. As a result,
the Company's total employees increased 7% from 2003 to 2004. In response to the
continuing trend of electronics manufacturing moving offshore, in 2004 the
Company also increased its personnel in both Europe and Asia. The Company
expects that its expansion of personnel and operations into these territories
will continue. Due to the foregoing, the Company expects that SG&A will increase
in future periods.

SG&A as a percentage of net sales improved to 14.8% for 2004 compared to 17.3%
for 2003. The improvement in SG&A as a percentage of net sales reflects the
increase in net sales as well as the benefits of our operating efficiencies as
the increase in sales more than offset the increase in SG&A.

Income from Operations

Income from operations was $8.2 million for 2004 compared to $3.6 million for
2003. The significant increase in income from operations was due to the increase
in sales and gross profit dollars as discussed previously, which increases more
than offset the increase in SG&A described above.

Interest Expense

Interest expense increased to $3.8 million for 2004 from $2.6 million for 2003.
The increase in interest expense resulted from an increase in our average
borrowings. Our average borrowings increased by $21.1 million for 2004 when
compared to 2003. The increase in average borrowings was due to increases in our
inventory and accounts receivable levels. Our inventory increased to support the
increased levels of sales beginning towards the end of 2003 and the growth in
sales during the first half of 2004. At the same time, our accounts receivable
also increased as a result of the increased sales levels during 2004. During
2004 the Company's effective interest rate was impacted by several factors. The
Company's effective interest rate was adversely impacted by five interest rate
hikes by the Federal Reserve Board between June 30, 2004 and December 31, 2004,
which raised the Federal funds rate by 125 basis points. This adverse effect was
offset by improvements in the pricing levels on borrowings under the Company's
$85 million credit facility, as amended, which expires May 14, 2006 (the Credit
Facility) and the repayment

of fixed-rate debt utilizing borrowings under the Credit Facility at a lower
rate. In connection with the interest rate charged under the Credit Facility,
the Company improved from the third pricing level at the beginning of 2004, to
the second pricing level effective in the middle of the second quarter of 2004
and to the first pricing level effective in the middle of the third quarter of
2004. These improvements in pricing levels, which aggregated 100 basis points,
were based on the Company achieving an increase in its debt service coverage
ratio as calculated pursuant to the Credit Facility. Furthermore, the repayment
of $5.2 million of fixed-rate debt at 9% on June 14, 2004 utilizing borrowings
under the Credit Facility at lower interest rates should continue to have a
positive effect on interest expense when compared to the prior year. If the
Federal Reserve continues to increase interest rates as anticipated, interest
expense will increase. Interest expense for 2004 and 2003 included non-cash
amortization of deferred financing fees of $361,000 and $208,000. Interest
expense will reflect an aggregate of $1.1 million of deferred financing fees
over the term of the Credit Facility. See "Liquidity and Capital Resources"
below and Note 6 to Notes to Consolidated Financial Statements.

Other Income

In August 2004, the Company received $1.2 million, including accrued interest
and attorney's fees, as a result of prevailing in a contract litigation
initiated in August 2001. The Company has reflected the reimbursement of
attorney's fees of $77,000 in selling, general and administrative expenses and
the balance of $1,081,000 in other income on the Consolidated Statements of
Income for the year ended December 31, 2004.

Net Income

Net income was $3.2 million or $.78 per share (diluted) for the year ended
December 31, 2004, compared to $546,000 or $.14 per share (diluted) for the year
ended December 31, 2003. Net income for 2004 reflects other income of $1.1
million on a pre-tax basis ($616,000 on an after-tax basis or $.15 per share
(diluted)) as a result of prevailing in a contract litigation.

Comparison of Years Ended December 31, 2003 and 2002
----------------------------------------------------

Sales

Net sales for the year ended December 31, 2003 were $311.5 million, compared to
net sales of $332.0 million for 2002. The decrease was primarily attributable to
an industry downturn and the negative impact from weak demand for electronic
components. Another factor that contributed to the decrease in sales was the
continuing trend for electronics manufacturing to move offshore where the
Company has very limited sales presence. The negative industry conditions
continued through the beginning of the third quarter of 2003. Conditions began
improving during the latter part of the third quarter of 2003. Sales for the
second half of 2003 increased by 19.7% over sales for the first six months of
2003. In addition to representing our third sequential quarterly increase in
sales, the fourth quarter of 2003 was also the first quarterly period since the
fourth quarter of 2002 where sales increased over the corresponding quarter of
the prior year. In the fourth quarter of 2003 sales increased by 12.9% compared
to the same period of 2002. In an effort to increase its offshore presence in
response to the continuing trend of electronics manufacturing moving offshore,
the Company established operations in the United Kingdom to support European
markets and in Korea and Malaysia to support Asian markets.

Gross Profit

Gross profit was $57.6 million for 2003, compared to gross profit of $60.7
million for 2002. The decrease in gross profit was primarily due to the decrease
in net sales. Gross profit margins as a percentage of net sales were 18.5% for
2003 compared to 18.3% for 2002. The slight improvement in gross profit margins
for 2003 compared to 2002 reflected a 21.0% reduction in sales to accounts that
require aggressive pricing programs, as well as a change in our product mix
during 2003 versus 2002. Notwithstanding this slight improvement, there was
continued pressure on gross profit margins reflecting the continued development
of long-term strategic relationships with accounts that require aggressive
pricing programs, as well as the continuing change in our product mix.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) decreased to $54.0 million
for 2003 from $56.7 million for 2002. The improvement in SG&A reflected the
reduction in variable expenses associated with the year over year decline in
sales and gross profit dollars. In addition, the improvement reflected
reductions in operating lease expenses as well as reductions in payroll costs
and discretionary expenditures.

SG&A as a percentage of net sales was 17.3% for 2003 compared to 17.1% for 2002.
The small increase in SG&A as a percentage of net sales for 2003 reflected the
decline in sales which more than offset the absolute dollar improvement in SG&A.

Income from Operations

Income from operations was $3.6 million for 2003 compared to $4.1 million for
2002. The decrease in income from operations was due to the decline in sales and
gross profit dollars as discussed previously, which decreases were substantially
offset by the improvements in SG&A described above.

Interest Expense

Interest expense decreased to $2.6 million for 2003 from $3.1 million for 2002.
The decrease in interest expense for 2003 compared to 2002 was due to decreases
in our average borrowings and decreases in overall interest rates. Our average
borrowings under our credit facility decreased by $5 million when comparing 2003
and 2002. The decrease in average borrowings occurred primarily during the first
nine months of 2003 due to decreases in our inventory as well as a refund of
income taxes. During the fourth quarter of 2003 our average borrowings increased
by $9 million when compared to the third quarter of 2003 and by $12 million when
compared to the fourth quarter of 2002. The increase in average borrowings for
the fourth quarter of 2003 was due to increases in our inventory to support the
increased level of sales towards the end of 2003 and an anticipated increase in
sales for 2004. During the third and fourth quarters of 2003, the Company
benefited from an improvement in its interest pricing levels associated with the
then new Credit Facility which closed in May of 2003. Based upon the debt
service coverage ratio as then defined in the Credit Facility and as calculated
using the June 30, 2003 financial statements, the Company improved from the
third pricing level to the first pricing level effective in the middle of the
third quarter of 2003. This improvement resulted in a reduction of 100 basis
points on the interest rates charged on the Company's borrowings under the
Credit Facility. This improved rate continued through the middle of November
2003, at which point the pricing level again changed based on the September 30,
2003 financial statements. As of September 30, 2003 the debt service coverage
ratio decreased and the Company reverted to the third pricing level effective
from the middle of the fourth quarter of 2003 until the beginning of 2004. Due
to the timing of the pricing level changes, interest expense was not
significantly impacted for the fourth quarter and twelve months of 2003.
Interest expense for 2003 included non-cash amortization of deferred financing
fees of $208,000.

Net Income

Net income was $546,000 or $.14 per share (diluted) for the year ended December
31, 2003, compared to $1.9 million or $.49 per share (diluted) for 2002. Net
income for 2002 includes other income of $1.3 million on an after-tax basis that
primarily related to a partial payment in settlement of an accounts receivable
that had been written-off in 2001.

Liquidity and Capital Resources
-------------------------------

Working capital at December 31, 2004 increased to $94.1 million from working
capital of $63.2 million at December 31, 2003. The current ratio was 2.98:1 at
December 31, 2004 compared to 2.19:1 at December 31, 2003. The increase in
working capital was primarily due to increases in accounts receivable and
inventory as well as a decrease in the current portion of long-term debt.
Accounts receivable was $69.0 million at December 31, 2004 compared to $53.8
million at December 31, 2003.

The increase in accounts receivable reflects an increase in the level of sales
towards the latter part of 2004 as compared to the latter part of 2003. The
average number of days that accounts receivables were outstanding decreased to
57 days as of December 31, 2004 compared to 58 days as of December 31, 2003.
Inventory levels were $67.6 million at December 31, 2004 compared to $58.2
million at December 31, 2003. The increase primarily reflects higher inventory
levels needed to support the increased level of sales in 2004. Accounts payable
was $41.1 million at December 31, 2004 compared to $41.9 million at December 31,
2003.

On June 14, 2004, the Company utilized available borrowings under the Credit
Facility to repay in full $5.2 million of 9% subordinated debentures that had
matured. This debt is reflected in the current portion of long-term debt on the
Consolidated Balance Sheet as of December 31, 2003.

The Company has other subordinated debt with various maturities through 2015
aggregating approximately $779,000 and has an unfunded postretirement benefit
obligation of approximately $1.1 million. See table below and Note 6 to Notes to
Consolidated Financial Statements.

In August 2002, the Company's Board of Directors authorized the continuance of
the stock repurchase program, originally approved by the Board and announced in
1999, which provided for the repurchase of up to $2.0 million in purchase price
of the Company's common stock. The stock repurchases may, at the discretion of
the Company's management, be made from time to time at prevailing prices in the
open market or through privately negotiated transactions. The Company's
management will base its decision on market conditions, the price of its common
stock, available cash flow and other factors. The Company does not currently
anticipate making stock repurchases. The Company did not repurchase any shares
of its common stock during the year ended December 31, 2004. To date, the
Company has repurchased 244,089 shares at an aggregate price of approximately
$758,000 under this program. Shares purchased under this program are immediately
retired and become authorized and unissued shares of common stock available for
reissuance for any corporate purpose.

The Company's Credit Facility, which was entered into on May 14, 2003 and
expires on May 14, 2006, was amended as of June 11, 2004 to increase that credit
facility to $85 million from $65 million and to amend certain provisions.
Borrowings under the Credit Facility bear interest at one of three pricing
levels dependent on the Company's debt service coverage ratio at the quarterly
pricing date (as defined), and are secured by all of the Company's assets
including accounts receivable, inventories and equipment. At the first pricing
level, at the Company's option, the rate will be either (a) .5% over the greater
of the Federal funds rate plus .5% and prime or (b) 2.75% over LIBOR. At the
second level, at the Company's option, the rate will be either (a) 1% over the
greater of the Federal funds rate plus .5% and prime or (b) 3.25% over LIBOR. At
the third level, at the Company's option, the rate will be either (a) 1.5% over
the greater of the Federal funds rate plus .5% and prime or (b) 3.75% over
LIBOR. The Company improved from the third pricing level under its Credit
Facility at the beginning of 2004, to the second pricing level effective in the
middle of the second quarter of 2004 and to the first pricing level effective in
the middle of the third quarter of 2004. These improvements in pricing levels,
which aggregated 100 basis points, were based on the Company achieving an
increase in its debt service coverage ratio as calculated pursuant to the Credit
Facility. The positive impact on interest expense from the improved pricing
levels was offset by the adverse effect from five interest rate hikes by the
Federal Reserve Board between June 30, 2004 and December 31, 2004, which raised
the Federal funds rate by 125 basis points. The effective interest rate on
borrowings under the Credit Facility increased slightly for 2004 compared to
2003. In connection with the Credit Facility, interest expense for 2004 and 2003
included non-cash amortization of deferred financing fees of $361,000 and
$208,000 and will reflect an aggregate of $1.1 million of deferred financing
fees over the term of the Credit Facility. The amounts that the Company may
borrow under the Credit Facility are based upon specified percentages of the
Company's eligible accounts receivable and inventories (as defined) and the
Company is required to comply with certain affirmative and negative covenants
and certain financial ratios. The covenants, among other things, place
limitations and restrictions on the Company's borrowings, investments, capital
expenditures and transactions with affiliates; prohibit dividends and
acquisitions; and prohibit stock redemptions in excess of an aggregate cost of
$2.0 million during the term of the Credit Facility. The Credit Facility
requires the Company to maintain certain minimum levels of tangible net worth
throughout the term of the credit agreement as well

as a minimum debt service coverage ratio and a minimum inventory turnover level,
each tested on a quarterly basis. The Company was in compliance with all
covenants under the Credit Facility at December 31, 2004.

At December 31, 2004, outstanding borrowings under the Company's Credit Facility
aggregated $75.0 million compared to $48.0 million at December 31, 2003. See
Note 6 to Notes to Consolidated Financial Statements.

Long-term debt, operating leases and other long-term obligations as of December
31, 2004 mature as follows:

Payments Due by Period
-----------------------------------------------------
Less than More than
Obligations Total 1 year 1-3 years 4-5 years 5 years
---------------------------------------------------------------------------------------------------------

Long-term debt (1) ................ $76,593,000 $ 705,000 $75,397,000 $ 175,000 $ 316,000
Operating leases .................. 11,100,000 3,400,000 4,500,000 1,100,000 2,100,000
Other long-term obligations (2) ... 1,063,000 - - - 1,063,000
----------- ----------- ----------- ----------- -----------
Total obligations ................. $88,756,000 $ 4,105,000 $79,897,000 $ 1,275,000 $ 3,479,000
=========== =========== =========== =========== ===========

------------

(1) Reflected on the Company's Consolidated Balance Sheet as of December 31,
2004 and includes $74,958,000 under the Company's Credit Facility which
matures on May 14, 2006.
(2) Reflected on the Company's Consolidated Balance Sheet as of December 31,
2004 and represents a postretirement benefit obligation.

In June 2004 the Company entered into a software license and services agreement
in connection with a new enterprise resource planning (ERP) system. The
aggregate cost of this new ERP system, including estimated costs of training and
implementation, is expected to be approximately $2.8 to $3.5 million. At
December 31, 2004, $798,000 associated with this ERP system has been reflected
in property, plant and equipment - net and $264,000 has been reflected in other
current assets on the Consolidated Balance Sheet. In July 2004, the Company
financed $1.1 million of its ERP costs with a third party finance company under
an installment payment arrangement. At December 31, 2004, the outstanding
balance under this arrangement was $856,000 which is payable in four equal
quarterly installments of approximately $217,000 through January 1, 2006. The
effective interest rate under this agreement is 1.9% per annum. In addition, the
Company has arranged financing for an additional $1.9 million of the aggregate
cost of the ERP system with another third party finance company, which financing
arrangement is expected to have maturities through May 2008 based upon the
Company's anticipated utilization of the financing arrangement and has an
effective interest rate of 2.2% per annum.

The Company currently expects that its cash flows from operations and additional
borrowings available under its Credit Facility will be sufficient to meet the
Company's current financial requirements over the next twelve months, including
obligations related to the current portion of long-term debt and operating
leases. As the Company has historically been successful in refinancing its line
of credit facilities, management expects to refinance its present Credit
Facility prior to its expiration in May 2006.

Off-Balance Sheet Arrangements
------------------------------

The Company continues to guarantee the future payment to a third party of
certain leases which were previously pledged to the Company as collateral for
the payment of outstanding receivables which were owed by a customer. This
guaranty was made when the leases were sold to this third party who paid to the
Company in 2001 the net present value of the future payments of the leases. As
of December 31, 2004, the Company had made payments aggregating $26,000 under
this guaranty as a result of nonpayments of rental amounts by lessees, which
nonpayments have continued subsequent to the balance sheet date. The Company
plans to seek recovery from the lessees for any amounts that the Company pays
under its guaranty. There can be no assurance, however, that the Company will be
successful in

recovering any amounts paid under its guaranty. At December 31, 2004 the maximum
additional exposure under this guaranty, which continues through the latest
lease expiration date of March 31, 2006, was $303,000 with a net present value
of $278,000.

Inflation and Currency Fluctuations
-----------------------------------

The Company does not believe that inflation significantly impacted its business
during 2004; however, inflation has had significant effects on the economy in
the past and could adversely impact the Company's results in the future. The
Company believes that currency fluctuations could adversely impact its financial
results in the future if the Company increases transactions in foreign
currencies and/or adds offshore infrastructure which is paid for in foreign
currencies. The Company believes that currency fluctuations could have adverse
effects on its business if the impact from those currency fluctuations makes
components manufactured abroad too expensive, causes limitations in customer
productions due to unfavorable export conditions or causes the Company's
offshore suppliers to limit exports to the United States. In certain prior
years, the Company believes that currency fluctuations have had such adverse
effects. In addition, foreign currency fluctuations could result in increasing
the cost of goods of the Company or reducing its net sales as purchase and sale
prices for the Company's goods fixed in foreign currency may result in the cost
of goods in U.S. dollars being greater when paid or net sales in U.S. dollars on
payment for goods being less when received than anticipated when the price
payable or to be received in foreign currency is originally fixed.

New Accounting Pronouncements Applicable to the Company
-------------------------------------------------------

In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4" (SFAS 151), effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. This Statement
amends the guidance in Accounting Research Bulletin (ARB) No. 43, Chapter 4,
"Inventory Pricing," to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs and wasted material (spoilage).
Paragraph 5 of ARB No. 43, Chapter 4, previously stated that "...under some
circumstances, items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs may be so abnormal as to require treatment as
current period charges...." SFAS 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal..." In addition, SFAS 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. The Company adopted SFAS 151 as of January 1, 2005. The
effect of the adoption of SFAS 151 was not material.

In December 2004, FASB issued Statement of Financial Accounting Standards No.
153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29"
(SFAS 153), effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. This Statement amends Accounting
Principles Board (APB) Opinion No. 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. The
Company adopted SFAS 153 as of January 1, 2005. The effect of the adoption of
SFAS 153 was not material.

In December 2004, FASB issued Statement of Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" (SFAS 123 (revised 2004)), effective
as of the beginning of the first interim or annual reporting period that begins
after June 15, 2005. This Statement is a revision of FASB Statement No. 123,
"Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS 123 (revised 2004) eliminates the alternative to use APB Opinion
No. 25's intrinsic value method of accounting that was provided in Statement 123
as originally issued. Under APB Opinion No. 25, issuing stock options to
employees generally resulted in recognition of no compensation cost. SFAS 123
(revised 2004) requires entities to recognize the cost of employee services
received in exchange for awards of equity instruments based on the grant-date
fair value of those awards (with limited exceptions). Recognition of that
compensation cost helps users of financial statements to better understand the
economic transactions

affecting an entity and to make better resource allocation decisions. The
Company will adopt SFAS 123 (revised 2004) for the fiscal quarter beginning July
1, 2005. The effect of the adoption of SFAS 123 (revised 2004) is not expected
to be material.

Forward-Looking Statements; Business Risks and Uncertainties
------------------------------------------------------------

This report contains statements that are forward-looking within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. When used in this report, the words "believes," "estimates,"
"plans," "expects," "intends," "anticipates," "contemplates," "may," "will,"
"shall," "assuming," "prospect," "should," "could," "looking forward" and
similar expressions, to the extent used, are intended to identify the
forward-looking statements. All forward-looking statements are based on current
expectations and beliefs concerning future events that are subject to risks and
uncertainties. Actual results may differ materially from the results suggested
in this report. In many cases, we cannot predict the risks or uncertainties that
could cause actual results to differ materially from those indicated in the
forward-looking statements. Factors that may cause or contribute to such
differences, and our business risks generally, include, but are not limited to,
the items described below, as well as in other sections of this report and in
other of our public filings and in our press releases. The Company undertakes no
obligation to update publicly or revise any forward-looking statements, business
risks and/or uncertainties.

Our industry is cyclical, which causes our operating results to fluctuate
significantly.

We cannot predict the timing or the severity of the cycles within our industry.
In particular, it is difficult to predict how long and to what levels any
industry slowdown or downturn and/or general economic weakness will last or be
exacerbated by terrorism or war or other factors or, alternatively, the
likelihood of an industry upturn or the period of time it will last. The
electronic components distribution industry has historically been affected by
general economic downturns, which have often had an adverse economic effect upon
manufacturers, end-users of electronic components and electronic components
distributors. In addition, our industry directly depends on the continued growth
of the electronic components industry and indirectly on the level of end-user
demand for our customers' products. Due to changing conditions, our customer
base has experienced and may in the future experience periods of inventory
corrections which could materially adversely impact our results. Furthermore,
the timing of new product developments, the life-cycle of existing electronic
products, and the level of acceptance and growth of new products can affect
demand for electronic components. In that regard, the Company has supported in
the past and expects in the future to support new technologies and emerging
markets, the failure of which to be accepted or grow could have a material
adverse effect on our operating results. These market changes and factors have
caused in the past, and will likely cause in the future, our operating results
to significantly fluctuate.

We are dependent on a limited number of suppliers. If one or more of our largest
suppliers chooses not to sell products to us, our operating results could
suffer.

We rely on a limited number of suppliers for products which generate a
significant portion of our sales. Substantially all of our inventory has and
will be purchased from suppliers with which we have entered into non-exclusive
distributor agreements which are typically cancelable on short notice (generally
30 to 90 days). Products purchased from our three largest suppliers accounted
for approximately 33% of our consolidated purchases during the calendar year
ended December 31, 2004, of which 21% were purchased from one supplier. No other
supplier accounted for more than five percent of our consolidated purchases
during this period. While most of the products that we sell are available from
other sources, our future success will depend in large part on maintaining
relationships with existing suppliers and developing relationships with new
ones. We believe that the loss of a key supplier (particularly our largest
supplier) could have a material adverse impact on our business in the short term
as we attempt to replace the products offered by that supplier with the products
of other suppliers. However, if we were to lose our right to distribute the
products of any particular supplier, there can be no assurance that we would be
able to replace the products which were available from that particular supplier.
Thus, the loss of, or significant

disruptions in relationships with, any of our largest suppliers (particularly
our largest supplier) or a significant number of other suppliers in a short
period of time, could have a material adverse effect on our operating results.

We do not have long-term contracts with our customers and, as a result, our
customers may be able to cancel, reduce or delay their orders without penalty.

We typically do not obtain long-term purchase orders or commitments but instead
work with our customers to develop nonbinding forecasts of future orders. Based
on such nonbinding forecasts, we make commitments regarding the level of
business that we will seek and accept, and the levels and utilization of
personnel and other resources. A variety of conditions, both specific to each
individual customer and generally affecting each customer's industry, may cause
our customers to cancel, reduce or delay orders that were either previously made
or anticipated or attempt to return inventory. Generally, our customers may
cancel, reduce or delay purchase orders and commitments without penalty or other
charges associated with such cancellation, reduction or delay. Significant or
numerous cancellations, reductions or delays in orders by customers could have a
material adverse effect on our operating results.

We may not be able to sustain or manage growth or achieve satisfactory levels of
profitability.

As and to the extent market conditions improve, we will need to manage our
expanding operations (including our developing European and Asian operations)
effectively and successfully integrate into our operations that expansion and
any new businesses or divisions which we may acquire or open. If we are unable
to do so, particularly in instances in which we have made or make significant
investments, our failure could have a material adverse effect on our operating
results. We may be unsuccessful in growing and achieving satisfactory levels of
profitability if we are unable to:

- secure adequate supplies of competitive products on a timely basis and
on commercially reasonable prices and other terms, especially in times
of product allocations;
- expand sales to existing customers and increase our customer base;
- turn our inventories and collect our accounts receivable fully and in a
timely manner, especially with respect to customers in new technologies
or in emerging markets and generally as a result of the weakened or any
further weakening financial condition of certain customers (including
several customer bankruptcies);
- avoid obsolescence of inventory or devaluation of inventory as a result
of adverse market conditions;
- maintain our existing key supplier relationships as well as develop new
relationships with leading suppliers of electronic components;
- hire and retain additional qualified management, marketing and other
personnel to successfully manage our growth, including personnel to
monitor our operations, control costs and maintain effective inventory
and credit controls;
- effectively and fully utilize our level of personnel and facility and
infrastructure overcapacity; and
- invest to maintain and enhance our infrastructure, including
telecommunications and information systems, enterprise resource
planning (ERP) system, logistics services and our service capabilities,
including "distribution technology".

A decline in gross profit margins arising from a change in market conditions or
aggressive pricing programs could adversely affect our operating results.

During certain prior periods, we have experienced an increase in gross profit
margins as a result of favorable market conditions in the electronic components
distribution industry, including limited supply of certain products. However,
there is no assurance that negative changes in the economic environment
generally and/or in the electronic components industry in particular will not
occur. Furthermore, we continue to develop long-term strategic relationships
with accounts which have required aggressive pricing programs, as well as there
is continued price competition for products sold by us. These and other factors
(such as increases in low-margin, large volume transactions and a change in our
product mix) could result in a decline in our gross profit margins, materially
adversely affecting our operating results.

We may not be able to satisfy our funding requirements.

We currently anticipate needing to spend significant amounts of cash to: meet
our working capital requirements (including to support increases in levels of
inventory, as well as customer backlog, and accounts receivable as our level of
sales increases); invest in capital equipment and infrastructure; upgrade our
information and communication systems, including our new enterprise resource
planning (ERP) system; acquire businesses or open divisions; or respond to
increases in expenses and costs, unanticipated developments, increasing customer
demands or competitive pressures. If we do not have enough cash on hand, cash
generated from our operations and/or cash available under our credit facility to
meet these cash requirements, we will need to seek alternative sources of
financing to carry out our growth and operating strategies, particularly if our
credit facility is not available to do so. We may not be able to raise needed
cash on terms acceptable to us, or at all. Financing may be on terms that are
dilutive or potentially dilutive. If alternative sources of financing are
required but are insufficient or unavailable, we will be required to modify our
operating plans to the extent of available funding, if and assuming such
modifications and/or other actions can be made or taken at all.

Our global expansion initiatives may not be successful.

The Company has commenced global expansion initiatives in an attempt to increase
its sales to customers' locations in foreign countries. Given the Company's
limited experience in the international market and that the Company only fairly
recently, and on a limited basis so far, commenced operations outside of North
America, no assurance can be given that the Company's global expansion
initiatives will be successful.

We are exposed to interest rate changes which could adversely affect our
operating results.

We are exposed to interest rate changes with respect to our credit facility,
which currently is based upon, at our option, the prime rate or LIBOR. No
assurance can be given that interest rates will not continue to rise. Any
material increase in the level of interest rates could materially adversely
affect our operating results.

We are dependent on foreign manufacturers and subject to trade regulations which
expose us to political and economic risk.

A significant number of components sold by us are manufactured by foreign
companies. As a result, our ability to sell certain products at competitive
prices could be adversely affected by any of the following:

- increases in tariffs or duties;
- changes in trade treaties;
- strikes or delays in air or sea transportation;
- future United States legislation with respect to pricing and/or import
quotas on products imported from foreign countries; and
- turbulence in offshore economies or financial markets.

Our ability to be competitive with respect to sales of imported components could
also be affected by other governmental actions and policy changes, including
anti-dumping and other international antitrust legislation. In addition, adverse
currency fluctuations could have the effect of making components manufactured
abroad more expensive, cause limitations in customer productions due to
unfavorable export conditions or cause our offshore suppliers to limit exports
to the United States. In addition, foreign currency fluctuations could result in
increasing the cost of goods to us or reducing our net sales as purchase and
sale prices for our goods fixed in foreign currency may result in the cost of
goods in U.S. dollars being greater when paid or net sales in U.S. dollars on
payment for goods being less when received than anticipated when the price
payable or to be received in foreign currency is originally fixed. Because we
historically purchase substantially all of our products from United States
subsidiaries and affiliates of foreign manufacturers, almost all of our
purchases are paid for in U.S. dollars, which usually reduces or eliminates the
potential adverse effects of currency fluctuations. However, in late 2002 we
began purchasing a limited amount (less

than 7% of total purchases for 2004) of our product offshore and this offshore
purchasing activity may increase in the future. Accordingly, there can be no
assurance that such factors could not have a material adverse effect on our
operating results in the future.

Our global expansion initiatives expose us to a variety of risks which could
adversely affect our operating results.

Our sales to customers' locations in foreign countries increased to $69.7
million for 2004 up from $41.2 million in 2003 due to our global expansion
initiatives. Our global operations are subject to a variety of risks including
the following:

- limited experience in markets outside of North America;
- foreign currency fluctuations;
- political and economic instability;
- the burden and cost of complying with foreign laws;
- changes to foreign laws and regulations;
- import and export duties and value added taxes;
- difficulty in staffing and managing foreign operations; and
- unpredictable sales cycles.

Our foreign subsidiaries currently conduct substantially all of their business
in U.S. dollars. As we expand our global initiative we may be required to
transact business in the local currency of the customers' location. Fluctuations
in currency exchange rates could lead to a reduction in sales or profitability.
To the extent revenues and expenses are denominated in currencies other than
U.S. dollars, gains and losses on the conversion to U.S. dollars may contribute
to fluctuation in our operating results.

Our new enterprise resource planning (ERP) system could have an adverse effect
on our operations.

Our operations could be adversely affected if and when the new ERP system is
implemented if the new ERP system does not perform as anticipated. If there is a
failed implementation of the new ERP system, then service to the Company's
customers and suppliers could be adversely impacted. The strain on the Company's
employees, as well as on its financial resources, may be significant for a
period of time in connection with this new ERP system and the implementation
thereof.

Our industry is subject to supply shortages. Any delay or inability to obtain
components may have an adverse effect on our operating results.

During certain prior periods there have been shortages of components in the
electronics industry and the availability of certain components have been
limited by some of our suppliers. Although such shortages and allocations have
not had a material adverse effect on our operating results, there can be no
assurance that any future shortages or allocations would not have such an effect
on us.

The prices of our components are subject to volatility.

A significant portion of the memory products we sell have historically
experienced volatile pricing. If market pricing for these products decreases
significantly, we may experience periods when our investment in inventory
exceeds the market price of such products. In addition, at times there are price
increases from our suppliers that we are unable to pass on to our customers.
These market conditions could have a negative impact on our sales and gross
profit margins unless and until our suppliers reduce the cost of these products
to us. Further, in the future aggressive pricing programs that may be required,
an increased number of low-margin, large volume transactions and/or increased
availability of the supply of certain products can further impact gross profit
margins.

Our industry is highly competitive and competition could harm our ability to
sell our products and services and thereby reduce our market share.

The electronic components distribution industry is highly competitive. We
generally compete with local, regional and national distributors. Some of our
competitors have greater name recognition and financial, personnel and other
resources than we do. There can be no assurance that we will continue to compete
successfully with existing or new competitors and failure to do so could have a
material adverse effect on our operating results.

Emergence of new competitive business models or sources of competition could
have adverse effects on our business.

Additional competition has emerged in the electronic components distribution
industry. This increased competition resulted in part from the advent of third
party logistics and fulfillment companies, businesses commonly referred to as
e-exchanges and e-brokers and several other forms of e-commerce companies which
have grown with the expanded use of the Internet. In addition to the increased
competition from these other groups, some of the total available distribution
market share is being reduced as more and more original equipment manufacturers
transition their procurement into EMS companies and original design
manufacturers. The EMS companies and original design manufacturers utilize their
abilities to aggregate demand to develop direct purchasing channels with
component manufacturers. Furthermore, as more and more manufacturing moves
outside the boundaries of North America, the Company believes that the total
available distribution market share is also being reduced as procurement
channels increase in Asia and Europe. While we have implemented our e-commerce
strategies, including our website and multiple portals, and commenced operations
in Europe and Asia to confront certain of these new business models and sources
of competition, there can be no assurance that we will be able to defend our
market share against the emergence of these or other new business models and
sources of competition.

A reversal of the trend for distribution to play an increasing role in the
electronic components industry could affect our business.

In recent years, there has been a growing trend for original equipment
manufacturers and contract electronics manufacturers to outsource their
procurement, inventory and materials management processes to third parties,
particularly electronic component distributors. Although we do not currently
foresee this trend reversing, if it did, our business would be materially
adversely affected.

Our operations would be adversely affected if third party carriers were unable
to transport or were materially hindered in transporting our products.

All of our products are shipped through third party carriers, principally one
carrier. If a strike or other event prevented or materially hindered or
disrupted that carrier from transporting our products, there is no assurance
that other carriers would be available or have the capacity to deliver our
products to our customers. If adequate third party sources to ship our products
were not available at any time, our operating results would be materially and
adversely affected.

We depend on the continued services of our executive officers, and their loss
could affect our ability to successfully grow our business.

We are highly dependent upon the services of our President and Chief Executive
Officer. The permanent loss for any reason of our President and Chief Executive
Officer, or any one or more of our other key executives, could have a material
adverse effect upon our operating results. While we believe that we would be
able to locate suitable replacements for our executives if their services were
lost, there can be no assurance that we would, in fact, be able to do so.

We must attract and retain personnel to help support our future growth, and
competition for personnel in our industry has previously been intense.

We require the services of a substantial number of qualified personnel. Our
future success depends to a significant degree upon the continued contributions
of our management, engineering, sales, marketing, information technology,
distribution and finance personnel. During certain prior periods, the market for
such skilled and experienced personnel was characterized by intense competition
and aggressive recruiting, as well as a high degree of employee mobility. Such a
market, if it was to return, would make it particularly difficult to attract and
retain the qualified personnel we require. The loss of or our inability to
continue to attract and retain these key personnel could harm our business.

We may be exposed to product liability claims.

We are likely to be named as a defendant in any products liability action
brought by an end-user as a result of our value-added services or as a
participant in the distribution chain between the manufacturer and end-user.
Although as of this date there are no material claims asserted against us for
products liability, there can be no assurance that such claims will not arise in
the future. In the event that any products liability claim is not covered by
insurance or we are not indemnified by or cannot recover damages from our
supplier of the product or another third party in the chain of distribution, we
may be required to fund some or all of a product liability claim, which could
have a material adverse effect on us.

We may be exposed to warranty claims.

The Company may be exposed to warranty claims by its customers both with respect
to products manufactured by others which the Company distributes and with
respect to products on which the Company has performed value added work. With
respect to claims relating to products manufactured by others, the Company would
expect that the manufacturers of such products would indemnify the Company as
well as defend such claims on the Company's behalf to the extent provided for
under its agreement with the manufacturer, although no assurance can be given
that any manufacturer would so do. In addition, there may be instances where a
customer might be able to enforce an express or implied warranty claim against
the Company with respect to products manufactured by the Company's suppliers.
With respect to products manufactured or assembled by third party companies for
Aved Memory Products, the Company offers a warranty for a period of one year
against defects in workmanship and materials under normal use and service.
Accordingly, a significant number of such warranty claims could have a material
adverse effect on us.

We are exposed to potential risks from recent legislation requiring companies to
evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and
Exchange Commission (SEC) adopted rules requiring public companies to include a
report of management on the company's internal control over financial reporting
in their annual reports on Form 10-K that contains an assessment by management
of the effectiveness of the company's internal control over financial reporting.
In addition, the independent registered public accounting firm auditing the
company's financial statements must attest to and report on management's
assessment of the effectiveness of the company's internal control over financial
reporting. We will be required to comply with these rules with respect to our
fiscal year ending December 31, 2006. If our independent auditors interpret the
Section 404 requirements and the related rules and regulations differently from
us or if our independent auditors are not satisfied with our internal control
over financial reporting or with the level at which it is documented, operated
or reviewed, they may decline to attest to management's assessment or issue a
qualified report. Additionally, if we are not able to continue to meet the
requirements of Section 404 in a timely manner or with adequate compliance, we
might be subject to sanctions or investigation by regulatory authorities, such
as the SEC or The Nasdaq Stock Market. Any such actions could result in an
adverse reaction in the financial markets due to a loss of confidence in the
reliability of our financial statements, which could cause the market price of
our common stock to decline.

Any acquisitions could be difficult to integrate, disrupt our business and
adversely affect our operations.

Our growth in the future may depend, in part, on our ability to acquire
compatible electronic components distributors or other businesses and to
integrate the acquired operations. There can be no assurance that we will be
able to locate additional appropriate acquisition candidates, or that we will be
successful in acquiring any identified candidates. In addition and as we have
experienced in the past, we cannot be certain that the operations of any
acquired companies will be effectively integrated or prove profitable. The
completion of future acquisitions may require the expenditure of sizable amounts
of capital and management effort. Moreover, unexpected problems encountered in
connection with our acquisitions could have a material adverse effect on our
operating results.

Our officers and directors have and will continue to have significant control
over us.

If the Company's Chairman and President and Chief Executive Officer exercised
all of their outstanding stock options, they and their respective spouses and
children and related trusts would own as of December 31, 2004 an aggregate of
approximately 672,000 shares, representing approximately 16% of the outstanding
shares of common stock. As a result of such stock ownership and their positions
as executive officers, as the members of the executive committee of our Board of
Directors and as two of the eight directors of the Company, they are and will
continue to be in a position to control the day-to-day affairs of the Company.

Our shareholder rights plan, preferred stock and governing documents may
discourage potential acquisitions of our business.

We have a shareholders rights plan and have authorized preferred stock which is
available to be issued with such rights, preferences, privileges and limitations
as are determined by the Board of Directors. In addition, our Certificate of
Incorporation includes provisions designed to discourage attempts by others to
acquire control of us without negotiation with our Board of Directors, and to
attempt to ensure that such transactions are on terms favorable to all of our
shareholders. These provisions provide, among other things:

- that meetings of our shareholders may only be called by the Board of
Directors;
- that an affirmative vote of two-thirds of our outstanding shares of
common stock is required to approve certain business combinations
unless 65% of our Board approves such transaction;
- for three classes of directors with each class elected for a three year
staggered term;
- that our Board in evaluating a tender offer or certain business
combinations is authorized to give due consideration to all relevant
factors; and
- that actions of shareholders may not be taken by written consent of
shareholders in lieu of a meeting.

For various reasons, however, these provisions may not always be in the best
interest of our shareholders. These reasons include the fact that the provisions
of our Certificate of Incorporation (i) make it difficult to remove directors
even if removal would be in the best interest of our shareholders; (ii) make it
difficult for our shareholders to approve certain transactions that are not
approved by at least 65% of our Board, even if the transactions would be
beneficial to our shareholders; and (iii) eliminate the ability of our
shareholders to act without a meeting. Our shareholder rights plan, our
blank-check preferred stock and our governing documents may have the effect of
delaying, deterring or preventing a change in control of the Company, could
discourage potential investors from bidding for our common stock at a premium
over the market price of the common stock and could adversely affect the market
price and the voting rights of the holders of the common stock.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
-------- ----------------------------------------------------------

The Company's Credit Facility bears interest based on interest rates tied to the
prime or LIBOR rate, either of which may fluctuate over time based on economic
conditions. As a result, the Company is subject to market risk for changes in
interest rates and could be subjected to increased or decreased interest
payments if market interest rates fluctuate. If market interest rates increase,
the impact may have a material adverse effect on the Company's financial
results. For each 100 basis point fluctuation in the

interest rates charged on the Company's borrowings under its credit facility,
interest expense will increase or decrease by $750,000 per annum based on
outstanding borrowings at December 31, 2004. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."

ITEM 8. Financial Statements and Supplementary Data
------- -------------------------------------------

The Consolidated Financial Statements of the Company and its subsidiaries and
supplementary data required by this item are included in Item 15(a)(1) and (2)
of this report.

In addition, see Note 3 to Notes to Consolidated Financial Statements for
presentation of unaudited quarterly results of operations for the eight quarters
ended December 31, 2004.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
------- ---------------------------------------------------------------
Financial Disclosure
--------------------

None.

ITEM 9A. Controls and Procedures
-------- -----------------------

Evaluation of Disclosure Controls and Procedures
------------------------------------------------

As of the end of the period covered by this Annual Report on Form 10-K, we
evaluated, under the supervision and with the participation of our management,
including our chief executive officer and the chief financial officer, the
effectiveness of the design and operation of our "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934, Rules 13a -
15(e) and 15d - 15(e)). Based on that evaluation, our management, including our
chief executive officer and chief financial officer, have concluded that as of
the date of the evaluation our disclosure controls and procedures were effective
to ensure that all material information required to be filed in this report has
been made known to them.

Changes In Internal Controls Over Financial Reporting
-----------------------------------------------------

There have been no changes in our internal controls over financial reporting
that occurred during the fourth quarter of 2004 that have materially affected,
or are reasonably likely to materially affect, our internal controls over
financial reporting.

PART III

ITEMS 10, 11, 12, 13 and 14. Directors and Executive Officers of the Registrant;
---------------------------- ---------------------------------------------------
Executive Compensation; Security Ownership of Certain Beneficial Owners and
---------------------------------------------------------------------------
Management and Related Stockholder Matters; Certain Relationships and Related
-----------------------------------------------------------------------------
Transactions; and Principal Accountant Fees and Services.
---------------------------------------------------------

The response to these items will be included in a definitive proxy statement
filed within 120 days after the end of the Registrant's fiscal year, which
definitive proxy statement is incorporated herein by this reference.

PART IV

ITEM 15. Exhibits and Financial Statement Schedules.
-------- -------------------------------------------

(a) List of documents filed as part of this report Page
---------------------------------------------- ----

1. Financial Statements
--------------------
Management's Responsibility for Financial Reporting.............. F-1
Report of Registered Independent Public Accounting Firm.......... F-1
Consolidated Balance Sheets...................................... F-2
Consolidated Statements of Income................................ F-3
Consolidated Statements of Changes in Shareholders' Equity....... F-4
Consolidated Statements of Cash Flows............................ F-5
Notes to Consolidated Financial Statements....................... F-6

2. Financial Statement Schedule
----------------------------
Schedule II - Valuation and Qualifying Accounts.................. S-1

3. Exhibits
--------

3.1 Certificate of Incorporation, as amended (incorporated by
reference to Exhibits 3.1 to the Company's Registration Statement
on Form S-1, File No. 33-15345-A, and to the Company's Form 10-K
for the fiscal year ended December 31, 1991), as further amended
by (i) Certificate of Amendment of Certificate of Incorporation
dated August 21, 1995 of the Company (incorporated by reference
to Exhibit 3.1 to the Company's Form 10-K for the year ended
December 31, 1995) and (ii) Certificate of Amendment of
Certificate of Incorporation dated June 1, 1999 of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Form
10-Q for the quarter ended June 30, 1999).
3.2 By-Laws, as amended July 29, 1994 (incorporated by reference to
Exhibit 3.1 to the Company's Form 10-Q for the quarter ended June
30, 1994).
4.1 Specimen Certificate of Common Stock (incorporated by reference
to Exhibit 4.1 to the Company's Form 10-Q for the quarter ended
June 30, 1999).
4.2 2000 Common Stock Purchase Rights Agreement, dated as of June 9,
2000, between the Company and American Stock Transfer & Trust
Company (incorporated by reference to Exhibit number 4.1 to the
Company's Registration Statement on Form 8-A, filed with the
Securities and Exchange Commission on June 13, 2000).
10.1 Form of Indemnification Contracts with Directors and Executive
Officers (incorporated by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-2, File No. 33-47512).
10.2 Lease Agreement for Headquarters dated May 1, 1994 between Sam
Berman d/b/a Drake Enterprises ("Drake") and the Company
(incorporated by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarter ended March 31, 1994).
10.3 Lease Agreement for west coast corporate office and northern
California sales office in San Jose, California dated October 1,
1998 between San Jose Technology Properties, LLC and the Company
(incorporated by reference to Exhibit 10.3 to the Company's Form
10-K for the year ended December 31, 1998).
10.4 Promissory Notes, all dated May 1, 1994 payable to Drake, the
Company's landlord, in the amounts of $865,000 and $32,718
(incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarter ended March 31, 1994).
10.5 Promissory Note, dated May 1, 1995, payable to Drake, the
Company's landlord, in the amount of $90,300 (incorporated by
reference to Exhibit 10.35 to Amendment No. 1 to the Company's
Registration Statement on Form S-1, File No. 33-58661).
10.6 Promissory Note, dated October 1, 1996, payable to Sam Berman,
d/b/a Drake Enterprises, in the amount of $161,500 (incorporated
by reference to Exhibit 10.38 to the Company's Form 10-K for the
year ended December 31, 1996).
10.7 Agreement between Drake and the Company dated May 1, 1994
(incorporated by reference to Exhibit 10.5 to the Company's Form
10-K for the year ended December 31, 1994).

10.8 Amended and Restated All American Semiconductor, Inc. Employees',
Officers', Directors' Stock Option Plan, as amended through
August 22, 2001 (incorporated by reference to Exhibit 10.7 to the
Company's Form 10-K for the year ended December 31, 2001).**
10.9 All American Semiconductor, Inc. Amended and Restated 2000
Nonemployee Director Stock Option Plan, as amended and restated
through August 22, 2001 (incorporated by reference to Exhibit
10.8 to the Company's Form 10-K for the year ended December 31,
2001).**
10.10 Deferred Compensation Plan (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-2, File
No. 33-47512).**
10.11 Amendment No. 1 to the All American Semiconductor, Inc. Deferred
Compensation Plan for Executives (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
June 30, 2003).**
10.12 Employment Agreement dated as of May 24, 1995, between the
Company and Paul Goldberg (incorporated by reference to Exhibit
10.22 to Amendment No. 1 to the Company's Registration Statement
on Form S-1, File No. 33-58661), as amended by First Amendment to
Employment Agreement dated as of December 31, 1996, between the
Company and Paul Goldberg (incorporated by reference to Exhibit
10.9 to the Company's Form 10-K for the year ended December 31,
1996), as amended by Second Amendment to Employment Agreement
dated as of August 21, 1998, between the Company and Paul
Goldberg (incorporated by reference to Exhibit 10.1 to the
Company's Form 10-Q for the quarter ended September 30, 1998), as
amended by Third Amendment to Employment Agreement effective as
of January 1, 2000 and dated as of April 27, 2000, between the
Company and Paul Goldberg (incorporated by reference to Exhibit
10.1 to the Company's Form 10-Q for the quarter ended March 31,
2000).**
10.13 Employment Agreement dated as of May 24, 1995, between the
Company and Bruce M. Goldberg (incorporated by reference to
Exhibit 10.24 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, File No. 33-58661), as amended by First
Amendment to Employment Agreement dated as of August 21, 1998,
between the Company and Bruce M. Goldberg (incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended September 30, 1998), as amended by Second Amendment
to Employment Agreement effective as of January 1, 2000 and dated
as of April 27, 2000, between the Company and Bruce M. Goldberg
(incorporated by reference to Exhibit 10.2 to the Company's Form
10-Q for the quarter ended March 31, 2000).**
10.14 All American Semiconductor, Inc. 401(k) Profit Sharing Plan,
amended and restated (incorporated by reference to Exhibit 10.1
to the Company's Form 10-Q for the quarter ended September 30,
2003).**
10.15 Form of Salary Continuation Plan (incorporated by reference to
Exhibit 10.37 to the Company's Form 10-K for the year ended
December 31, 1996).**
10.16 Employment Agreement effective as of January 1, 2000 and dated as
of April 27, 2000, between the Company and Howard L. Flanders
(incorporated by reference to Exhibit 10.3 to the Company's Form
10-Q for the quarter ended March 31, 2000).**
10.17 Employment Agreement effective as of January 1, 2000 and dated as
of April 27, 2000, between the Company and Rick Gordon
(incorporated by reference to Exhibit 10.4 to the Company's Form
10-Q for the quarter ended March 31, 2000).**
10.18 Composition Agreement dated September 18, 2002 among ParView,
Inc., AmeriCapital, LLC and the Company (without exhibits)
(incorporated by reference to Exhibit 10.3 to the Company's Form
10-Q for the quarter ended September 30, 2002).
10.19 Credit Agreement among Harris Trust and Savings Bank, as a lender
and administrative agent, US Bank National Association, as
co-agent, and the other lenders party thereto and the Company, as
borrower, dated May 14, 2003 (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarter ended
March 31, 2003).
10.20 First Amendment to Credit Agreement dated as of June 11, 2004
(incorporated by reference to Exhibit 10.1 to the Company's Form
10-Q for the quarter ended June 30, 2004).
10.21 Software License and Services Agreement dated as of June 30, 2004
by and between the Company and PeopleSoft USA, Inc. (incorporated
by reference to Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended June 30, 2004). Portions of this exhibit have

been omitted and separately filed with the Securities and
Exchange Commission pursuant to a request for confidential
treatment. Redactions are marked by "[*]".
10.22 Lease Agreement dated July 22, 2004, by and between Winthrop
Resources Corporation and the Company in connection with the
Company's enterprise resource planning (ERP) system and other
future projects. *
10.23 Installment Payment Agreement dated July 28, 2004, by and between
Siemens Financial Services, Inc. and the Company in connection
with the Company's enterprise resource planning (ERP) system.
Portions of this exhibit have been omitted and separately filed
with the Securities and Exchange Commission pursuant to a request
for confidential treatment. Redactions are marked by "[*]".*
21.1 List of subsidiaries of the Registrant.*
23.1 Consent of Lazar Levine & Felix LLP, registered independent
public accounting firm.*
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.*
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.*
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
ss. 1350.*
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
ss. 1350.*

------------------
* Filed herewith
** Management contract or compensation plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.

ALL AMERICAN SEMICONDUCTOR, INC.
(Registrant)

By: /s/ BRUCE M. GOLDBERG
--------------------------------------------------------
Bruce M. Goldberg, President and Chief Executive Officer

Dated: March 31, 2005

By: /s/ HOWARD L. FLANDERS
--------------------------------------------------------
Howard L. Flanders, Executive Vice President and
Chief Financial Officer

Dated: March 31, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on March 31, 2005.

/s/ PAUL GOLDBERG Chairman of the Board, Director
----------------------------
Paul Goldberg

/s/ BRUCE M. GOLDBERG President and Chief Executive Officer,
---------------------------- Director
Bruce M. Goldberg (Principal Executive Officer)

/s/ HOWARD L. FLANDERS Executive Vice President and Chief
---------------------------- Financial Officer, Director
Howard L. Flanders (Principal Financial and Accounting
Officer)

/s/ RICK GORDON Senior Vice President of Sales and
---------------------------- Marketing, Director
Rick Gordon

/s/ ROBIN L. CRANDELL Director
----------------------------
Robin L. Crandell

/s/ MICHAEL W. FORMAN Director
----------------------------
Michael W. Forman

/s/ HOWARD M. PINSLEY Director
----------------------------
Howard M. Pinsley

/s/ RICHARD E. SIEGEL Director
----------------------------
Richard E. Siegel

MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING

The Company's management is responsible for the preparation of the Consolidated
Financial Statements in accordance with generally accepted accounting principles
and for the integrity of all the financial data included in this Form 10-K. In
preparing the Consolidated Financial Statements, management makes informed
judgements and estimates of the expected effects of events and transactions that
are currently being reported.

Management maintains a system of internal controls that is designed to provide
reasonable assurance that assets are safeguarded and that transactions are
executed and recorded in accordance with management's policies for conducting
its business. This system includes policies which require adherence to ethical
business standards and compliance with all laws to which the Company is subject.
The internal controls process is continuously monitored by direct management
review.

The Board of Directors, through its Audit Committee, is responsible for
determining that management fulfils its responsibility with respect to the
Company's Consolidated Financial Statements and the system of internal controls.

The Audit Committee, comprised solely of directors who are not officers or
employees of the Company, meets quarterly with representatives of management and
the Company's independent accountants to review and monitor the financial,
accounting, and auditing procedures of the Company in addition to reviewing the
Company's financial reports. The Company's independent accountants have full and
free access to the Audit Committee.

/s/ BRUCE M. GOLDBERG /s/ HOWARD L. FLANDERS
------------------------------------ -------------------------------------
Bruce M. Goldberg Howard L. Flanders
President, Chief Executive Officer Executive Vice President, Chief
Financial Officer

REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM

To The Board of Directors
All American Semiconductor, Inc.
Miami, Florida

We have audited the accompanying consolidated balance sheets of All American
Semiconductor, Inc. and subsidiaries (the Company) as of December 31, 2004 and
2003 and the related consolidated statements of income, changes in shareholders'
equity and cash flows for the three years in the period ended December 31, 2004.
Our audits also included the financial statement schedule listed in Part IV,
Item 15(a) of this Form 10-K. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of All
American Semiconductor, Inc. and subsidiaries at December 31, 2004 and 2003 and
the results of their operations and their cash flows for the three years in the
period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.

/s/ Lazar Levine & Felix LLP
------------------------------------------------
LAZAR LEVINE & FELIX LLP
New York, New York
February 18, 2005

F-1

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS December 31 2004 2003
------------------------------------------------------------------------------------------

Current assets:
Cash .................................................. $ 645,000 $ 620,000
Accounts receivable, less allowances for doubtful
accounts of $1,955,000 and $2,250,000 ............... 69,010,000 53,817,000
Inventories ........................................... 67,608,000 58,173,000
Other current assets .................................. 4,370,000 3,794,000
------------- -------------
Total current assets ................................ 141,633,000 116,404,000
Property, plant and equipment - net ..................... 3,185,000 2,585,000
Deposits and other assets ............................... 2,648,000 3,384,000
------------- -------------
$ 147,466,000 $ 122,373,000
============= =============

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt ..................... $ 705,000 $ 5,199,000
Accounts payable ...................................... 41,100,000 41,912,000
Accrued expenses ...................................... 5,499,000 5,947,000
Other current liabilities ............................. 197,000 134,000
------------- -------------
Total current liabilities ........................... 47,501,000 53,192,000
Long-term debt:
Notes payable ......................................... 75,174,000 48,046,000
Subordinated debt ..................................... 714,000 778,000
Other long-term debt .................................. 1,063,000 1,177,000
------------- -------------
124,452,000 103,193,000
------------- -------------
Commitments and contingencies

Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued ............................. - -
Common stock, $.01 par value, 40,000,000 shares
authorized, 3,893,161 and 3,760,001 shares issued
and outstanding ..................................... 39,000 38,000
Capital in excess of par value ........................ 25,747,000 25,121,000
Accumulated deficit ................................... (2,772,000) (5,979,000)
------------- -------------
23,014,000 19,180,000
------------- -------------
$ 147,466,000 $ 122,373,000
============= =============

See notes to consolidated financial statements

F-2

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31 2004 2003 2002
-------------------------------------------------------------------------------

NET SALES .................... $ 409,421,000 $ 311,529,000 $ 332,047,000
Cost of sales ................ (340,612,000) (253,933,000) (271,304,000)
------------- ------------- -------------
Gross profit ................. 68,809,000 57,596,000 60,743,000
Selling, general and
administrative expenses .... (60,613,000) (53,976,000) (56,655,000)
------------- ------------- -------------

INCOME FROM OPERATIONS ....... 8,196,000 3,620,000 4,088,000
Interest expense ............. (3,750,000) (2,648,000) (3,138,000)
Other income - net ........... 1,081,000 - 2,220,000
------------- ------------- -------------

INCOME FROM OPERATIONS
BEFORE INCOME TAXES ........ 5,527,000 972,000 3,170,000
Income tax provision ......... (2,320,000) (426,000) (1,287,000)
------------- ------------- -------------

NET INCOME ................... $ 3,207,000 $ 546,000 $ 1,883,000
============= ============= =============

EARNINGS PER SHARE:
Basic....................... $ .84 $ .14 $ .49
===== ===== =====
Diluted..................... $ .78 $ .14 $ .49
===== ===== =====

See notes to consolidated financial statements

F-3

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Capital in Retained Total
Common Excess of Earnings Treasury Shareholders'
Shares Stock Par Value (Deficit) Stock Equity
---------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 2001 ....... 4,040,150 $ 40,000 $ 26,328,000 $ (8,408,000) $ (935,000) $ 17,025,000

Purchase of treasury shares ...... - - - - (83,000) (83,000)

Retirement of treasury shares .... (219,196) (2,000) (1,016,000) - 1,018,000 -

Net income ....................... - - - 1,883,000 - 1,883,000
------------ ------------ ------------ ------------ ------------ ------------

Balance, December 31, 2002 ....... 3,820,954 38,000 25,312,000 (6,525,000) - 18,825,000

Purchase of treasury shares ...... - - - - (191,000) (191,000)

Retirement of treasury shares .... (60,953) - (191,000) - 191,000 -

Net income ....................... - - - 546,000 - 546,000
------------ ------------ ------------ ------------ ------------ ------------

Balance, December 31, 2003 ....... 3,760,001 38,000 25,121,000 (5,979,000) - 19,180,000

Exercise of stock options ........ 133,160 1,000 455,000 - - 456,000

Income tax benefit from
stock options exercised ........ - - 171,000 - - 171,000

Net income ....................... - - - 3,207,000 - 3,207,000
------------ ------------ ------------ ------------ ------------ ------------

Balance, December 31, 2004 ....... 3,893,161 $ 39,000 $ 25,747,000 $ (2,772,000) $ - $ 23,014,000
============ ============ ============ ============ ============ ============

See notes to consolidated financial statements

F-4

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31 2004 2003 2002
------------------------------------------------------------------------------------------------------------------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 3,207,000 $ 546,000 $ 1,883,000
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization .............................. 716,000 796,000 932,000
Allowances for doubtful accounts ........................... (295,000) 532,000 (127,000)
Non-cash interest expense .................................. 371,000 229,000 19,000
Loss on disposal of fixed assets ........................... 12,000 39,000 5,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ................. (14,898,000) (13,115,000) 110,000
Decrease (increase) in inventories ......................... (9,435,000) (5,411,000) 28,270,000
Decrease (increase) in other current assets ................ (164,000) 870,000 10,263,000
Increase (decrease) in accounts payable .................... (812,000) 6,758,000 (6,020,000)
Decrease in accrued expenses ............................... (555,000) (3,306,000) (492,000)
Increase (decrease) in other current liabilities ........... 57,000 (73,000) 23,000
Decrease in net assets of discontinued operations .......... - - 36,000
------------- ------------- -------------
Net cash provided by (used for) operating activities ... (21,796,000) (12,135,000) 34,902,000
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ........................ (507,000) (647,000) (256,000)
Decrease (increase) in other assets .......................... 375,000 (1,015,000) 320,000
------------- ------------- -------------
Net cash provided by (used for) investing activities ... (132,000) (1,662,000) 64,000
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit agreement .................... 428,670,000 317,568,000 315,718,000
Repayments under line of credit agreement .................... (401,758,000) (303,535,000) (350,367,000)
Repayments of notes payable .................................. (5,415,000) (69,000) (226,000)
Purchase of treasury shares .................................. - (191,000) (83,000)
Net proceeds from issuance of equity securities .............. 456,000 - -
------------- ------------- -------------
Net cash provided by (used for) financing activities ... 21,953,000 13,773,000 (34,958,000)
------------- ------------- -------------
Increase (decrease) in cash .................................. 25,000 (24,000) 8,000
Cash, beginning of year ...................................... 620,000 644,000 636,000
------------- ------------- -------------
Cash, end of year ............................................ $ 645,000 $ 620,000 $ 644,000
============= ============= =============

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ................................................ $ 3,296,000 $ 2,257,000 $ 3,274,000
============= ============= =============
Income taxes paid (refunded) - net ........................... $ 1,531,000 $ (861,000) $ (9,482,000)
============= ============= =============

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

In July 2004, the Company entered into a financing arrangement with a third
party to finance $1.1 million related to the purchase of a portion of a new
enterprise resource planning system.

See notes to consolidated financial statements

F-5

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------

The Company is a distributor of electronic components manufactured by others.
The Company distributes a full range of semiconductors (active components),
including transistors, diodes, memory devices, microprocessors,
microcontrollers, other integrated circuits, active matrix displays and various
board-level products, as well as passive/electromechanical components. Passive
products include capacitors, resistors and inductors. Electromechanical products
include power supplies, cable, switches, connectors, filters and sockets. These
products are sold primarily to original equipment manufacturers in a diverse and
growing range of industries, including manufacturers of computers and
computer-related products; office and home office equipment; cellular and
portable products; wireless products; networking, satellite and other
communications products; Internet infrastructure equipment and appliances;
automobiles and automotive subsystems; consumer goods; voting and gaming
machines; point-of-sale equipment; robotics and industrial equipment; defense
and aerospace equipment; home entertainment; security and surveillance
equipment; and medical instrumentation. The Company also sells products to
contract electronics manufacturers, or electronics manufacturing services, or
EMS, providers who manufacture products for companies in all electronics
industry segments. Through the Aved Memory Products division of its subsidiary,
Aved Industries, Inc., the Company also designs and has manufactured by third
parties under the label of its subsidiary's division, certain memory modules
which are sold to original equipment manufacturers.

The Company's financial statements are prepared in accordance with generally
accepted accounting principles (GAAP) in the United States of America. Those
principles considered particularly significant are detailed below. GAAP requires
management to make estimates and assumptions affecting the reported amounts of
assets, liabilities, revenues and expenses. While actual results may differ from
these estimates, management does not expect the variances, if any, to have a
material effect on the Consolidated Financial Statements.

Basis of Consolidation and Presentation
---------------------------------------

The Consolidated Financial Statements of the Company include the accounts of all
subsidiaries, all of which are wholly-owned. All material intercompany balances
and transactions have been eliminated in consolidation. The Company has
Canadian, Mexican, South Korean and United Kingdom subsidiaries which conduct
substantially all of their business in U.S. dollars.

Prior years' financial statements have been reclassified to conform with the
current year's presentation.

Concentration of Credit Risk/Fair Values
----------------------------------------

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The Company,
from time to time, maintains cash balances which exceed the federal depository
insurance coverage limit. The Company performs periodic reviews of the relative
credit rating of its bank to lower its risk. The Company believes that
concentration with regards to accounts receivable is limited due to its large
customer base. Fair values of cash, accounts receivable, accounts payable and
long-term debt reflected in the December 31, 2004 and 2003 Consolidated Balance
Sheets approximate carrying value at these dates.

Market Risk
-----------

The Company's credit facility bears interest based on interest rates tied to the
prime or LIBOR rate, either of which may fluctuate over time based on economic
conditions. As a result, the Company is subject to market risk for changes in
interest rates and could be subjected to increased or decreased interest
payments if market interest rates fluctuate. If market interest rates increase,
the impact may have a

F-6

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

material adverse effect on the Company's financial results. For each 100 basis
point fluctuation in the interest rates charged on the Company's borrowings
under its credit facility, interest expense will increase or decrease by
$750,000 per annum based on outstanding borrowings at December 31, 2004.

Inventories
-----------

Fixed Assets
------------

Fixed assets are reflected at cost. Depreciation of office furniture and
equipment and computer equipment is provided on the straight-line method over
the estimated useful lives of the respective assets, which range from five to
seven years. Amortization of leasehold improvements is provided using the
straight-line method over the term of the related lease or the life of the
respective asset, whichever is shorter. Maintenance and repairs are charged to
expense as incurred; major renewals and betterments are capitalized.

Revenue Recognition
-------------------

F-7

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

purchase the consigned inventory and in some instances maintains a right to
return unused product that is shipped under the consignment inventory program.
Revenue is not recognized from products shipped on consignment until
notification is received from the Company's consignee customer that the customer
has accepted title of and consumed the inventory that was shipped initially on
consignment. The product shipped on consignment in which title has not been
accepted by the customer is included in the Company's inventories and is not
included in revenue.

Accounts Receivable
-------------------

The Company's accounts receivable are due from a broad range of customers. The
Company extends credit based on ongoing evaluations of its customers' financial
condition and payment history. Accounts receivable are generally due within 30
days and are stated at amounts due from customers net of an allowance for
doubtful accounts. The allowance for doubtful accounts is maintained to provide
for losses arising from customers' inability to make required payments. If there
is a deterioration of our customers' credit worthiness and/or there is an
increase in the length of time that the receivables are past due greater than
the historical assumptions used, additional allowances may be required. The
Company writes off accounts receivable when they become uncollectible.
Subsequent collections of accounts receivable previously written-off are
credited to the allowance for doubtful accounts.

Shipping and Handling Costs
---------------------------

Shipping and handling costs associated with inbound freight are included in cost
of sales. Shipping and handling costs associated with outbound freight are
included in selling, general and administrative expenses.

Advertising
-----------

The Company advertises in various national industry publications and trade
journals. Advertising expense is included in selling, general and administrative
expenses.

Income Taxes
------------

The Company has elected to file a consolidated federal income tax return with
its subsidiaries. Deferred income taxes are provided on transactions which are
reported in the financial statements in different periods than for income tax
purposes. Deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
difference is expected to reverse. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. See Note 7 to Notes to Consolidated Financial
Statements.

Stock-Based Compensation
------------------------

The Company has two stock option plans, which are described in Note 8 to Notes
to Consolidated Financial Statements. The Company applies Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations to account for the option plans using the intrinsic value
method. The Company grants its options based on market value, accordingly, no
compensation cost has been recognized for the option plans. Had compensation
cost for the option plans been determined using the fair value based method, as
defined in Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), the Company's net earnings and earnings
per share would have been adjusted to the pro forma amounts indicated below. The
Company adopted Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" as of January 1, 2003, which amended SFAS 123. The effect of
the adoption of this Statement was not material as the Company continues to use
the intrinsic value method allowed under SFAS 123. The Company will discontinue

F-8

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

application of the intrinsic value method and will adopt Statement of Financial
Accounting Standards No. 123 (revised 2004), "Share-Based Payment" (SFAS 123
(revised 2004)), for the fiscal quarter beginning July 1, 2005. SFAS 123
(revised 2004) requires the recognition of compensation costs related to
services received in exchange for awards of equity instruments based on the
grant-date fair value of those awards. The effect of this adoption is not
expected to be material.

Years Ended December 31 2004 2003 2002
--------------------------------------------------------------------------------------------

Net earnings:
As reported $ 3,207,000 $ 546,000 $ 1,883,000
Total stock-based employee
compensation expense, net of tax (24,000) (41,000) (94,000)
------------- ------------- -------------
Pro forma $ 3,183,000 $ 505,000 $ 1,789,000
============= ============= =============

Basic earnings per share:
As reported $.84 $.14 $.49
Pro forma .83 .13 .46

Diluted earnings per share:
As reported $.78 $.14 $.49
Pro forma .77 .13 .46

The fair value of each option grant was estimated on the date of the grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for 2004, 2003 and 2002: expected volatility of 86%, 103% and 108%;
risk-free interest rate of 2.8%, 2.5% and 4.0%; and expected lives of 2 to 8
years.

The effects of applying SFAS 123 (revised 2004) in the above pro forma
disclosures are not indicative of future amounts as future amounts are likely to
be affected by the number of grants awarded and since additional awards are
generally expected to be made at varying prices.

Earnings Per Share
------------------

Earnings per common share is computed by dividing net income by the weighted
average, during each period, of the number of common shares outstanding and for
diluted earnings per share also common equivalent shares outstanding.

Statements of Cash Flows
------------------------

For purposes of the statements of cash flows, the Company considers all
investments purchased with an original maturity of three months or less to be
cash.

New Accounting Pronouncements Applicable to the Company
-------------------------------------------------------

F-9

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

abnormal..." In addition, SFAS 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. The Company adopted SFAS 151 as of January 1, 2005. The
effect of the adoption of SFAS 151 was not material.

NOTE 2 - EARNINGS PER SHARE
---------------------------

The following table sets forth the calculation of earnings per share on a basic
and diluted basis:

YEARS ENDED DECEMBER 31 2004 2003 2002
----------------------------------------------------------------------------------------------------

BASIC EARNINGS PER SHARE:
-------------------------

Net Income.................................. $ 3,207,000 $ 546,000 $ 1,883,000
=============== =============== ==============

Weighted Average Shares Outstanding......... 3,836,002 3,793,347 3,849,553
=============== =============== ==============

Basic Earnings Per Share.................... $ .84 $ .14 $ .49
======= ======= =======

DILUTED EARNINGS PER SHARE:
---------------------------

Net Income.................................. $ 3,207,000 $ 546,000 $ 1,883,000
=============== =============== ==============

Weighted Average and Dilutive Shares:
Weighted average shares outstanding....... 3,836,002 3,793,347 3,849,553
Dilutive shares........................... 292,047 88,852 449
--------------- --------------- --------------
4,128,049 3,882,199 3,850,002
=============== =============== ==============

Diluted Earnings Per Share.................. $ .78 $ .14 $ .49
======= ======= =======

F-10

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

Basic earnings per share are determined by dividing the Company's net income by
the weighted average shares outstanding. Diluted earnings per share include any
dilutive effects of outstanding stock options.

Excluded from the calculation of earnings per share are stock options to
purchase 241,790, 486,050 and 620,384 common shares in fiscal 2004, 2003 and
2002, as their inclusion would have been antidilutive.

NOTE 3 - QUARTERLY RESULTS OF OPERATIONS
----------------------------------------

The following table presents unaudited quarterly results of operations for the
eight quarters ended December 31, 2004. We believe that all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly such quarterly information.

First Second Third Fourth
Quarter Quarter Quarter Quarter
--------------- --------------- --------------- ---------------

2004
Net sales...................... $ 98,242,000 $ 106,909,000 $ 103,757,000 $ 100,513,000
Gross profit................... 16,994,000 18,303,000 16,604,000 16,908,000
Income from operations......... 2,434,000 2,728,000 1,672,000 1,362,000
Other income - net............. - - 1,081,000 -
Net income..................... 891,000 1,025,000 1,088,000 203,000
Diluted earnings per share..... $.22 $.25 $.26 $.05

2003
Net sales...................... $ 69,869,000 $ 71,932,000 $ 82,805,000 $ 86,923,000
Gross profit................... 13,882,000 13,965,000 14,709,000 15,040,000
Income from operations......... 684,000 778,000 1,004,000 1,154,000
Net income..................... 61,000 63,000 177,000 245,000
Diluted earnings per share..... $.02 $.02 $.04 $.06

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
--------------------------------------

December 31 2004 2003
---------------------------------------------------------------------------------------

Office furniture and equipment..................... $ 1,517,000 $ 1,566,000
Computer equipment................................. 2,748,000 1,922,000
Leasehold improvements............................. 1,978,000 1,839,000
-------------- -------------
6,243,000 5,327,000
Accumulated depreciation and amortization.......... (3,058,000) (2,742,000)
-------------- -------------
$ 3,185,000 $ 2,585,000
============== =============

NOTE 5 - STOCK REPURCHASE PROGRAM
---------------------------------

In August 2002, the Company's Board of Directors authorized the continuance of
the stock repurchase program, originally approved by the Board and announced in
1999, which provided for the repurchase of up to $2.0 million in purchase price
of the Company's common stock. The stock repurchases may, at the discretion of
the Company's management, be made from time to time at prevailing prices in the
open market or through privately negotiated transactions. The Company's
management will base its decision on market conditions, the price of its common
stock, available cash flow and other factors. The Company does not currently
anticipate making stock repurchases. The Company did not repurchase any shares
of its common stock during the year ended December 31, 2004. To date the Company
has repurchased 244,089 shares at an aggregate price of approximately $758,000
under this program. Shares purchased under this program are immediately retired
and become authorized and unissued shares of common stock available for
reissuance for any corporate purpose.

F-11

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

NOTE 6 - LONG-TERM DEBT
-----------------------

Line of Credit
--------------

The Company's line of credit facility was amended as of June 11, 2004 to
increase the credit facility to $85 million from $65 million and to amend
certain provisions. Borrowings under the Company's $85 million credit facility,
as amended, which expires May 14, 2006 (the Credit Facility), bear interest at
one of three pricing levels dependent on the Company's debt service coverage
ratio at the quarterly pricing date (as defined), and are secured by all of the
Company's assets including accounts receivable, inventories and equipment. At
the first pricing level, at the Company's option, the rate will be either (a)
.5% over the greater of the Federal funds rate plus .5% and prime or (b) 2.75%
over LIBOR. At the second level, at the Company's option, the rate will be
either (a) 1% over the greater of the Federal funds rate plus .5% and prime or
(b) 3.25% over LIBOR. At the third level, at the Company's option, the rate will
be either (a) 1.5% over the greater of the Federal funds rate plus .5% and prime
or (b) 3.75% over LIBOR. The Company improved from the third pricing level under
its Credit Facility at the beginning of 2004, to the second pricing level
effective in the middle of the second quarter of 2004 and to the first pricing
level effective in the middle of the third quarter of 2004. These improvements
in pricing levels, which aggregated 100 basis points, were based on the Company
achieving an increase in its debt service coverage ratio as calculated pursuant
to the Credit Facility. The positive impact on interest expense from the
improved pricing levels was offset by the adverse effect from five interest rate
hikes by the Federal Reserve Board between June 30, 2004 and December 31, 2004,
which raised the Federal funds rate by 125 basis points. The effective interest
rate on borrowings under the Credit Facility increased slightly for 2004
compared to 2003. In connection with the Credit Facility, interest expense for
2004 and 2003 included non-cash amortization of deferred financing fees of
$361,000 and $208,000 and will reflect an aggregate of $1,099,000 of deferred
financing fees over the term of the Credit Facility. The amounts that the
Company may borrow under the Credit Facility are based upon specified
percentages of the Company's eligible accounts receivable and inventories (as
defined) and the Company is required to comply with certain affirmative and
negative covenants and certain financial ratios. The covenants, among other
things, place limitations and restrictions on the Company's borrowings,
investments, capital expenditures and transactions with affiliates; prohibit
dividends and acquisitions; and prohibit stock redemptions in excess of an
aggregate cost of $2,000,000 during the term of the Credit Facility. The Credit
Facility requires the Company to maintain certain minimum levels of tangible net
worth throughout the term of the credit agreement as well as a minimum debt
service coverage ratio and a minimum inventory turnover level, each tested on a
quarterly basis. The Company was in compliance with all covenants under the
Credit Facility at December 31, 2004. At December 31, 2004, outstanding
borrowings under the Credit Facility aggregated $74,958,000 compared to
$48,046,000 at December 31, 2003.

Subordinated Debt
-----------------

On June 14, 2004, the Company utilized available borrowings under the Credit
Facility to repay in full $5,150,000 of 9% subordinated debentures that had
matured. This debt is reflected in the current portion of long-term debt on the
Consolidated Balance Sheet as of December 31, 2003.

In May 1994, the Company executed a twenty-year promissory note in the amount of
$865,000 in favor of the Company's landlord to finance substantially all of the
tenant improvements necessary for the Company's Miami facility. This $865,000
note, which is subordinate to the Company's credit facility, has a repayment
schedule with varying monthly payments of principal after the second year and
bears interest at 8% per annum. Certain additional improvements to the Company's
Miami corporate facility aggregating approximately $90,300 were financed as of
May 1, 1995 by the landlord. This $90,300 obligation is evidenced by a
promissory note payable in 240 consecutive, equal self-amortizing monthly
installments of principal and interest. This note, which is also subordinate to
the Company's credit facility, accrues interest at a fixed rate of 8% per annum.
In October 1996, the Company executed a promissory note in the amount of
$161,500 with the Company's landlord to finance certain additional improvements
to the Company's Miami corporate facility. This note, which is also subordinate
to the credit facility, is payable monthly with interest at 8.5% per annum and
matures in October 2011.

F-12

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

Other Long-Term Debt
--------------------

In June 2004 the Company entered into a software license and services agreement
in connection with a new enterprise resource planning (ERP) system. The
aggregate cost of this new ERP system, including estimated costs of training and
implementation, is expected to be approximately $2,800,000 to $3,500,000. At
December 31, 2004, $798,000 associated with this ERP system has been reflected
in property, plant and equipment - net and $264,000 has been reflected in other
current assets on the Consolidated Balance Sheet. In July 2004, the Company
financed $1,062,000 of its ERP costs with a third party finance company under an
installment payment arrangement. At December 31, 2004, the outstanding balance
under this arrangement was $856,000 which is payable in four equal quarterly
installments of approximately $217,000 through January 1, 2006. The effective
interest rate under this agreement is 1.9% per annum. In addition, the Company
has arranged financing for an additional $1,900,000 of the aggregate cost of the
ERP system with another third party finance company, which financing arrangement
is expected to have maturities through May 2008 based upon the Company's
anticipated utilization of the financing arrangement and has an effective
interest rate of 2.2% per annum.

In connection with an employment agreement with an executive officer, an
unfunded postretirement benefit obligation of $1,063,000 and $1,171,000 is
included in the Consolidated Balance Sheets at December 31, 2004 and 2003.

The following is a summary of the maturities of all long-term debt outstanding
at December 31, 2004:

2005.......................................................... $ 705,000
2006.......................................................... 75,243,000
2007.......................................................... 75,000
2008.......................................................... 79,000
2009.......................................................... 84,000
Thereafter.................................................... 1,470,000
--------------
$ 77,656,000
==============

NOTE 7- INCOME TAXES
--------------------

The tax effects of the temporary differences that give rise to the deferred tax
assets and liabilities as of December 31, 2004 and 2003 are as follows:

Deferred tax assets: 2004 2003
------------- -------------
Accounts receivable..................... $ 726,000 $ 835,000
Inventory............................... 592,000 642,000
Accrued expenses........................ 465,000 1,004,000
Postretirement benefits................. 533,000 575,000
Net operating loss...................... 47,000 212,000
------------- -------------
2,363,000 3,268,000
Deferred tax liabilities:
Fixed assets............................ 302,000 176,000
Deferred financing...................... 57,000 121,000
------------- -------------
Net deferred tax asset.................... $ 2,004,000 $ 2,971,000
============= =============

At December 31, 2004 and 2003, $1,725,000 and $2,347,000 of the net deferred tax
asset were included in other current assets and $279,000 and $624,000 were
included in deposits and other assets in the Consolidated Balance Sheets.

F-13

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

The components of income tax expense (benefit) are as follows:

Years Ended December 31 2004 2003 2002
------------------------------------------------------------------------------------------

Current
-------
Federal.......................... $ 1,214,000 $ 524,000 $ (1,463,000)
State............................ 139,000 46,000 (414,000)
-------------- -------------- --------------
1,353,000 570,000 (1,877,000)
-------------- -------------- --------------
Deferred
--------
Federal.......................... 918,000 (116,000) 2,769,000
State............................ 49,000 (28,000) 395,000
-------------- -------------- --------------
967,000 (144,000) 3,164,000
-------------- -------------- --------------
$ 2,320,000 $ 426,000 $ 1,287,000
============== ============== ==============

A reconciliation of the difference between the expected income tax rate using
the statutory federal tax rate and the Company's effective tax rate is as
follows:

Years Ended December 31 2004 2003 2002
----------------------------------------------------------------------------------------------

U.S. Federal income tax statutory rate.................... 34.0% 34.0% 34.0%
State income tax, net of federal income tax benefit....... 3.3 3.3 3.3
Goodwill amortization and
other - including non-deductible items.................. 19.8 11.8 3.3
Foreign tax extra territorial income exclusion
and net operating loss benefit.......................... (15.1) (5.3) -
----- ------ ------
Effective tax rate........................................ 42.0% 43.8% 40.6%
===== ====== ======

NOTE 8 - CAPITAL STOCK, OPTIONS AND WARRANTS
--------------------------------------------

In June 2000, the Company established the 2000 Nonemployee Director Stock Option
Plan, as amended (the Director Option Plan). The Director Option Plan provides
for awards of options to purchase shares of common stock, $.01 par value per
share, of the Company to nonemployee directors of the Company. An aggregate of
75,000 shares of the Company's common stock has been reserved for issuance under
the Director Option Plan. Under the Director Option Plan, on or about the day of
each nonemployee director's initial election to the Company's Board of
Directors, he or she is awarded nonqualified stock options to purchase at least
1,500 shares of the Company's common stock but not more than 15,000 shares, and
on the date of each annual meeting of the shareholders of the Company each
nonemployee director is automatically awarded additional nonqualified stock
options to purchase 1,000 shares. Pursuant to the Director Option Plan, the
Company granted an aggregate of 4,000 stock options to 4 individuals during
2004, 4,500 stock options to four individuals during 2003 and an aggregate of
4,500 stock options to four individuals during 2002. The stock options that were
granted in 2004 have an exercise price of $6.13. The stock options that were
granted in 2003 have exercise prices ranging from $2.19 to $3.41. The stock
options that were granted in 2002 have exercise prices ranging from $1.96 to
$1.98. All exercise prices are based on fair market value at date of grant and
the options all vest over a two-year period and are exercisable over a ten-year
period. At December 31, 2004, 16,250 stock options were outstanding under the
Director Option Plan.

In 1987, the Company established the Employees', Officers', Directors' Stock
Option Plan, as previously amended and restated (the Option Plan). The Option
Plan provides for the granting to key employees of both "incentive stock
options," within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the Code) and "nonqualified stock options" ("nonqualified
stock options" are options which do not comply with Section 422 of the Code) and
for the granting to nonemployee directors and independent contractors associated
with the Company of nonqualified stock options. Unless earlier terminated, the
Option Plan will continue in effect through April 18, 2009. The expiration of
the Option Plan, or its termination by the Board of Directors, will not affect
any options previously granted and then outstanding under the Option Plan. Such
outstanding options would remain in effect until they have been

F-14

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

exercised, terminated or have expired. A maximum of 1,100,000 shares of the
Company's Common Stock has been reserved for issuance upon the exercise of
options granted under the Option Plan, of which 234,056 shares of common stock
have been previously issued pursuant to the exercise of options granted under
the Option Plan and 865,944 shares of common stock are available for issuance as
of December 31, 2004 in connection with the exercise of options outstanding and
options to be granted.

A summary of options granted under the option plans and related information for
the years ended December 31, 2002, 2003 and 2004 follows:

Weighted Average
Options Exercise Price
------------ ----------------

Outstanding, December 31, 2001 635,634 $ 6.75
Weighted average fair value of options granted during 2001 3.88
Granted 85,500 3.37
Canceled (96,250) 5.68
------------
Outstanding, December 31, 2002 624,884 6.46
Weighted average fair value of options granted during 2002 1.93
Granted 329,510 1.92
Canceled (143,234) 5.69
------------
Outstanding, December 31, 2003 811,160 4.75
Weighted average fair value of options granted during 2003 1.05
Granted 131,360 5.25
Exercised (133,160) 3.42
Canceled (50,000) 4.98
------------
Outstanding, December 31, 2004 759,360 5.07
============
Weighted average fair value of options granted during 2004 2.48
Options exercisable:
December 31, 2002 453,464 7.22
December 31, 2003 404,855 7.04
December 31, 2004 402,735 6.23

Exercise prices for options outstanding as of December 31, 2004 ranged from
$1.92 to $14.32. The weighted-average remaining contractual life of these
options is approximately 2 years. Outstanding options at December 31, 2004 were
held by 135 individuals.

NOTE 9 - STOCK PURCHASE RIGHTS
------------------------------

Each Right initially entitles the registered holder to purchase from the
Company, but only when exercisable under the Rights Plan, one share of common
stock at a price of $95.00 per share, subject to certain future adjustments. The
Rights will be exercisable only if a person or group acquires 15% or more of the
Company's common stock (or 10% of such stock under certain circumstances) or
announces a tender offer the consummation of which would result in ownership by
a person or group of 15% or more of the common stock (or 10% or such stock under
certain circumstances). Upon such occurrence, each Right (other than Rights
owned by such person or group) will entitle the holder to purchase from the
Company the number of shares of the Company's common stock having a market value
equal to twice the exercise price of the Right.

F-15

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

outstanding common stock (or 10% of such stock under certain circumstances),
each Right (other than Rights owned by such person or group) will entitle its
holder to purchase, at the Right's then-current exercise price, a number of the
acquiring company's common shares having a market value of twice such price.

NOTE 10 - OTHER INCOME
----------------------

In August 2004, the Company received $1,158,000, including accrued interest and
attorney's fees, as a result of prevailing in a contract litigation initiated in
August 2001. The Company has reflected the reimbursement of attorney's fees of
$77,000 in selling, general and administrative expenses and the balance of
$1,081,000 in other income on the Consolidated Statements of Income for the year
ended December 31, 2004.

In September 2002, the Company entered into an agreement with a customer to whom
the Company had previously supplied display integration and turnkey support. The
agreement provided, among other things, that the Company release the
then-existing indebtedness of the customer, which indebtedness had been
previously written off by the Company primarily in the nine-month period ended
September 30, 2001, and certain related security interests. In consideration of
these releases, the Company received $2,031,000 in cash and 11,000,000 shares,
$.01 par value per share, of common stock of this customer. These shares are not
registered under the Securities Act of 1933 and are not publicly traded. The
shares are subject to a voting arrangement outside the control of the Company.
As a result of the voting arrangement, the Company has given up substantially
all of its voting rights. The Company has reflected the value of these shares in
deposits and other assets in the Consolidated Balance Sheets at December 31,
2004 and December 31, 2003, based on an independent appraisal of these shares at
$19,000 as of the date these shares were received by the Company. The combined
value of the cash and stock, together with lease payments that the Company
previously collected from leases that were pledged to the Company as collateral
for the then existing indebtedness, aggregated $2,220,000, after deducting
related legal expenses associated with the transaction. This amount is reflected
as other income in the Consolidated Statements of Income for the year ended
December 31, 2002.

NOTE 11 - COMMITMENTS/RELATED PARTY TRANSACTIONS
------------------------------------------------

In May 1994, the Company entered into a new lease with its then existing
landlord to lease a 110,800 square foot facility for its corporate headquarters
and Miami distribution center. The lease has a term expiring in 2014 (subject to
the Company's right to terminate at any time after the fifth year of the term
upon twenty-four months prior written notice and the payment of all outstanding
debt owed to the landlord). The lease gives the Company three six-year options
to renew at the fair market value rental rates. The lease is currently in its
eleventh year and provides for annual fixed rental payments totaling
approximately $360,100 in year eleven; and in each year thereafter during the
term, the rent shall increase once per year in an amount equal to the annual
percentage increase in the consumer price index not to exceed 4% in any one
year.

F-16

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

regional distribution center. In 2005, the Company will be transitioning most of
these Denver-based value-added services to its Miami, Florida facility. In
Tustin, California the Company leases a 13,900 square foot facility for its Aved
Memory Products division and certain of its Display Solutions Group operations.

The Company also leases approximately 20,000 square feet of space in San Jose,
California to house its west coast corporate offices and the headquarters of the
Company's sales and marketing functions, as well as its northern California
sales operation. Approximately 12,000 square feet of the space is being used for
corporate sales and marketing operations as well as other corporate offices
including the office of the President and Chief Executive Officer of the
Company; and 8,000 square feet of the space is being utilized for the local
sales operation.

In addition, the Company leases space for its other sales offices, which offices
range in size from approximately 200 square feet to 10,000 square feet. The
leases for these offices expire at various dates and include various escalation
clauses and renewal options.

Approximate minimum future lease payments required under operating leases for
office and distribution facility leases as well as equipment leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 2004, are as follows:

YEAR ENDING DECEMBER 31
-----------------------

2005.......................................................... $3,400,000
2006.......................................................... 2,300,000
2007.......................................................... 1,400,000
2008.......................................................... 800,000
2009.......................................................... 700,000
Thereafter.................................................... 2,500,000

Total rent expense for office and distribution facility leases, including real
estate taxes and net of sublease income, amounted to approximately $3,774,000,
$3,782,000, and $3,955,000 for the years ended December 31, 2004, 2003 and 2002.

Effective January 1, 1988, the Company established a deferred compensation plan
(the 1988 Deferred Compensation Plan) for executive officers and key employees
of the Company. The employees eligible to participate in the 1988 Deferred
Compensation Plan (the Participants) are chosen at the sole discretion of the
Board of Directors upon a recommendation from the Board of Directors'
Compensation Committee. Pursuant to the 1988 Deferred Compensation Plan,
commencing on a Participant's retirement date, he or she will receive an annuity
for ten years. The amount of the annuity shall be computed at 30% of the
Participant's Salary, as defined. Any Participant with less than ten years of
service to the Company as of his or her retirement date will only receive a pro
rata portion of the annuity. Retirement benefits paid under the 1988 Deferred
Compensation Plan will be distributed monthly. The Company did not pay any
benefits under this plan for 2004. The Company paid benefits of $53,600 for
2003, of which $38,000 was paid to an executive officer. The Company paid
benefits of $15,600 for 2002. At December 31, 2004, the cash surrender values of
insurance policies owned by the Company under the 1988 Deferred Compensation
Plan, which provide for the accrued deferred compensation benefits, aggregated
approximately $191,000. The retirement benefit accrual under this plan was
$456,000 at December 31, 2004.

During 1996, the Company established a second deferred compensation plan (the
Salary Continuation Plan) for executives of the Company. The executives eligible
to participate in the Salary Continuation Plan are chosen at the sole discretion
of the Board of Directors upon a recommendation from the Board of Directors'
Compensation Committee. The Company may make contributions each year in its sole
discretion and is under no obligation to make a contribution in any given year.
For 2004 and 2003, the Company did not make any contributions to the plan. For
2002 the Company committed to contribute

F-17

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

$115,000 under this plan. Participants in the plan will vest in their plan
benefits over a ten-year period. If the participant's employment is terminated
due to death, disability or due to a change in control of management, they will
vest 100% in all benefits under the plan. Retirement benefits will be paid, as
selected by the participant, based on the sum of the net contributions made and
the net investment activity. The retirement benefit accrual under this plan was
$686,000 at December 31, 2004.

During 2000, employment agreements with two of the Company's executive officers
were amended whereby the term, among other things, was extended through December
31, 2005, and thereafter the agreements automatically renew for successive one
year periods unless either party notifies the other of the intention not to
renew the agreement. In addition, during 2000 the Company entered into new
agreements with two other executive officers on similar terms as were contained
in their previous employment agreements with the Company. These new agreements
have an initial term that expired on December 31, 2003 and provide for automatic
one-year renewals unless either party notifies the other of the intention not to
renew the agreement.

In connection with an employment agreement with an executive officer, an
unfunded postretirement benefit obligation of $1,063,000 and $1,171,000 is
included in other long-term debt in the Consolidated Balance Sheets at December
31, 2004 and 2003.

The Company maintains a 401(k) plan (the 401(k) Plan), which is intended to
qualify under Section 401(k) of the Internal Revenue Code. All full-time
employees of the Company are eligible to participate in the 401(k) Plan after
completing 90 days of employment. During 2004, each eligible employee could
elect to contribute to the 401(k) Plan, through payroll deductions, up to 100%
of his or her salary, limited to $13,000 in 2004. The Company's 401(k) Plan
provides for discretionary matching contributions by the Company. The Company
did not match contributions for the years ended December 31, 2004, 2003 and
2002.

For the years ended December 31, 2004, 2003 and 2002, the Company purchased
product aggregating $1,999,000, $2,861,000 and $2,544,000 from a supplier of the
Company, Supertex, Inc., where one of the members of our board of directors is
an executive and a director.

The Company entered into a lease for residential space in San Jose, California
with a partnership which includes two of the Company's executive officers. The
lease provides for rental payments of $4,800 per month through January 1, 2006.
During 2004, the partnership agreed to reduce the monthly rental payment to
$3,200. The Company paid approximately $42,700, $51,200 and $43,400 to this
partnership for the years ended December 31, 2004, 2003 and 2002.

NOTE 12 - CONTINGENCIES
-----------------------

From time to time the Company may be named as a defendant in suits for product
defects, breach of warranty, breach of implied warranty of merchantability,
patent infringement or other actions relating to products which it distributes
which are manufactured by others. In those cases, the Company expects that the
manufacturers of such products will indemnify the Company as well as defend such
actions on the Company's behalf to the extent provided for under its agreement
with the manufacturer, although there can be no assurance that any manufacturer
will do so. Recently, there has been a trend throughout the United States of
increased litigation over various employee and intellectual property matters.
While the Company is presently involved in certain litigation relating to such
matters, the Company believes that none of these claims should have a material
adverse impact on its financial condition or results of operations. The Company
believes, however, that the costs associated with such matters may increase in
the future. There can be no assurance that a particular litigation will not have
a material adverse impact on the Company's financial condition or results of
operations in the future. With respect to products manufactured or assembled by
third party companies for Aved Memory Products, the Company offers a warranty
for a period

F-18

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

================================================================================

of one year against defects in workmanship and materials under normal use and
service. The Company periodically evaluates its warranty exposure based upon its
review of the experience and expected obligations associated with the warranty.

NOTE 13 - ECONOMIC DEPENDENCY
-----------------------------

For each of the years ended December 31, 2004, 2003 and 2002, purchases from one
supplier were in excess of 10% of the Company's total annual purchases and
aggregated approximately $74,343,000, $40,842,000 and $52,830,000. The net
outstanding accounts payable to this supplier at December 31, 2004, 2003 and
2002 amounted to approximately $4,453,000, $5,296,000, and $632,000. For each of
the years ended December 31, 2004, 2003 and 2002, no customer accounted for more
than 7% of the Company's sales. Sales to customers' locations in foreign
countries totaled $69,656,000, $41,243,000 and $35,418,000 for the years ended
December 31, 2004, 2003 and 2002.

NOTE 14 - BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
-----------------------------------------------------

Management believes that the Company is operating in a single business segment,
distribution of electronic components, in accordance with the rules of Statement
of Financial Accounting Standards No. 131 ("Disclosure About Segments of an
Enterprise and Related Information").

Sales by geographic areas are as follows:

Years Ended December 31 2004 2003 2002
--------------------------------------------------------------------------------------------

Americas (1)....................... $ 369,953,000 $ 294,950,000 $ 320,447,000
Europe............................. 16,570,000 8,558,000 7,033,000
Asia/Pacific....................... 22,898,000 8,021,000 4,567,000
--------------- --------------- ---------------
$ 409,421,000 $ 311,529,000 $ 332,047,000
=============== =============== ===============

(1) Includes sales in the United States and Puerto Rico of $339,765,000,
$270,286,000 and $296,629,000 for the years ended December 31, 2004, 2003
and 2002.

Long-lived assets (property, plant and equipment - net) are located
substantially in the Americas and include long-lived assets in the United States
of $3,177,000, $2,569,000 and $2,775,000 at December 31, 2004, 2003 and 2002.

F-19

ALL AMERICAN SEMICONDUCTOR, INC. AND SUBSIDIARIES

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS

Additions Additions
Balance at Charged to Charged to
Beginning of Costs and Other Balance at End
Description Period Expenses Accounts Deductions of Period
---------------------- ------------- ------------ ------------ -------------- ----------------

Allowance for
Doubtful Accounts
2004 $ 2,250,000 $ - $ 83,000 $ (378,000) $ 1,955,000
2003 $ 1,718,000 $ 507,000 $ 51,000 $ (26,000) $ 2,250,000
2002 $ 1,845,000 $ 114,000 $ 57,000 $ (298,000) $ 1,718,000

S-1