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

FORM 10-KSB

x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2003

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ________

EUROPEAN MICRO HOLDINGS, INC.
(Exact name of registrant as specified in charter)

Nevada
65-0803752
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification Number)
   
450 Fairway Drive, Suite 105, Deerfield Beach, Florida 33441
(Address of principal executive offices) (Zip Code)
   
Issuer’s telephone number:
(954) 596-0249
   
Securities registered pursuant to Section 12(g) of the Act:
  
   
Title of each class
None
   
Name of each exchange on which registered
None
   
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
 
Check whether the Issuer (1 ) filed all reports required to be filed by section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 1. Yes o No x 2. Yes o No x
 
Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB x
 
State Issuer’s Revenues for its most recent fiscal year: ______________
 
State the aggregate market value of the voting stock held by nonaffiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days.
 
The market value of shares held by nonaffiliates is $46,478 based on the bid price of $0.03 per share at [July 31, 2006].
 
As of [July 31, 2006], the Company had 5,029,667 shares of common stock issued and outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
None

 
 
Part I
 
ITEM 1. DESCRIPTION OF BUSINESS.
 
GENERAL DESCRIPTION OF BUSINESS
 
Forward-Looking Statements and Associated Risks. This filing contains forward-looking statements, including statements regarding  European Micro Holdings, Inc.’s (“European Micro” or the “Company”) projections on the amount and timing of liquidating distribution. In addition, when used in this filing, the words “believes,” “anticipates,” “intends,” “in anticipation of,” “expects,” and similar words are intended to identify certain forward-looking statements. These forward-looking statements are based largely on the Company’s expectations and are subject to a number of risks and uncertainties, many of which are beyond the Company’s control. Actual results could differ materially from these forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. The Company does not undertake any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.
 
Unless the context otherwise requires and except as otherwise specified, references herein to “European Micro” or the “Company” include European Micro Holdings, Inc. and its five wholly-owned subsidiaries, European Micro Plc, a company organized under the laws of the United Kingdom (“European Micro UK”), Nor’Easter Micro, Inc., a Nevada corporation (“Nor’Easter”), Colchester Enterprise Pte. Ltd., a company organized under the laws of Singapore (“Colchester), American Micro Computer Center, Inc., a Florida corporation (“American Micro”), Engenis.com Ltd., a company organized under the laws of the United Kingdom (“Engenis”), (collectively, the five wholly-owned subsidiaries are referred to as the “Subsidiaries”).
 
Overview
 
The Company was an independent distributor of microcomputer products, including personal computers, memory modules, disc drives and networking products, to customers mainly in Western Europe and to customers and related parties in the United States and Asia. The Company’s customers consisted of value-added resellers, corporate resellers, retailers, direct marketers and distributors. The Company generally did not sell to end-users. The Company monitored the geographic pricing strategies related to such products, currency fluctuations and product availability in an attempt to obtain inventory at favorable prices from other distributors, resellers and wholesalers.
 
As described in more detail below, during July, 2001 the management approved a plan for the liquidation and eventual sale or dissolution of the Company. Accordingly, we are engaged in an ongoing orderly liquidation of our assets.
 
European Micro Holdings, Inc. was organized under the laws of the State of Nevada in December 1997 and is the parent of European Micro UK and Nor’Easter. European Micro Holdings, Inc. was formerly the parent of Colchester, American Micro and Engenis. European Micro UK was organized under the laws of the United Kingdom in 1991 to serve as an independent distributor of microcomputer products to customers mainly in Western Europe and to related parties in the United States. Nor’Easter was organized under the laws of the State of Nevada on December 26, 1997 to serve as an independent distributor of microcomputer products in the United States. Colchester was organized under the laws of Singapore in November 1998 to serve as an independent distributor of microcomputer products in Asia. American Micro was organized under the laws of the State of Florida on June 24, 1999 to acquire AMCC and to serve as an independent distributor of microcomputer products in the United States. Premier Pages, Ltd. was formed on January 28, 2000 and later changed their name to Engenis.com Ltd on June 23, 2000. Engenis.com Ltd. was formed under the laws of the United Kingdom to serve as a business-to-business electronic commerce trading company.
 
European Micro UK was formerly the parent of European Micro GmbH (“European Micro Germany”), Sunbelt and European Micro B.V. (“European Micro Holland”) and has a 50% joint venture interest in Big Blue Europe, B.V. (“Big Blue Europe”). European Micro Germany was organized under the laws of Germany in 1993 and operated as a sales office in Düsseldorf, Germany. As of August 2000, the Company closed the sales operations of European Micro Germany. Sunbelt was a company registered in England and Wales, which was established in 1992 and based in Wimbledon, England. Sunbelt operated as a distributor of microcomputer products to dealers, value-added resellers and mass merchants throughout Western Europe. Except for the distribution of its Nova brand products (which was discontinued effective January 2000), Sunbelt’s distribution operations were integrated with and into the operations of European Micro UK. European Micro Holland was organized under the laws of Holland in 1995, and operated as a sales office near Amsterdam, Holland. Big Blue Europe was organized under the laws of Holland in January 1997 and was a computer parts distributor with offices located near Amsterdam, Holland, selling primarily to computer maintenance companies. Big Blue Europe has no affiliation with International Business Machines Corporation.
 
2
 
European Micro Holding’s headquarters are located at 450 Fairway Drive, Suite 105, Deerfield Beach, Florida 33441, and its telephone number is (954) 596-0249.
 
Industry
 
The microcomputer products industry had grown significantly in the late 1990’s, primarily due to increasing worldwide demand for computer products and the use of distribution channels by manufacturers for the distribution of products. There are two traditional distribution channels in the microcomputer industry: (i) those that sell directly to end-users (“resellers”) and (ii) those that sell to resellers (“distributors”). Distributors generally purchase a wide range of products in bulk directly from manufacturers and then ship products in smaller quantities to many different types of resellers, which typically include dealers, value-added resellers, system integrators, mail order resellers, computer products superstores and mass merchants. European Micro was an independent distributor and generally did not purchase products directly from manufacturers but purchased from other distributors.
 
Most manufacturers have implemented direct sales business models and reduced the number of distributors to which they distribute product. These efforts have been facilitated by the use of the Internet, among other things, and reduced the availability of products in the surplus or after-market. The Company had historically relied upon the surplus or after-market to obtain products for resale. In anticipation of these trends continuing for the foreseeable future, and the liquidity problems faced by the Company, the Board approved a plan of liquidation.
 
Strategy
 
The Company’s objectives are to proceed with an orderly liquidation of all assets. On September 1, 2001 the notes payable to the former American Micro shareholders were settled by transfer of all American Micro shares from European Micro Holdings to the former American Micro shareholders. The Company has to date liquidated Nor’Easter and Colchester and European Micro UK.
 
Products and Customers
 
The Company’s sales consisted of computer hardware products, such as personal computers, memory modules, disc drives and networking products, which were sold to value-added resellers, corporate resellers, retailers, direct marketers and distributors. The Company’s customers typically relied on distributors as their principal source of microcomputer products.
 
The Company typically purchased its products from distributors and other suppliers in large quantities. As a focused distributor, the Company focused on a limited and select group of products from a limited and select group of high quality manufacturers. As a result, the Company carried fewer individual products from fewer manufacturers than broadline distributors. The Company financed a significant portion of its total sales by extending trade credit. The Company attempted to minimize the risk of such credit by, among other things, monitoring the credit worthiness of its customers and insuring some of its accounts receivable. European Micro UK had sought to insure substantially all of its accounts receivable. Nor’Easter, Colchester and American Micro generally did not insure their accounts receivable.
 
3
 
The Company’s operations involved a single industry segment, the distribution of microcomputer products. Historically, the Company operated in one geographic area—the United Kingdom—and exported products from the United Kingdom to other European countries and to related parties in the United States. With the addition of Nor’Easter and American Micro in the United States, and the addition of Colchester in Singapore, the Company’s sales to third parties in the United States and Asia increased.
 
The Company’s net sales from operations outside the United States were primarily denominated in currencies other than United States dollar. Accordingly, the Company’s operations outside the United States imposed risks upon its business as a result of exchange rate fluctuations.
 
Sources of Supply
 
The Company obtained its products from distributors and other suppliers throughout the world in an attempt to obtain products at favorable prices while also maintaining continuity of supply. The Company generally made its purchases based on the most favorable combination of prices, quantities and product selection, and therefore its suppliers were constantly changing. The Company did not generally obtain products directly from manufacturers and generally did not enter into any long-term or distribution agreements with its suppliers. In some cases suppliers were also customers.
 
Suppliers delivered products against purchase orders tendered by the Company. The Company often requested specific delivery dates in its purchase orders and lead times for delivery from suppliers are typically short. Delivery was, however, subject to availability. From time to time the Company experienced delivery delays and inventory shortages.
 
Sales and Marketing
 
In order to address the individual customs, practices and business conventions in the countries in which the Company operated, the Company employed a sales staff conversant in Chinese, Dutch, English, French, German, Italian and Spanish and with a general knowledge of the applicable markets. Oversight and strategic direction were provided by senior management of the Company.
 
Sales. The Company marketed its products to distributors and resellers, not end-users. The Company’s customers typically placed orders through a sales representative
 
Marketing. The Company’s marketing department monitored and evaluated national market trends, price movements and changes in product specifications. It was also responsible for developing and implementing the Company’s advertising programs.
 
Competition
 
The Company operated in an industry which is characterized by intense competition based on price, product availability and delivery times. Its competitors included manufacturers and international distributors. Some competitors had greater financial and administrative resources than the Company.
 
Intellectual Property
 
The Company was attempting to build a brand name in the microcomputer industry. To that end, the Company had applied for trademark protection both in the United Kingdom and within the European Community. The following is a summary of the trademarks which the Company has applied for:
 
4
 
Trademark
  
Class(1)
  
No.
  
Applicant
  
Date of Filing
  
Comments
European Micro
  
9
  
438689
  
European Micro UK
  
12-23-96
  
U.K. Trademark granted
European Micro [Plc] & Logo
  
9
  
2119204
  
European Micro UK
  
12-20-96
  
U.K. Trademark granted
Premier Dealers Club & Logo
  
9
  
2152310
  
European Micro UK
  
11-29-97
  
U.K. Trademark granted
 
(1) Class 9 covers computer software, computer peripherals, parts and accessories for all such goods.
 
Employees
 
On July 31, 2006 the Company had three employees.
 
ITEM 2. DESCRIPTION OF PROPERTIES.
 
The corporate headquarters of European Micro Holdings, Inc. is located in Deerfield Beach, Florida.
 
European Micro’s facilities as of June 30, 2003 are described below:
 
Location
  
Square Feet
  
Lease Expiration
  
Miami, Florida (offices)
    
350
    
2003
  
Nashville, Tennessee (offices)
    
350
    
2003
  
 
    During the liquidation process, all leased properties have been vacated and the lease expired or a settlement was reached with the lessor.
 
ITEM 3. LEGAL PROCEEDINGS.
 
On November 12, 1999, Jeffrey and Marie Alnwick (the “Alnwicks”) and a New York corporation, Big Blue Products, commenced an action individually and derivatively for the Dutch company, Big Blue Europe, against the Company and its founders and officers, John B. Gallagher and Harry D. Shields in the United States District Court, Eastern District of New York, Jeffrey Alnwick and Marie Alnwick v. European Micro Holdings, Inc., Eastern District of New York, Docket No. 99 CV 7380 (the “Alnwick Litigation”).
 
In October 2003, the Company and its affiliated defendants entered into a settlement agreement whereby the plaintiffs discontinued the litigation and released all claims against the defendants. The parties bore their own legal costs and expenses and exchanged mutual releases.
 
In January 2001, Nor’Easter sued Arlington Computer Products, Inc. (“Arlington”) in the Superior Court of Rockingham County, New Hampshire, for breach of an agreement to pay for the purchase of laptop computers. Nor’Easter subsequently sued Arlington in the Circuit Court of Lake County, Illinois, to enforce a judgment obtained in the New Hampshire Litigation. In addition, Arlington sued Nor’Easter in the United States District Court for the Northern District of Illinois for breach of an agreement to sell Compaq computer memory modules. Nor’Easter filed a third party complaint in the Federal Litigation against Origin Micro, Inc. (“Origin”) for breach of an agreement to sell Compaq computer memory modules.
 
In June 2002, Nor’Easter and Arlington entered into a settlement agreement whereby Arlington paid Nor’Easter the sum of $52,556 and both parties discontinued the litigation and released all claims against each other. In July 2002, Nor’Easter and Origin entered into a settlement agreement whereby Origin paid Nor’Easter the sum of $49,000 and both parties discontinued the litigation and released all claims.
 
5
 
In December 2001, a former shareholder of Sunbelt served a statutory demand upon European Micro Plc in the sum of 92,710 pounds sterling. This sum was subsequently reduced to 73,940 pounds sterling. On April 19, 2002 Judge Kershaw QC granted the European Micro Plc an injunction preventing the former shareholder from presenting a petition in this sum based upon the statutory demand. On July 31, 2002 the Court of Appeal dismissed European Micro Plc’s claim and ordered the costs to be paid. In August 2003, the debt plus costs and interest owed the former shareholder of Sunbelt was assigned to Harry Shields, a shareholder of European Micro Holdings, Inc., for the sum of 107,000 pounds sterling.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
None.

6
 
 
PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
The Company’s shares of Common Stock began trading on the Nasdaq National Market on June 12, 1998, under the symbol “EMCC.” On April 20, 2001, the Company received a Nasdaq Staff Determination Letter stating that the Company's common stock failed to maintain a minimum market value of public float of $5.0 million. As a result, the Company's common stock was delisted from the Nasdaq Stock Market on April 27, 2001. The Company's common stock is now quoted on the pink sheets.
 
The Company’s high and low bid prices by quarter during fiscal 2003 and 2002 are presented as follows:
 
   
Fiscal Year 2003
  
   
High
  
Low
  
First Quarter (July 2002 to September 2002)
  
$
0.03
  
$
0.01
  
Second Quarter (October 2002 to December 2002)
    
0.03
    
0.01
  
Third Quarter (January 2003 to March 2003)
    
0.03
    
0.01
  
Fourth Quarter (April 2003 to June 2003)
    
0.03
    
0.01
  
 
   
Fiscal Year 2002
  
   
High
  
Low
  
First Quarter (July 2001 to September 2001)
  
$
0.35
  
$
0.01
  
Second Quarter (October 2001 to December 2001)
    
0.06
    
0.01
  
Third Quarter (January 2002 to March 2002)
    
0.06
    
0.01
  
Fourth Quarter (April 2002 to June 2002)
    
0.04
    
0.02
  
 
On July 31, 2006, the Company had approximately 117 shareholders of record.
 
Dividends
 
During the fiscal years ended June 30, 2003 and 2002, no dividends were declared or paid. The Company declared a dividend in the aggregate amount of $200,000 on the outstanding shares of Common Stock of record as of August 1, 2005. The dividend was paid on September 1, 2005. The Company currently intends to proceed with the orderly liquidation of its assets.
 
Recent Sales of Unregistered Securities
 
None.
 
ITEM 6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following information should be read in conjunction with the consolidated financial statements of the Company and the notes thereto appearing elsewhere in this filing.
 
Certain statements within this Item and throughout this Annual Report on Form 10-KSB and the documents incorporated herein are “forward-looking statements” as described in the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995. These statements involve a number of risks and uncertainties and actual results could differ materially from those projected.
 
Critical Accounting Estimates

The Company’s only critical accounting estimate pertains to fair value measurement in applying the liquidation basis of accounting. Management’s estimate of fair value is based upon the actual amounts collected from the liquidation of the assets and liabilities. Management does not believe these estimates could significantly change in the future.
 
7
 
Years Ended June 30, 2003 and 2002
 
Total Net Sales. Due to the operational closures, the last of which was European Micro UK, no sales have occurred since October 2001. Total net sales were $10.9 million in the year ended June 30, 2002. Nor’Easter’s operations were closed in April 2001. Colchester’s operations were closed during July 2001. In addition, American Micro was transferred back to its original shareholders on September 1, 2001, in settlement of notes payable. European Micro UK ceased operations in October 2001. As a result of these closures and transfers, the Company ceased generating revenue during the first half of fiscal 2002.
 
Operating Expenses. Operating expenses were $118,000 in the year ended June 30, 2003 as compared to $2.6 million in the comparable period in 2002.
 
Interest Expense. Interest expense decreased by $244,000 from $250,000 in the year ended June 30, 2002 to $6,000 in the comparable period in 2003. This was attributable to short-term borrowings and long-term borrowings having been completely repaid by June 30, 2002. Interest expense in the year ended 2003 was interest on related party loans.
 
Income Taxes. In the year ended June 30, 2002, the company recorded a tax benefit related to the losses at European Micro UK, however the Company has not accrued a tax benefit for operating losses in the United States or Singapore as realization is not considered more likely than not. No benefit or expense was recorded in the year ended June 30, 2003.
 
Recent Accounting Pronouncements

Consolidation of Variable Interest Entities
 
In January 2003, (as revised in December 2003) The Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities", an interpretation of Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements". Interpretation No. 46 addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated support from other parties, which is provided through other interest that will absorb some or all of the expected losses of the entity; (ii) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: the direct or indirect ability to make decisions about the entities activities through voting rights or similar rights; or the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities; the right to receive the expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected losses.
 
Interpretation No. 46, as revised, also requires expanded disclosures by the primary beneficiary (as defined) of a variable interest entity and by an enterprise that holds a significant variable interest in a variable interest entity but is not the primary beneficiary.
 
Interpretation No. 46, as revised, applies to small business issuers no later than the end of the first reporting period that ends after December 15, 2004. This effective date includes those entities to which Interpretation 46 had previously been applied. However, prior to the required application of Interpretation No. 46, a public entity that is a small business issuer shall apply Interpretation 46 or this Interpretation to those entities that are considered to be special-purpose entities no later than as of the end of the first reporting period that ends after December 15, 2003
 
Interpretation No. 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. This interpretation has not been retroactively applied to the June 30, 2002 Consolidated Financial Statements.
 
In June 2003, the FASB issued an Exposure Draft for proposed SFAS entitled "Qualifying Special Purpose Entities ("QSPE") and Isolation of transferred Assets", an amendment of SFAS No. 140 ("The Exposure Draft"). The Exposure Draft is a proposal that is subject to change and as such, is not yet authoritative. If the proposal is enacted in its current form, it will amend and clarify SFAS 140. The Exposure Draft would prohibit an entity from being a QSPE if it enters into an agreement that obliged a transferor of financial assets, its affiliates, or its agents to deliver additional cash or other assets to fulfill the special-purposes entity's obligation to beneficial interest holders.
 
8
 
Accounting for Stock-Based Compensation
 
In December 2002, the Financial Accounting Standards Board issued Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123," ("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") and provides alternative methods for accounting for a change by registrants to the fair value method of accounting for stock-based compensation. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require disclosure in the significant accounting policy footnote of both annual and interim financial statements of the method of accounting for stock based-compensation and the related pro forma disclosures when the intrinsic value method continues to be used. The statement is effective for fiscal years beginning after December 15, 2002, and disclosures are effective for the first fiscal quarter beginning after December 15, 2002.
 
Derivative Instruments and Hedging Activities
 
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. This statement is effective for contracts entered into or modified after June 30, 2003 and all of its provisions should be applied prospectively.
 
Accounting For Certain Financial Instruments with Characteristics of both Liabilities and Equity
 
In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting For Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 changes the accounting for certain financial instruments with characteristics of both liabilities and equity that, under previous pronouncements, issuers could account for as equity. The new accounting guidance contained in SFAS No. 150 requires that those instruments be classified as liabilities in the balance sheet.
 
SFAS No. 150 affects the issuer’s accounting for three types of freestanding financial instruments. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type includes put options and forward purchase contracts, which involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under this Statement is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers’ shares. SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety.
 
Most of the provisions of Statement 150 are consistent with the existing definition of liabilities in FASB Concepts Statement No. 6, “Elements of Financial Statements”. The remaining provisions of this Statement are consistent with the FASB’s proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own shares. This Statement shall be effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a non-public entity, as to which the effective date is for fiscal periods beginning after December 15, 2004.

9
 

Loan Commitments Accounted for as Derivative Instruments
 
In March 2004, the U.S. Securities and Exchange Commission’s Office of the Chief Accountant and the Division of Corporate Finance released Staff Accounting bulletin (“SAB”) No. 105, “Loan Commitments Accounted for as Derivative Instruments”. This bulletin contains specific guidance on the inputs to a valuation-recognition model to measure loan commitments accounted for at fair value, and requires that fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. In addition, SAB105 requires the disclosure of the accounting policy for loan commitments, including methods and assumptions used to estimate the fair value of loan commitments, and any associated hedging strategies. SAB 105 is effective for derivative instruments entered into subsequent to March 31, 2004 and should also be applied to existing instruments as appropriate. The Company has not yet completed its evaluation of SAB 105, but does not anticipate a material impact on the financial statements.
 
Share-Based Payment
 
In December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Payment”. SFAS No. 123 (R) revises SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123 (R) focuses primarily on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123 (R) requires companies to recognize in the statement of operations 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). SFAS No. 123 (R) is effective as of the first interim or annual reporting period that begins after June 15, 2005 for non-small business issuers and after December 15, 2005 for small business issuers. Accordingly, the Company adopted SFAS No. 123 (R) in its quarter ending March 31, 2006. The Company has evaluated the provisions of SFAS No. 123 (R) and has determined that SFAS No. 123 (R) will not have any impact on its financial statement presentation or disclosures.
 
Accounting for Nonmonetary Transactions

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB No. 29”. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS No. 153 amends Opinion 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. This statement is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005, earlier application is permitted. The Company has determined that SFAS No. 153 did not have any impact on its financial statement presentation or disclosures.
 
Accounting for changes in accounting principles
 
In May 2005, the FASB issued SFAS No. 154 that establishes new standards on accounting for changes in accounting principles. Pursuant to the new rules, all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 completely replaces Accounting Principles Bulletin (APB) Opinion 20 and SFAS 3, though it carries forward the guidance in those pronouncements with respect to accounting for changes in estimates, changes in the reporting entity, and the correction of errors. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Management does not believe the adoption of SFAS No. 154 will have a material impact on the Company’s financial condition or results of operations.
 
10
 

Accounting for Certain Hybrid Financial Instruments
 
In February 2006, the FASB issued SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140” This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” This Statement permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for fiscal years beginning after September 15, 2006. Management does not believe the adoption of SFAS No. 155 will have a material impact on the Company’s financial condition or results of operations.
 
Seasonality
 
The Company typically experienced variations in its total net sales and net income on a quarterly basis as a result of many factors. These included, but were not limited to, seasonal variations in demand for the products and services offered by the Company, the introduction of new hardware and software technologies and products offering improved features and functionality, the introduction of new products and services by the Company and its competitors, the loss or consolidation of a significant supplier or customer, changes in the level of operating expenses, inventory adjustments, product supply constraints, competitive conditions including pricing, interest rate fluctuations, the impact of acquisitions, currency fluctuations and general economic conditions. Historical operating results included a reduction in demand in Europe during the summer months.
 
Liquidity and Capital Resources
 
The Company’s primary cash requirements were for operating expenses, funding accounts receivable, the purchase of inventory to support operations, taking greater advantage of available cash discounts offered by certain of the Company’s suppliers for early payment, acquisitions and debt service. The Company had historically funded these cash requirements through a combination of loans, internally generated cash flow and the net proceeds of its initial public offering.
 
General. The Company had suffered operating losses in fiscal 2000 and 2001. Ongoing legal costs associated with the litigation related to Big Blue Europe, the costs associated with the Company’s electronic commerce strategy, increases in general overhead costs, and increased interest expense due primarily to increased borrowings, coupled with decreasing sales volumes and gross profit margins, negatively impacted operating results. These factors resulted in the noncompliance of the financial covenants of the Company’s loan agreements. Due to these operating results and the covenant violations, the lender on the American Micro and Nor'Easter lines of credit and the European Micro Holdings, Inc. term loan demanded repayment of the Nor'Easter line of credit before June 15, 2001 and the American Micro line of credit and the European Micro Holdings term loan by August 15, 2001. As a result, during April 2001, the Company decided to cease operations at Nor’Easter and during June 2001, the Company decided to cease operation at Colchester. The Nor’Easter line of credit was repaid on June 15, 2001. The American Micro line of credit was repaid during May 2001. The European Micro Holdings term loan was repaid on August 20, 2001.
 
The contingent earn-out payment of the American Micro acquisition relating to two times the after tax earnings for calendar year 2000 of approximately $1,839,000 was due to the former American Micro shareholders. As a result of financial restrictions imposed by the lender on the American Micro and Nor’Easter lines of credit, on February 20, 2001, the Company delivered two Secured Promissory Notes (“Notes”) to the former American Micro shareholders in the original amount of $823,712 each. The Notes called for monthly principal payments of $50,000, plus interest at 8% commencing April 1, 2001, subject to financial covenant restrictions. Each Note was due in full within (30) days of the satisfaction of the American Micro and Nor’Easter lines of credit. On July 15, 2001, the Company notified the former American Micro shareholders that it would be unable to meet its obligations under each Note. After the repayment of the American Micro and Nor’Easter lines of credit along with the repayment of the European Micro Holdings, Inc. term loan, the Company was no longer restricted from performing its obligations to the American Micro shareholders. On August 22, 2001 the former American Micro shareholders demanded full payment of the Notes. On September 1, 2001 the notes payable to the former American Micro shareholders were settled by transfer of all American Micro shares from European Micro Holdings to the former American Micro shareholders.
 
11
 
Another factor that negatively impacted the Company’s liquidity was the terms of the borrowing arrangements of European Micro UK. European Micro UK’s borrowing capacity was subject to termination by the lender at the lender’s sole discretion. During August, 2001 the lender on the European Micro UK’s line of credit demanded repayment. European Micro UK was able to repay the line of credit with a loan from a significant shareholder.
 
Hence, with the complete termination of all lines of credit available to the Company, the closures of Nor’easter and Colchester and the loss of American Micro, the Company had no alternative but to proceed with a complete liquidation of all assets. At June 30, 2003, the Company had $258,000 of cash which is a $151,000 increase from the June 30, 2002 amount of $107,000. The increase was primarily due to an increase in cash provided by operating activities. On July 12, 2005, the Company declared a cash dividend in the aggregate amount of $200,000 on the issued and outstanding shares of Common Stock held by shareholders of record as of August 1, 2005. The dividend was paid on September 1, 2005. As of July 31, 2006, liquidation is almost complete with the only asset being cash in the approximate amount of $20,000.
 
Long-Term Capital. The Company’s long-term capital needs were historically met from the sales of securities and long-term borrowings. Certain long-term funding was supplied to the Company in the form of capital lease agreements and term loans. The lease agreements were secured by vehicles owned by the Company. As of June 30, 2002, all borrowings had been repaid.
 
On October 28, 1999, the Company obtained a $1.5 million term loan. The term loan agreement was with the same lender as the Nor’easter Micro and American Micro line of credit facilities discussed above. Further, the term loan credit agreement contained similar loan covenant requirements. The term loan was to be repaid with quarterly payments of $125,000 over three years. The term loan bore interest at the one-month LIBOR plus two and one-quarter percentage points (2.25%). The term loan was secured by substantially all of the assets of the Company. As partial security for this loan, Messrs. Gallagher and Shields pledged to the lender a portion of their shares of common stock of the Company. In addition, Mr. Shields pledged personal assets as additional collateral and further agreed to maintain certain personal financial statement liquidity levels. As described above, the Company was not in compliance with loan covenants for the June 30, 2001 reporting period. This term loan was repaid on August 20, 2001.
 
On July 1, 1999, the Company acquired AMCC for a purchase price of $1,131,00, plus an earn-out. The portion of the purchase price paid at closing was funded through the Company’s working capital. The contingent earn-out payment relating to two times the after tax earnings for calendar year 1999 of approximately $600,000 was paid in March 2000. Pursuant to the original merger agreement, the remaining earn-out portion was to be due no later than May 1, 2001.
 
On July 16, 1999, European Micro UK purchased the office building in which it had previously been leasing space for 1,705,000 pounds sterling. The purchase price was financed in part by a loan in the amount of 1,312,000 pounds sterling. This loan called for monthly payments of principal and interest in the amount of 15,588 pounds sterling and would have matured in July 2009. The mortgage loan note bore interest at a fixed rate of 7.6%. The mortgage loan note included certain financial and non-financial covenants and restrictions. The agreement also contained a provision whereby the lender could have declared a default based on subjective criteria. The financial covenants were measured using the financial results of European Micro UK as of each fiscal year end. Based upon European Micro UK’s fiscal year end operating results, European Micro UK was out of compliance with one of the covenant requirements at June 30, 2001. The Company was not able to obtain a waiver of this non-compliance. European Micro UK sold the office building effective March 31, 2002 for 1,510,000 pounds sterling ($2,143,000 at March 31, 2002). Proceeds from the sale were held in escrow at March 31, 2002. The proceeds were released from escrow on April 5, 2002, at which time the mortgage loan note secured by the office building plus accrued interest was paid in full in the amount of 1,102,000 pounds sterling. The remaining proceeds of 369,000 pounds sterling, after commissions and legal fees of 39,000 pounds sterling, were paid down on the related party note payable to Harry Shields.
 
12
 
On August 24, 2000, European Micro Holdings, Inc. entered into an Equity Line of Credit (the “Equity Credit Line”). The Company raised $50,000 by issuing 25,020 shares of common stock under the Equity Line of Credit. The Company and the investor agreed to terminate the Equity Line of Credit effective May 15, 2001. In connection with such termination, all outstanding warrants held by the investor and the placement agent were terminated. The Company agreed to issue the placement agent warrants to purchase 500,000 shares of common stock at $5.00 per share, which warrants become exercisable only if the closing bid price of such common stock is $4.00 per share or more for ten consecutive trading days. These warrants expired on August 23, 2005. Since the closing bid price of the common stock was never $4.00 for ten consecutive trading days, the warrants never became exercisable, and as such no expense was recognized.
 
Currency Risk Management
 
Reporting Currency. European Micro Holding’s, Nor’Easter’s and American Micro’s reporting and functional currency, as defined by Statement of Financial Accounting Standards No. 52, was the U.S. dollar. The functional currency of European Micro UK was the U.K. pound sterling and Colchester was the Singapore dollar. European Micro UK and Colchester translate into the reporting currency by measuring assets and liabilities using the exchange rates in effect at the balance sheet date and results of operations using the average exchange rates prevailing during the period.
 
Hedging and Currency Management Activities. The Company occasionally hedged to guard against currency fluctuations between the U.K. pound sterling and the U.S. dollar. 
 
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
The consolidated financial statements of the Company appear beginning at page F-1.
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
On December 28, 2000, KPMG was dismissed as the independent certified public accountants for the Company. On the same day, BDO Seidman was engaged as the Company’s independent certified public accountants. On January 5, 2001, the Company filed a Form 8-K, which disclosed that the Company dismissed KPMG LLP as its independent certified public accountant effective December 28, 2000.
 
On February 12, 2004, the Company chose to engage the accounting firm of Weinberg and Company, P.A. to serve as independent certified public accountants. On November 11, 2005, the Company filed a Form 8-K, which disclosed that the Company dismissed BDO Seidman as its independent certified public accountant effective February 12, 2004. The dismissal of KPMG and BDO Seidman was not in connection with any dispute over accounting practices or the Company's financial statements or reporting; management believed that it would be more economical and in their best interest to retain a local independent registered public accounting firm.
 
ITEM 8A. Controls And Procedures
 
(A) Evaluation of Disclosure Controls and Procedures:

The Company’s Principal Executive Officer and Principal Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report, have concluded that as of such date, the Company’s disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company that is required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

13
 
(B) Changes in Internal Controls:
 
In connection with the evaluation of the Company’s internal controls during the Company’s last fiscal quarter, the Company’s Principal Executive Officer and Principal Financial Officer have determined that there are no changes to the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially effect, the Company’s internal controls over financial reporting.
 
ITEM 8B. OTHER INFORMATION
 
None.

14
 

PART III
 
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
 
The Board of Directors of the Company consists of six seats, divided into three classes of two members each. The terms of office of the three classes of directors (Class I, Class II and Class III) end in successive years. Currently there are four vacancies, two in Class I and two in Class II. Pursuant to the Company’s bylaws, a majority of the remaining two members of the Board may appoint successors to fill the vacancies.
 
Class III Directors—Present Term
   
John B. Gallagher
Age 51
 
 
 
Mr. Gallagher is co-founder of the Company and European Micro Plc, a wholly-owned subsidiary of the Company. He has served as Co-Chairman, Co-President and Director of the Company since it was formed in December 1997. Mr. Gallagher has also served as Co-Chairman and Director of European Micro Plc since it was formed in 1991 and as President, Secretary, Treasurer and Director of American Micro Computer Center, Inc., a computer distributor, since 1999. Between 1989 and 1999, Mr. Gallagher served as President of American Surgical Supply Corp. of Florida d/b/a American Micro Computer Center until it was acquired by the Company in 1999 and changed its name to American Micro Computer Center, Inc. He was a Director and President of Ameritech Exports, a computer distributor, from 1992 to 1997. Mr. Gallagher is an attorney with a Bachelor of Arts and a Juris Doctorate from the University of Florida.
   
Harry D. Shields
Age 56
 
 
Mr. Shields is co-founder of the Company and European Micro Plc, a wholly-owned subsidiary of the Company. He has served as Co-Chairman, Co-President and Director of the Company since it was formed in December 1997. Mr. Shields has also served as Co-Chairman and Director of European Micro Plc since it was formed in 1991. Mr. Shields had been Vice President and a Director of American Micro Computer Center, Inc. from its acquisition in 1999 to August 31, 2001. He served as President of Technology Express, a computer distributor, from 1986 to 2003, and was a Director of Ameritech Exports, a computer distributor, from 1992 to 1997. Mr. Shields has a Bachelor of Arts from DePaul University and a Masters of Science from the University of Tennessee.
 
Executive Officer
 
In addition to John B. Gallagher and Harry D. Shields, who are listed above, the following individual is an executive officer of the Company:

Jay Nash
Age 44
Mr. Nash has been Chief Financial Officer, Controller, Secretary and Treasurer of the Company since January 1998. He had also been Assistant Secretary and a Director of American Micro Computer Center, Inc. since 1999. He had served as Vice President of Technology Express, Inc., a computer distributor, since 1992 and was an accountant with Jacques Miller, a real estate firm, from 1986 to 1992 and KPMG LLP, an accounting firm, from 1983 to 1986. Mr. Nash is a Certified Public Accountant with a Bachelor of Science in Accounting from the University of Tennessee.
 
15
 
ITEM 10. EXECUTIVE COMPENSATION.
 
Executive Compensation
 
Summary Compensation Table

The following table sets forth compensation information for the three fiscal years ended June 30, 2003 for the Company's Chief Executive Officers, the two other executive officers of the Company and the most highly compensated executive officer of European Micro Plc for Fiscal 2001.
 
       
Annual Compensation
  
Long-Term Compensation
      
 
Name and Principal Position(s)
  
 
Fiscal Year
  
 
 
Salary
  
 
 
Bonus
  
Other Annual
Compensation
(1)
  
No. of Stock Options
Granted (2)
  
 
All Other Compensation
  
John B. Gallagher
    
2003
  
$
0
  
$
0
  
$
0
    
0
  
$
0
  
Co-Chairman and Co-President
    
2002
  
$
17,333
    
0
    
0
    
0
    
0
  
     
2001
  
$
329,000(3
)
  
0
    
0
    
0
    
0
  
                                       
Harry D. Shields
    
2003
  
$
0
  
$
0
  
$
0
    
0
  
$
0
  
Co-Chairman and Co-President
    
2002
  
$
0
    
0
    
0
    
0
    
0
  
     
2001
  
$
225,000
    
0
    
0
    
0
    
0
  
                                       
Jay Nash
    
2003
  
$
0
  
$
0
  
$
0
    
0
  
$
0
  
Chief Financial Officer, Controller,
    
2002
  
$
12,500
    
0
    
0
    
0
    
0
  
Secretary and Treasurer
    
2001
  
$
75,000
    
0
    
0
    
11,000
    
0
  
                                       
Frank Cruz
    
2003
  
$
0
  
$
0
  
$
0
    
0
  
$
0
  
Chief Operating Officer (4)
    
2002
  
$
16,000
    
0
    
0
    
0
    
0
  
     
2001
  
$
111,688(3
)
  
0
    
0
    
11,000
    
0
  
                                       
Laurence Gilbert
    
2003
  
$
0
  
$
0
  
$
0
    
0
  
$
0
  
Managing Director (5)
    
2002
  
$
0
  
$
0
  
$
0
    
0
    
0
  
     
2001
  
$
123,020
  
$
46,171
  
$
21,270
    
26,000
    
0
  
 
(1) This consists primarily of employee benefits, including the use of a company owned car, pension plan and medical insurance.

(2) Options to purchase shares of common stock granted pursuant to the 1998 Incentive Plan. Messrs. Nash, Cruz and Gilbert were granted options to purchase shares of the Company’s common stock on August 21, 2000 and January 13, 2001.
 
(3) Mr. Gallagher’s salary includes an annual salary of $104,000 paid by American Micro Computer Center, Inc., a wholly-owned subsidiary of the Company, in Fiscal 2001. Mr. Cruz’ salary also includes $29,093 paid by American Micro Computer Center, Inc.
 
(4) Mr. Cruz was the Chief Operating Officer of European Micro Holdings, Inc. until July 31, 2001. He is no longer employed by European Micro Holdings, Inc.
 
(5) Mr. Gilbert was the Managing Director of European Micro Plc until May 31, 2001. He is no longer employed by European Micro Plc.
 
16
 

Option Grants in Fiscal 2003

During Fiscal 2003, the Company did not grant options to any of the named executive officers.

Option Exercises and Values for Fiscal 2003

There are no outstanding options.

Employment Agreements

Employment Agreements with the Chief Executive Officers. The Company entered into five-year employment agreements with each of Messrs. Gallagher and Shields. Pursuant to the agreements, each executive was employed as Co-Chairman and Co-President of the Company. These agreements were effective as of January 1, 1998, and each provided for initial annual base salaries of $175,000, plus annual cost of living adjustments and other increases to be determined at any time or from time to time by the Board of Directors or any committee thereof. On January 31, 1999, the annual base salaries for each of Messrs. Gallagher and Shields were increased to $275,000. Effective May 1, 2000, Messrs. Gallagher and Shields voluntarily decreased their annual base salaries from $275,000 to $225,000. Effective July 1, 2001, Messrs. Gallagher and Shields voluntarily waived payment of their base salaries. Furthermore, effective August 31, 2001, Messrs. Gallagher and Shields terminated their employment agreements and permanently released the Company from its obligation to pay past due compensation for the prior two months.

On July 1, 1999, Mr. Gallagher entered into a two-year employment agreement with American Micro Computer Center, Inc., a wholly-owned subsidiary of the Company (“American Micro”). Pursuant to this agreement, Mr. Gallagher was employed as President of American Micro. This agreement provided for an annual base salary of $104,000, which was in addition to the annual base salary paid by the Company. Effective August 31, 2001, Mr. Gallagher terminated the employment agreement with American Micro.

Employment Agreements with Other Named Executive Officers. European Micro Plc entered into an employment agreement with Mr. Laurence Gilbert. Pursuant to the agreement, Mr. Gilbert was employed as Managing Director of European Micro Plc. Mr. Gilbert’s agreement was effective January 1, 1998, and was terminated on May 31, 2001. Neither Jay Nash nor Frank Cruz had employment agreements with the Company.
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
Directors and Executive Officers

The following table shows the amount of common stock of the Company beneficially owned by the Company’s directors, the executive officers named in the Summary Compensation Table below and by all directors and executive officers as a group as of July 31, 2006. Unless otherwise indicated, beneficial ownership is direct and the person indicated has sole voting and investment power. As of July 31, 2006, the Company had 5,029,667 shares of common stock outstanding.

 
Name and Address
  
Shares Beneficially Owned
  
Percent of
Class
  
John B. Gallagher
    
1,900,000
    
37.8
%
Harry D. Shields
    
1,577,696
    
31.4
%
All officers and directors as a group
    
3,477,696
    
69.2
%
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Except as noted below, based upon a review of filings with the Securities and Exchange Commission, the Company believes that all of the Company’s directors and executive officers complied during Fiscal 2003 with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934.

17
 
Stockholders Agreement

Pursuant to a stockholders agreement, each of Messrs. Gallagher and Shields have agreed to vote his shares in concert on all matters submitted to a vote of stockholders of the Company, including the election of all directors. In the event that either Messrs. Gallagher or Shields cannot agree to vote his shares in concert with the other, neither shall vote his shares.
 
Code Of Ethics
 
On August 28, 2006, our Board of Directors adopted a Code of Business Conduct and Ethics that applies to all of our officers, directors and employees.
 
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
On February 2, 1999, the Company’s Board formed an Acquisition Committee consisting solely of independent directors to evaluate and determine whether the Company should acquire American Surgical Supply Corp. of Florida d/b/a American Micro Computer Center (“AMCC”) and, if so, on what terms. The members of the committee were Kyle R. Saxon and Barrett Sutton. John B. Gallagher, who is a significant shareholder, Co-Chairman and Co-President of the Company, was the President and a Director of AMCC and owned fifty percent of its outstanding capital stock. Frank Cruz, who was the Chief Operating Officer of the Company, had been an employee of AMCC since 1994. He was an employee of American Micro, the newly-formed, wholly-owned subsidiary of the Company formed to acquire AMCC. The remaining fifty percent of AMCC’s outstanding capital stock was owned by Mr. Gallagher’s father. The committee’s charter authorized it to take any action it deemed necessary to properly evaluate and determine whether the Company should acquire AMCC, including hiring independent advisors and ensuring that any such transaction was fair to the Company and its stockholders from a financial point of view. The committee hired independent legal counsel and an independent financial advisor to render a fairness opinion. On July 1, 1999, the Company acquired AMCC.

During Fiscal 2003, the Company borrowed money from Harry D. Shields, Technology Express, Inc. and American Micro. Harry D. Shields who is the Co-Chairman, Co-President, director and a significant stockholder of the Company, is also the owner of Technology Express, Inc. John B. Gallagher who is the Co-Chairman, Co-President, director and a significant stockholder of the Company, is also the owner of American Micro. In addition, Jay Nash, who was Chief Financial Officer, Controller, Secretary and Treasurer of the Company, has been an officer of Technology Express since 1992. Amounts payable to the related parties are listed below:
 
   
($ in thousands) 
  
   
Fiscal 2003
  
Notes Payable to Harry D. Shields(1)
  
$
192
  
Accounts Payable to Technology Express(2)
    
-
  
Accounts Payable to American Micro(2)
    
-
  
 
(1) The largest aggregate amount of indebtedness owed by the Company to Harry D. Shields between July 1, 2002 and June 30, 2003 was approximately $275,000.
(2) The largest aggregate amount of indebtedness owed by the Company to Technology Express and American Micro between July 1, 2002 and June 30, 2003 was approximately $148,000 and $26,000 respectively. These amounts represent advances to the Company in order to pay bills.

18
 
 
ITEM 13. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
 
(a)(1)(2) Financial Statements. See index to consolidated financial statements and supporting schedules.
 
(a)(3) Exhibits.

Exhibit No.
  
Description
  
Location
2.01
  
Agreement for the Acquisition of Sunbelt (UK) Limited by European Micro Plc dated October 26, 1998
  
Incorporated by reference as Exhibit 2.01 to the Company’s Quarterly Report on Form 10-QSB filed on November 13, 1998.
         
2.02
  
Merger Agreement re: AMCC dated June 29, 1999
  
Incorporated by reference as Exhibit 2.02 to the Company’s Annual Report on Form 10-KSB filed on September 28, 1999.
         
2.03
  
Plan of 1999 Merger re: AMCC dated June 29, 1999
  
Incorporated by reference as Exhibit 2.03 to the Company’s Annual Report on Form 10-KSB filed on September 28, 1999.
         
2.04
  
Articles of Merger re: AMCC dated June 29, 1999
  
Incorporated by reference as Exhibit 2.04 to the Company’s Annual Report on Form 10-KSB filed on September 28, 1999.
         
2.05
  
Amendment to Merger Agreement re: AMCC dated October 2, 2000
  
Incorporated by reference as Exhibit 2.05 to the Company’s Registration Statement on Form S-1 filed on October 27, 2000.
         
3.01
  
Articles of Incorporation
 
Incorporated by reference as Exhibit No. 3.01 to the Company’s Registration Statement on Form S-1 filed on January 16, 1998.
         
3.02
  
Certificate of Amendment of Articles of Incorporation
  
Incorporated by reference as Exhibit 3.02 to the Company’s Quarterly Report on Form 10-QSB filed on May 13, 1998.
         
3.03
  
Bylaws
 
Incorporated by reference as Exhibit No. 3.02 to the Company’s Registration Statement on Form S-1 filed on January 16, 1998.
         
4.01
  
Form of Stock Certificate
  
Incorporated by reference as Exhibit No. 4.01 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
         
4.02
  
1998 Stock Incentive Plan
  
Incorporated by reference as Exhibit No. 4.02 to the Company’s Registration Statement on Form S-1 filed on January 16, 1998.
         
4.03
  
1998 Stock Employee Stock Purchase Plan
  
Incorporated by reference as Exhibit No. 4.03 to the Company’s Registration Statement on Form S-1 filed on January 16, 1998.
         
4.04
  
Form of Lock-up Agreement
  
Incorporated by reference as Exhibit No. 4.04 to the Company’s Registration Statement on Form S-1/A filed on March 24, 1998.
         
10.01
  
Form of Advice of Borrowing Terms with National Westminster Bank Plc
  
Incorporated by reference as Exhibit No. 10.01 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
 
19
 
Exhibit No.
  
Description
  
Location
10.02
  
Invoice Discounting Agreement with Lombard NatWest Discounting Limited, dated November 21, 1996
  
Incorporated by reference as Exhibit No. 10.02 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
         
10.03
  
Commercial Credit Insurance, policy number 60322, with Hermes Kreditversicherungs-AG dated August 1, 1995
  
Incorporated by reference as Exhibit No. 10.03 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
         
10.04
  
Commercial Credit Insurance, policy number 82692, with Hermes Kreditversicherungs-AG dated August 1, 1995
  
Incorporated by reference as Exhibit No. 10.04 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
         
10.05
  
Consignment Agreement with European Micro Computer B.V., dated January 1996
  
Incorporated by reference as Exhibit No. 10.05 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
         
10.06
  
Stockholders’ Cross-Purchase Agreement by and between Jeffrey Gerard Alnwick, Marie Alnwick, European Micro Plc and Big Blue Europe, B.V. dated August 21, 1997
  
Incorporated by reference as Exhibit No. 10.07 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
         
10.07
  
Trusteed Stockholders Cross-Purchase Agreement by and between John B. Gallagher, Harry D. Shields, Thomas H. Minkoff, Trustee of the Gallagher Family Trust, Robert H. True and Stuart S. Southard, Trustees of the Henry Daniel Shields 1997 Irrevocable Educational Trust, European Micro Holdings, Inc. and SunTrust Bank, Nashville, N.A., as Trustee dated January 31, 1998
  
Incorporated by reference as Exhibit No. 10.08 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
         
10.08
  
Executive Employment Agreement between John B. Gallagher and European Micro Holdings, Inc. effective as of January 1, 1998
  
Incorporated by reference as Exhibit No. 10.09 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
         
10.09
  
Executive Employment Agreement between Harry D. Shields and European Micro Holdings, Inc. effective as of January 1, 1998
  
Incorporated by reference as Exhibit No. 10.10 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
         
10.10
  
Contract of Employment Agreement between Laurence Gilbert and European Micro UK dated March 14, 1998
  
Incorporated by reference as Exhibit No. 10.11 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
         
10.11
  
Subscription Agreement by and between John B. Gallagher, Harry D. Shields, Thomas H. Minkoff, Trustee of the Gallagher Family Trust, Robert H. True and Stuart S. Southard, Trustees of the Henry Daniel Shields 1997 Irrevocable Educational Trust, European Micro Holdings, Inc. effective as of January 31, 1998
  
Incorporated by reference as Exhibit No. 10.13 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
         
10.12
  
Administrative Services Contract by and between European Micro Holdings, Inc. and European Micro Plc effective as of January 1, 1998
  
Incorporated by reference as Exhibit No. 10.14 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
         
10.13
  
Escrow Agreement between European Micro Holdings, Inc., Tarpon Scurry Investments, Inc. and The Chase Manhattan dated as of March 24, 1998
  
Incorporated by reference as Exhibit No. 10.15 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
 
20
 
Exhibit No.
  
Description
  
Location
10.14
  
Form of Indemnification Agreements with officers and directors
  
Incorporated by reference as Exhibit No. 10.16 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
         
10.15
  
Form of Transfer Agent Agreement with Chase Mellon Stockholder Services, L.L.C.
  
Incorporated by reference as Exhibit No. 10.17 to the Company’s Registration Statement on Form S-1/A filed on March 6, 1998.
         
10.16
  
Form of Credit Agreement by and between European Micro UK and National Westminster Bank Plc
  
Incorporated by reference as Exhibit No. 10.17 to the Company’s Annual Report on Form 10-KSB filed on September 28, 1998.
         
10.17
  
Consulting Contract dated September 10, 1998 by and between European Micro Holdings, Inc. and The Equity Group
  
Incorporated by reference as Exhibit 10.19 to the Company’s Quarterly Report on Form 10-QSB filed on November 13, 1998.
         
10.18
  
Employment Agreement dated July 1, 1999 between John B. Gallagher and American Micro
  
Incorporated by reference as Exhibit 10.21 to the Company’s Annual Report on Form 10-KSB filed on September 28, 1999.
         
10.19
  
Revolving Loan Agreement dated October 5, 2000 between American Micro and SouthTrust Bank re: Line of Credit to American Micro
  
Incorporated by reference as Exhibit 10.19 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
10.20
  
First Amendment to Loan Agreement dated October 5, 2000 among the Company, American Micro, Nor’Easter and SouthTrust Bank, N.A. re: Term Loan to the Company
  
Incorporated by reference as Exhibit 10.20 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
10.21
  
Revolving Loan Agreement dated October 5, 2000 between Nor’Easter and SouthTrust Bank re: Line of Credit to Nor’Easter
  
Incorporated by reference as Exhibit 10.21 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
10.22
  
Loan Agreement dated October 28, 1999 among the Company, American Micro, Nor’Easter and SouthTrust Bank, N.A. re: Term Loan to the Company
  
Incorporated by reference as Exhibit 10.23 to the Company’s Quarterly Report on Form 10-QSB filed on November 15, 1999.
         
10.23
  
Security Agreement dated October 5, 2000 between Nor’Easter and SouthTrust Bank
  
Incorporated by reference as Exhibit 10.23 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
10.24
  
Security Agreement dated October 5, 2000 between American Micro and SouthTrust Bank
  
Incorporated by reference as Exhibit 10.24 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
10.25
  
Line of Credit Note given by Nor’Easter to SouthTrust Bank
  
Incorporated by reference as Exhibit 10.25 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
10.26
  
Line of Credit Note given by American Micro to SouthTrust Bank
  
Incorporated by reference as Exhibit 10.26 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
10.27
  
Unconditional Guaranty given by Harry Shields to SouthTrust Bank Re: American Micro
  
Incorporated by reference as Exhibit 10.27 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
 
21
 
Exhibit No.
  
Description
  
Location
10.28
  
Unconditional Guaranty given by John Gallagher to SouthTrust Bank Re: American Micro
  
Incorporated by reference as Exhibit 10.28 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
10.29
  
Amended and Restated Unlimited Guaranty Agreement dated October 5, 2000 between Harry Shields and SouthTrust Bank
  
Incorporated by reference as Exhibit 10.29 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
         
10.30
  
Amended and Restated Unlimited Guaranty Agreement dated October 5, 2000 between John Gallagher and SouthTrust Bank
  
Incorporated by reference as Exhibit 10.30 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
         
10.31
  
Unconditional Guaranty given by John Gallagher to SouthTrust Bank Re: Nor’Easter
  
Incorporated by reference as Exhibit 10.31 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
         
10.32
  
Unconditional Guaranty given by Harry Shields to SouthTrust Bank Re: Nor’Easter
  
Incorporated by reference as Exhibit 10.32 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
10.33
  
Specific Agreement for the Provision of Professional Services dated as of March 17, 2000 between the Company and Cap Gemini UK Plc
  
Incorporated by reference as Exhibit 10.25 to the Company’s Quarterly Report on Form 10-QSB filed on May 15, 2000.
         
         
10.34
  
Equity Line of Credit Agreement dated as of August 24, 2000, between the Company and Spinneret Financial System, Ltd.
  
Incorporated by reference as Exhibit 10.34 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
10.35
  
Registration Rights Agreement dated as of August 24, 2000, between the Company and Spinneret Financial System, Ltd.
  
Incorporated by reference as Exhibit 10.35 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
10.36
  
Warrant to Purchase Common Stock dated as of August 24, 2000, given by the Company to Spinneret Financial System, Ltd.
  
Incorporated by reference as Exhibit 10.36 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
10.37
  
Warrant to Purchase Common Stock dated as of August 24, 2000, given by the Company to the May Davis Group, Inc.
  
Incorporated by reference as Exhibit 10.37 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
10.38
  
Registration Rights Agreement dated as of August 24, 2000, between the Company and the May Davis Group, Inc.
  
Incorporated by reference as Exhibit 10.38 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
10.39
  
Placement Agent Agreement dated as of August 24, 2000, between the Company and the May Davis Group, Inc.
  
Incorporated by reference as Exhibit 10.39 to the Company’s Annual Report on Form 10-KSB filed on October 11, 2000.
         
14.01
  
Code of Ethics
  
Incorporated by reference as Exhibit 14.01 to the Company’s Annual Report on Form 10-KSB filed on October 12, 2006.

(b) Reports on Form 8-K.
 
None.
 
22
 
Item 14. Principal accounting fees and services.
 
AUDIT FEE
 
The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for our audit of annual financial statements and review of financial statements included in our Form 10-KSB and 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years were:
 
2003   $ 15,000  
2002   $ 33,339  
 
ALL OTHER FEES

The aggregate fees billed in each of the last two fiscal years for the products and services provided by the principal accountant other than the services reported in the above paragraph were:
 
2003   $ -  
2002   $ -  
  
23
  
SIGNATURES
 
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
 
Date: October 16, 2006.    
   
  EUROPEAN MICRO HOLDINGS, INC.
 
 		  
 		  
 
  By:   /s/ John B. Gallagher 
 
John B. Gallagher
Co-President
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
SIGNATURE
  
TITLE
  
DATE
         
/s/ Harry D. Shields
  
Co-Chairman; Co-President (Principal Executive Officer);
 
October 16, 2006
Harry D. Shields   Director    
         
/s/ John B. Gallagher
  
Co-Chairman; Co-President (Principal Executive Officer);
 
October 16, 2006
John B. Gallagher   Director    
         
/s/ Jay P. Nash 
  
Chief Financial Officer and Controller (Principal Financial
 
October 16, 2006
Jay P. Nash   Officer and Controller)    
 
24
 

Index to the Financial Statements

European Micro Holdings, Inc. and Subsidiaries 

Report of Independent Registered Public Accounting Firm
  
F-2
     
Consolidated Statement of Net Assets in liquidation as of June 30, 2003 (Liquidation Basis)
  
F-3
     
Consolidated Statements of Changes in Net Assets for the years ended June 30, 2003 and 2002 (Liquidation Basis)
  
F-4
   
 
Consolidated Statements of Cash Flows for the years ended June 30, 2003 and 2002 (Liquidation Basis)
  
F-5
     
Notes to Consolidated Financial Statements as of June 30, 2003
  
F-6
 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors of
European Micro Holdings, Inc. and Subsidiaries:
 
We have audited the accompanying consolidated statement of net assets in liquidation of European Micro Holdings, Inc. and Subsidiaries (the "Company") as of June 30, 2003 and the related consolidated statements of changes in net assets and cash flows for the years ended June 30, 2003 and 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements 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 audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As described in Note 2 to the financial statements, the stockholders of the Company approved a plan of liquidation on July 1, 2001, and the Company commenced liquidation shortly thereafter. As a result, the Company has changed its basis of accounting for periods subsequent to June 30, 2001 from the going-concern basis to a liquidation basis.

In our opinion, the consolidated financial statements referred to above, present fairly, in all material respects, the financial position of European Micro Holdings, Inc. and Subsidiaries as of June 30, 2003, and the results of their operations and their cash flows for the years ended June 30, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America applied on the bases described in the preceding paragraph.
 
WEINBERG & COMPANY, P.A.
 
Boca Raton, Florida
June 15, 2006

F-2
 
 
European Micro Holdings, Inc. and Subsidiaries
 
Consolidated Statement of Net Assets in liquidation as of June 30, 2003
(Liquidation Basis)
(In thousands)
 
 
  
2003
  
ASSETS
        
ASSETS:
        
Cash
  
$
258
  
Income taxes receivable
    
1,020
  
         
TOTAL ASSETS
  
$
1,278
  
LIABILITIES
        
LIABILITIES:
        
Accounts payable
 
$
43
  
Accrued expenses and other liabilities
   
425
  
Due to related parties
   
192
  
         
TOTAL LIABILITIES
  
$
660
  
         
COMMITMENT AND CONTINGENCIES
        
         
NET ASSETS IN LIQUIDATION (available to holders of Common Stock)
  
$
618
  
 
See accompanying notes to consolidated financial statements.

F-3
 
 
European Micro Holdings, Inc. and Subsidiaries
 
Consolidated Statements of Changes in Net Assets for the years ended
June 30, 2003 and 2002
(Liquidation Basis)
(In thousands)

   
2003
  
2002
  
SALES:
              
Net sales
 
$
-
  
$
10,930
  
               
COST OF GOODS SOLD:
              
Cost of goods sold
   
-
    
(9,555
)
     
 
   
 
 
GROSS PROFIT
    
-
    
1,375
  
               
OPERATING EXPENSES:
              
Selling, general and administrative expenses
   
(118
)
  
(2,631
)
     
 
   
 
 
LOSS FROM OPERATIONS
    
(118
)
  
(1,256
)
               
OTHER INCOME (EXPENSE)
              
Interest Income
    
36
    
-
  
Interest expense
    
(6
)
  
(250
)
Forgiveness of debt
    
-
    
686
  
Loss on rescission of American Micro purchase
    
-
    
(1,345
)
     
 
   
 
 
TOTAL OTHER INCOME (EXPENSE)
    
30
    
(909
)
     
 
   
 
 
LOSS BEFORE INCOME TAXES
    
(88
)
  
(2,165
)
               
Income tax benefit
   
-
    
702
  
     
 
   
 
 
NET LOSS
    
(88
)
  
(1,463
)
               
NET ASSETS BEGINNING OF PERIOD
    
649
    
2,067
  
               
EFFECT OF FOREIGN EXCHANGE RATES
    
57
    
45
  
     
 
   
 
 
NET ASSETS IN LIQUIDATION
  
$
618
  
$
649
  
 
See accompanying notes to consolidated financial statements.

F-4
 
 
European Micro Holdings, Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows
For the years ended June 30, 2003 and 2002
(Liquidation Basis)
(In thousands)

   
2003
  
2002
  
CASH FLOWS FROM OPERATING ACTIVITIES:
              
Net loss
  
$
(88
)
$
(1,463
)
Adjustments to reconcile net loss to net cash provided by operating activities
              
Forgiveness of Debt
    
-
    
(686
)
Loss on rescission of American Micro purchase
    
-
    
1,345
  
Changes in assets and liabilities, net of effects from dispositions
              
Accounts receivable
    
49
    
5,369
  
Inventories
    
-
    
2,865
  
Prepaid expenses and other current assets
    
13
    
(98
)
Income taxes receivable
    
554
    
(1,057
)
Accounts payable
    
31
    
(1,167
)
Accrued expenses and other liabilities
    
(355
)
  
(278
)
Due to related parties
    
(110
)
  
300
  
     
 
   
 
 
Net cash provided by operating activities
    
94
    
5,130
  
     
 
   
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
              
Sale of property and equipment
    
-
    
2,382
  
     
 
   
 
 
Net cash provided by investing activities
    
-
    
2,382
  
     
 
   
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
              
Decrease in short-term borrowings, net
    
-
    
(5,684
)
Repayment of long-term borrowings
    
-
    
(2,153
)
     
 
   
 
 
Net cash used in financing activities
    
-
    
(7,837
)
     
 
   
 
 
Net cash transferred in disposition
    
-
    
(65
)
               
Effect of foreign exchange rates
    
57
    
14
  
     
 
   
  
 
NET INCREASE (DECREASE) IN CASH
    
151
    
(376
)
Cash at beginning of year
    
107
    
483
  
     
 
   
 
 
CASH AT END OF YEAR
  
$
258
  
$
107
  
 
See accompanying notes to consolidated financial statements.

F-5
 
 
European Micro Holdings, Inc. and Subsidiaries
 
Consolidated Statements of Cash Flows
For the years ended June 30, 2003 and 2002
(Liquidation Basis)
(In thousands)

 
  
2003
  
2002
  
Supplemental disclosure of non-cash investing and financing activities:              
On September 1, 2001 the notes payable in the amount of $1,318,000 to the former American Micro shareholders were settled by transfer of all American Micro shares from European Micro Holdings to the former American Micro shareholders. The following represents the assets and liabilities transferred by the settlement of the notes payable.
              
               
Book value of assets transferred
        
$
2,682
  
           
 
  
Book value of liabilities transferred
        
$
1,337
  
           
 
  
               
Supplemental disclosure of cash flow information:
              
Cash paid for interest
  
$
6
  
$
250
  
     
 
    
 
  
Cash paid for taxes
  
$
-
  
$
1
  
 
See accompanying notes to consolidated financial statements.

F-6
 
 
European Micro Holdings, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
As of June 30, 2003

Note 1 Summary of Significant Accounting Policies and Organization
 
 
(A) Organization

On December 23, 1997, European Micro Holdings, Inc. was incorporated, in the state of Nevada, and 4,000,000 shares of common stock with a par value of $0.01 per share were issued. The 4,000,000 shares were issued to the shareholders of European Micro Plc in exchange for the entire issued share capital of that company on January 31, 1998. European Micro Holdings, Inc. and its subsidiaries are hereinafter referred to as “European Micro” or “the Company.” The following companies’ results of operations and financial position have been included in the consolidated financial statements as follows:

 
Companies
  
 
Incorporated
  
Commenced Operations
  
 
Acquired
  
European Micro Holdings, Inc.
    
1997
    
1998
    
-
  
Nor’Easter Micro Inc.
    
1997
    
1998
    
-
  
European Micro Plc
    
1991
    
1992
    
-
  
European Micro GmbH
    
1993
    
1993
    
-
  
European Micro BV
    
1997
    
1997
    
-
  
Colchester Enterprise Pte. Ltd.
    
1998
    
1999
    
-
  
Sunbelt (UK) Limited
    
-
    
-
    
October 26, 1998
  
American Micro Computer Center, Inc.
    
-
    
-
    
July 1, 1999
  
Engenis.com Ltd.
    
2000
    
-
    
-
  
 
European Micro operated in a single industry trading computer components. In principle the Company purchased components from international suppliers, including related parties, and sold them in local markets. The main operating company, European Micro Plc, had its principal operations in Altrincham, England with its subsidiaries operating in Germany and Holland. Nor’Easter Micro Inc. had its operations in Portsmouth, New Hampshire. Colchester Enterprise Pte. Ltd. had its operations in Singapore. American Micro Computer Center, Inc. had its operations in Miami, Florida.

The parent company held a 50% interest in a joint venture company, Big Blue Europe BV. Big Blue Europe BV commenced operations in January 1997 and had been included in these consolidated financial statements under the equity method of accounting. Big Blue Europe BV operated in the same industry as the Company. Big Blue Europe BV ceased operations in 2001 and the investment was written-off at June 30, 2001.

Due to sales slowdown and liquidity problems resulting from the Company’s primary lender demanding repayment of their loans, the Company decided to cease operations at Nor’Easter. During May and June 2001, the remaining inventory was sold or written off. All fixed assets were sold or written off except for a vehicle which was sold in July 2001. All accounts receivable were collected except for the Arlington receivable (See Note 4). All accounts payable were paid and the bank accounts were closed. Nor’Easter’s parent European Micro Holdings paid off the remaining balance on Nor’Easter’s Line of Credit on June 15, 2001 and paid all remaining liabilities as they came due.

Due to the same liquidity problems, during June 2001, the Company decided to cease operations at Colchester. During July 2001, Colchester terminated all employees and hired a liquidator to finalize the remaining business. On September 4, 2003, Colchester’s liquidation process was finalized.

Since the Company was unable to meet the requirements of the notes payable due to the former American Micro Computer Center, Inc. (“AMCC”) shareholders, on September 1, 2001, the Company entered into a Settlement and Stock Purchase Agreement whereby all AMCC shares were transferred back to the former AMCC shareholders in order to satisfy the notes payable.

F-7
 
 
European Micro Holdings, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
As of June 30, 2003 (continued)

Summary of Significant Accounting Policies and Organization (continued)

During August, 2001 the lender on the European Micro Plc’s line of credit demanded repayment. European Micro Plc was able to repay the line of credit with a loan from a majority shareholder. On October 5, 2001, an agreement between European Micro Plc and Square 1 International, Ltd, a company majority owned by a significant shareholder of European Micro Holdings, Inc., provided for the orderly transfer of employees and the purchase of inventory and fixed assets from European Micro Plc to Square 1 International, Ltd. In July 2002, the Company hired a liquidator to finalize the remaining business. On December 7, 2005, European Micro Plc’s liquidation process was finalized.

(B) Principles of Consolidation

 
The consolidated financial statements include the accounts of the Company and its wholly owned inactive subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

 
The Company’s investment in Big Blue Europe BV was accounted for under the equity method, until the investment was completely written off on June 30, 2001.
 
 
(C) Basis of Presentation

 
The consolidated financial statements are expressed in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America, under the liquidation basis of accounting since July 1, 2001.

(D) Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual amounts could differ significantly from these estimates.

(E) Revenue and Expense Recognition
 
Revenues were recognized at the time the goods were shipped. Revenues from related parties were recognized when the products were sold by the related parties to third parties. Discount and customer rebates were deducted from sales revenue when earned. Costs of goods sold included material and freight costs. Selling, general and administrative costs are charged to expense as incurred. For the year ended June 30, 2003, the Company did not have any revenue or related cost of goods sold. 
 
(F) Inventories

Inventories were stated at the lower of cost or market value. Cost was determined using the weighted average cost method. As of June 30, 2002 all inventories had been sold or liquidated.

F-8
 
 
European Micro Holdings, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
As of June 30, 2003 (continued)

Summary of Significant Accounting Policies and Organization (continued)

(G) Property, Equipment & Impairment of Long-Lived Assets

Prior to the adoption of the liquidation basis of accounting, property and equipment were recorded at cost. Property and equipment held under capital leases were stated at the present value of minimum lease payments at the inception of the related leases. Depreciation was calculated using the straight line method over their estimated useful lives as follows: Furniture, fixtures & equipment, 2-7 years and motor vehicles and other, 4 years. Property and equipment held under capital leases and leasehold improvements to property under operating leases were amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the assets. The cost of additions and betterments were capitalized, and repairs and maintenance costs were charged to operations in the period incurred. When depreciable assets were retired or sold, the cost and related allowances for depreciation were removed from the accounts and the gain or loss was recognized. The Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Based upon a comprehensive review of all liquidity circumstances and current market conditions, the Company determined that the value of certain property and equipment was impaired. As a result of this determination, for the year ended June 30, 2001, the Company abandoned, discarded and wrote-off $171,440 in property and equipment. The Company also wrote-down $422,123 in property and equipment to net realizable value.

As a result of recording the write-off in the year ended June 30, 2001, no adjustments were needed to reflect the change to liquidation basis of accounting, as of July 1, 2001. As of June 30, 2002 all property and equipment had been sold or liquidated.

(H) Depreciation and Amortization

Depreciation expense was not recorded during the year ended June 30, 2002 because, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 121, substantially all of the Company’s long-lived assets were deemed to be held for sale. No depreciation expense was recorded in fiscal year ended June 30, 2003, because all property and equipment was sold or liquidated in 2002.

(J) Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 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.

(K) Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation.

The carrying amounts of the Company’s financial instruments, including cash, taxes receivable, accounts payable, accrued expenses and other current liabilities approximate fair value because of their short maturities.

F-9
 
 
European Micro Holdings, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
As of June 30, 2003 (continued)

Summary of Significant Accounting Policies and Organization (continued)

During prior years, the Company had entered into foreign currency exchange contracts to reduce exposure to foreign currency fluctuations associated with the settlement of inter-company receivables and payables denominated in foreign currencies. Foreign exchange contracts generally had maturities of less than one year and were accounted for on the fair value method. Gains and losses resulting from these instruments were recognized in the same period as the underlying foreign currency transaction gains and losses and were included in cost of sales. The Company did not use foreign currency exchange contracts or other derivative financial instruments for speculative or trading purposes.

(L) Foreign Currency Transaction

Assets and liabilities of foreign subsidiaries, whose functional currency is the local currency, were translated into US Dollars at year-end exchange rates. Capital accounts were re-measured into US dollars at the acquisition date rates. Income and expense items were translated at the average rates of exchange prevailing during the year. The adjustments resulting from translating the financial statements of such foreign subsidiaries were recorded as a component of accumulated other comprehensive income (loss) in stockholders equity. Foreign currency transaction and forward exchange contracts gains or losses are reported in results of operations.
 
(M) Stock Option Plans

The Company accounts for its employee stock option plans in accordance with Accounting Principals Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Under APB 25, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. In accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” the Company provides pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1998 and subsequent years as if the fair value based method defined in SFAS No. 123 had been applied. No stock options were granted during 2003 or 2002.
 
(N) Loss Per Common Share
 
Since the adoption of the liquidation basis of accounting on July 1, 2001, loss per share was not computed as such amounts are not deemed to be meaningful.

(O) Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation

(P) Recent Accounting Pronouncements

Consolidation of Variable Interest Entities

In January 2003, (as revised in December 2003) The Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities", an interpretation of Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements". Interpretation No. 46 addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated support from other parties, which is provided through other interest that will absorb some or all of the expected losses of the entity; (ii) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: the direct or indirect ability to make decisions about the entities activities through voting rights or similar rights; or the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities; the right to receive the expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected losses.
 
F-10
 
European Micro Holdings, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
As of June 30, 2003 (continued)

Summary of Significant Accounting Policies and Organization (continued)

Interpretation No. 46, as revised, also requires expanded disclosures by the primary beneficiary (as defined) of a variable interest entity and by an enterprise that holds a significant variable interest in a variable interest entity but is not the primary beneficiary.

Interpretation No. 46, as revised, applies to small business issuers no later than the end of the first reporting period that ends after December 15, 2004. This effective date includes those entities to which Interpretation 46 had previously been applied. However, prior to the required application of Interpretation No. 46, a public entity that is a small business issuer shall apply Interpretation 46 or this Interpretation to those entities that are considered to be special-purpose entities no later than as of the end of the first reporting period that ends after December 15, 2003.

Interpretation No. 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. This interpretation has not been retroactively applied to the June 30, 2002 Consolidated Financial Statements.

In June 2003, the FASB issued an Exposure Draft for proposed SFAS entitled "Qualifying Special Purpose Entities ("QSPE") and Isolation of transferred Assets", an amendment of SFAS No. 140 ("The Exposure Draft"). The Exposure Draft is a proposal that is subject to change and as such, is not yet authoritative. If the proposal is enacted in its current form, it will amend and clarify SFAS 140. The Exposure Draft would prohibit an entity from being a QSPE if it enters into an agreement that obliged a transferor of financial assets, its affiliates, or its agents to deliver additional cash or other assets to fulfill the special-purposes entity's obligation to beneficial interest holders.

Accounting for Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board issued Statement No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure - an amendment of FASB Statement No. 123," ("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "Accounting for Stock Based Compensation" ("SFAS 123") and provides alternative methods for accounting for a change by registrants to the fair value method of accounting for stock-based compensation. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require disclosure in the significant accounting policy footnote of both annual and interim financial statements of the method of accounting for stock based-compensation and the related pro forma disclosures when the intrinsic value method continues to be used. The statement is effective for fiscal years beginning after December 15, 2002, and disclosures are effective for the first fiscal quarter beginning after December 15, 2002. The Company has not adopted early application of this standard and does not believe that early adoption would have a material effect on these financial statements.

Derivative Instruments and Hedging Activities

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. This statement is effective for contracts entered into or modified after June 30, 2003 and all of its provisions should be applied prospectively.

F-11
 
European Micro Holdings, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
As of June 30, 2003(continued)

Summary of Significant Accounting Policies and Organization (continued)

Accounting For Certain Financial Instruments with Characteristics of both Liabilities and Equity

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 150, “Accounting For Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 changes the accounting for certain financial instruments with characteristics of both liabilities and equity that, under previous pronouncements, issuers could account for as equity. The new accounting guidance contained in SFAS No. 150 requires that those instruments be classified as liabilities in the balance sheet.

SFAS No. 150 affects the issuer’s accounting for three types of freestanding financial instruments. One type is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type includes put options and forward purchase contracts, which involves instruments that do or may require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under this Statement is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers’ shares. SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety.

Most of the provisions of Statement 150 are consistent with the existing definition of liabilities in FASB Concepts Statement No. 6, “Elements of Financial Statements”. The remaining provisions of this Statement are consistent with the FASB’s proposal to revise that definition to encompass certain obligations that a reporting entity can or must settle by issuing its own shares. This Statement shall be effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of a non-public entity, as to which the effective date is for fiscal periods beginning after December 15, 2004.

Loan Commitments Accounted for as Derivative Instruments

In March 2004, the U.S. Securities and Exchange Commission’s Office of the Chief Accountant and the Division of Corporate Finance released Staff Accounting bulletin (“SAB”) No. 105, “Loan Commitments Accounted for as Derivative Instruments”. This bulletin contains specific guidance on the inputs to a valuation-recognition model to measure loan commitments accounted for at fair value, and requires that fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. In addition, SAB 105 requires the disclosure of the accounting policy for loan commitments, including methods and assumptions used to estimate the fair value of loan commitments, and any associated hedging strategies. SAB 105 is effective for derivative instruments entered into subsequent to March 31, 2004 and should also be applied to existing instruments as appropriate. The Company has not yet completed its evaluation of SAB 105, but does not anticipate a material impact on the financial statements.

Share-Based Payment

In December 2004, the FASB issued SFAS No. 123 (R), “Share-Based Payment”. SFAS No. 123 (R) revises SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123 (R) focuses primarily on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123 (R) requires companies to recognize in the statement of operations 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). SFAS No. 123 (R) is effective as of the first interim or annual reporting period that begins on or after June 15, 2005 for non-small business issuers and on or after December 15, 2005 for small business issuers. Accordingly, the Company will adopt SFAS No. 123 (R) in its quarter ending March 31, 2006. The Company has evaluated the provisions of SFAS No. 123 (R) and has determined that SFAS No. 123 (R) will not have any impact on its financial statement presentation or disclosures.
 
F-12
 
European Micro Holdings, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
As of June 30, 2003(continued)

Summary of Significant Accounting Policies and Organization (continued)
 
Accounting for Nonmonetary Transactions
 
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB No. 29”. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS No. 153 amends Opinion 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. This statement is effective for nonmonetary exchanges occurring in fiscal periods beginning after June 15, 2005, earlier application is permitted. The Company has determined that SFAS No. 153 did not have any impact on its financial statement presentation or disclosures.
 
Accounting for changes in accounting principles
 
In May 2005, the FASB issued SFAS No. 154 that establishes new standards on accounting for changes in accounting principles. Pursuant to the new rules, all such changes must be accounted for by retrospective application to the financial statements of prior periods unless it is impracticable to do so. SFAS No. 154 completely replaces Accounting Principles Bulletin (APB) Opinion 20 and SFAS 3, though it carries forward the guidance in those pronouncements with respect to accounting for changes in estimates, changes in the reporting entity, and the correction of errors. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Management does not believe the adoption of SFAS No. 154 will have a material impact on the Company’s financial condition or results of operations.
 
Accounting for Certain Hybrid Financial Instruments
 
In February 2006, the FASB issued SFAS No. 155 “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140” This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” This Statement permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement is effective for fiscal years beginning after September 15, 2006. Management does not believe the adoption of SFAS No. 155 will have a material impact on the Company’s financial condition or results of operations.

F-13
 
European Micro Holdings, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
As of June 30, 2003(continued)
 
2 Liquidation

The Company had suffered operating losses in fiscal 2000 and 2001. Ongoing legal costs associated with the litigation related to Big Blue Europe, (See Note 4), the costs associated with the Company’s electronic commerce strategy, increases in general overhead costs, and increased interest expense due primarily to increased borrowings, coupled with decreasing sales volumes and gross profit margins, have negatively impacted operating results. These factors resulted in the noncompliance of the financial covenants of the Company’s loan agreements. Due to these operating results and the covenant violations, the lender on the American Micro and Nor'Easter lines of credit and the European Micro Holdings, Inc. term loan demanded repayment of the Nor'Easter line of credit before June 15, 2001 and the American Micro line of credit and the European Micro Holdings term loan by August 15, 2001. As a result, during April 2001, the Company decided to cease operations at Nor’Easter and during June 2001, the Company decided to cease operations at Colchester. The Nor’Easter line of credit was repaid on June 15, 2001. The American Micro line of credit was repaid during May 2001. The European Micro Holdings term loan was repaid on August 20, 2001.

The contingent earn-out payment of the American Micro acquisition relating to two times the after tax earnings for calendar year 2000 of approximately $1,839,000 was due to the former American Micro shareholders. As a result of financial restrictions imposed by the lender on the American Micro and Nor’Easter lines of credit, on February 20, 2001, the Company delivered two Secured Promissory Notes (“Notes”) to the former American Micro shareholders in the original amount of $823,712 each. The Notes called for monthly principal payments of $50,000, plus interest at 8% commencing April 1, 2001, subject to financial covenant restrictions. Each Note was due in full within (30) days of the satisfaction of the American Micro and Nor’Easter lines of credit. On July 15, 2001, the Company notified the former American Micro shareholders that it would be unable to meet its obligations under each Note. After the repayment of the American Micro and Nor’Easter lines of credit along with the repayment of the European Micro Holdings, Inc. term loan, the Company was no longer restricted from performing its obligations to the American Micro shareholders. On August 22, 2001 the former American Micro shareholders demanded full payment of the Notes. On September 1, 2001 the Notes to the former American Micro shareholders were settled by transfer of all American Micro shares from European Micro Holdings to the former American Micro shareholders.

Another factor that negatively impacted the Company’s liquidity was the terms of the borrowing arrangements of European Micro UK. European Micro UK’s borrowing capacity was subject to termination by the lender at lender’s sole discretion and during August, 2001 the lender on the European Micro UK’s line of credit demanded repayment. European Micro UK was able to repay the line of credit with a loan from a significant shareholder. This loan to a significant shareholder was completely repaid on April 3, 2003.

Hence, with the complete termination of all lines of credit available to the Company, the closures of Nor’easter and Colchester and the loss of American Micro, the Company had no alternative but to proceed with a complete liquidation of all assets. On July 12, 2005, the Company declared a cash dividend in the aggregate amount of $200,000 on the issued and outstanding shares of Common Stock held by shareholders of record as of August 1, 2005. The dividend was paid on September 1, 2005. As of July 31, 2006, liquidation is almost complete with the only asset being cash in the approximate amount of $20,000.

F-14
 
European Micro Holdings, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
As of June 30, 2003(continued)

3 Income Tax Receivable and Taxes

 
The Company has recorded an income tax receivable of $1,020,000. This receivable originates from European Micro UK’s net operating loss carryback from fiscal 2002. This amount was collected from the United Kingdom’s inland revenue during July 2004.

 
Income tax benefit consists of the following (in thousands):

   
Years ended June 30,
  
   
2003
  
2002
  
Current
              
Federal and State
  
$
-
  
$
-
  
Foreign
    
-
    
(702
)
Deferred
              
Federal and State
    
-
    
-
  
Foreign
    
-
    
-
  
Total income tax benefit
  
$
-
  
$
(702
)

Provision has not been made for U.S. or additional foreign taxes on approximately $3,672,000 at June 30, 2000, of undistributed earnings of foreign subsidiaries, as those earnings were intended to be permanently reinvested. The foreign subsidiaries incurred substantial losses in excess of undistributed earnings for the years ended June 30, 2003, 2002 and 2001, and as a result there are no longer any undistributed earnings from foreign subsidiaries that could be repatriated to the US.

A reconciliation between actual income taxes and amounts computed by applying the federal statutory rate of 34% to earnings before income taxes is summarized as follows (in thousands):

   
Years ended June 30,
  
   
2003
  
2002
  
US federal statutory rate on loss before income taxes
  
$
(20
)
$
(279
)
Depreciation and Amortization
    
-
    
3
  
Change in valuation allowance
    
20
    
844
  
Adjustment to reconcile to actual income  tax refund received
   
-
    
(1,270
)
Income tax benefit
  
$
-
  
$
(702
)
 
F-15
 
 
European Micro Holdings, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
As of June 30, 2003(continued)

3 Income Tax Receivable and Taxes (continued)

Sources of deferred tax assets are as follows (in thousands):

   
June 30, 2003
  
Deferred tax assets:
        
Property and equipment, principally due to differences in depreciation and amortization
  
$
1,236
  
Net operating loss carry forwards
    
1,734
  
Other
    
386
  
Total gross deferred tax assets
    
3,356
  
Valuation allowance
    
(3,356
)
Net deferred tax assets
  
$
-0-
  

The Company has U.S. federal net operating loss carryforwards of approximately $4,200,000, which will begin to expire in 2018. The use of this net operating loss in future years may be restricted under Section 382 of the Internal Revenue Code. The valuation allowance, which increased in fiscal year 2003 by $20,000, has been provided for deferred tax assets as recoverability in future periods is not deemed to be more likely than not.
 
4 Commitments and Contingencies

On November 12, 1999, a New York corporation, Big Blue Products, and its owners Jeffrey and Marie Alnwick (the “Alnwicks”), commenced an action individually and derivatively for the Dutch company, Big Blue Europe, against the Company and its founders and officers, John B. Gallagher and Harry D. Shields in the United States District Court, Eastern District of New York, Jeffrey Alnwick and Marie Alnwick v. European Micro Holdings, Inc., Eastern District of New York, Docket No. 99 CV 7380 (the “Alnwick Litigation”).

The complaint alleged thirty-three causes of action. Plaintiffs claimed, in substance, that defendants breached oral and written agreements relating to the management, operation and funding of Big Blue Europe. Specifically, plaintiffs alleged that defendants breached the joint venture agreement by which Big Blue Europe was formed, a licensing agreement for use of the “Big Blue” service mark in Europe, a non-competition agreement preventing Big Blue Europe from operating in the United States and several capital contribution agreements. Plaintiffs also claimed that defendants breached their fiduciary duties to the Alnwicks, engaged in fraudulent acts, aided and abetted breaches of fiduciary duties by others, misappropriated trade secrets and interfered with the employment contract of Big Blue Europe’s managing director. The complaint seeked unspecified compensatory and punitive damages, as well as injunctive relief restraining defendants from acting in violation of the alleged agreements.

Defendants moved to dismiss the complaint principally on the basis of forum non-conveniens in favor of existing proceedings in the Netherlands (commenced by European Micro UK), where a Dutch court appointed an independent director to oversee operations of the company. Defendants argued that any dispute between the shareholders and directors of the Dutch company, Big Blue Europe, which operated pursuant to Dutch law, should be resolved by a Dutch court. The United States District Court for the Eastern District of New York dismissed 31 of the 33 claims brought against the Company on grounds of "forum non conveniens."

F-16
 
 
European Micro Holdings, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
As of June 30, 2003(continued)

4 Commitments and Contingencies (continued)

The Court decided that it would be more appropriate that these claims be adjudicated in The Netherlands, under Dutch Law. The Judge had granted the Plaintiffs in the case (Jeffrey and Marie Alnwick and Big Blue Products) the option to proceed with the remaining two allegations in United States District Court. Plaintiffs requested that these two counts also be dismissed. On April 19, 2001, the Plaintiffs filed a notice of appeal. In October 2003, the Company and its affiliated defendants entered into a settlement agreement with the plaintiffs. In accordance with the agreement, all parties dismissed all actions and released all claims.

In January 2001, Nor’Easter sued Arlington Computer Products, Inc. (“Arlington”) in the Superior Court of Rockingham County, New Hampshire, for breach of an agreement to pay for the purchase of laptop computers. Nor’Easter subsequently sued Arlington in the Circuit Court of Lake County, Illinois, to enforce a judgment obtained in the New Hampshire Litigation. In addition, Arlington sued Nor’Easter in the United States District Court for the Northern District of Illinois for breach of an agreement to sell Compaq computer memory modules. Nor’Easter filed a third party complaint in the Federal Litigation against Origin Micro, Inc. (“Origin”) for breach of an agreement to sell Compaq computer memory modules.

In June 2002, Nor’Easter and Arlington entered into a settlement agreement whereby on June 20, 2002, Arlington paid Nor’Easter the sum of $52,556 and both parties discontinued the litigation and released all claims against each other. In July 2002, Nor’Easter and Origin entered into a settlement agreement whereby on July 29, 2002, Origin paid Nor’Easter the sum of $49,000 and both parties discontinued the litigation and released all claims.

In December 2001, a former shareholder of Sunbelt served a statutory demand upon European Micro Plc in the sum of 92,710 pounds sterling. This sum was subsequently reduced to 73,940 pounds sterling. On April 19, 2002 Judge Kershaw QC granted the European Micro Plc an injunction preventing the former shareholder from presenting a petition in this sum based upon the statutory demand. On July 31, 2002 the Court of Appeal dismissed European Micro Plc’s claim and ordered the costs to be paid. In August 2003, the debt plus costs and interest owed the former shareholder of Sunbelt was assigned to Harry Shields, a shareholder of European Micro Holdings, Inc., for the sum of 107,000 pounds sterling, (approximately $177,000 at exchange rate on June 30, 2003). This amount is included in due to related parties in the accompanying consolidated statement of net assets in liquidation as of June 30, 2003. This amount plus interest of 9,483 pounds sterling was repaid by European Micro UK to Harry Shields on August 10, 2004.

The Company leased offices and certain equipment under non-cancelable operating leases and vehicles under capital leases. As of June 30, 2003, all capital lease agreements had been cancelled or assumed by other entities.

Rental expense for the years ended June 30, 2003 and 2002 was $25,000 and $11,000 respectively.

5 Foreign Exchange Contracts

The Company utilized derivative financial instruments in the form of forward exchange contracts for the purpose of economic hedges of anticipated sale and purchase transactions. In addition the Company entered into economic hedges for the purposes of hedging foreign currency market exposures of underlying assets, liabilities and other obligations, which exist as part of its ongoing business operations.

 
Where the foreign currency exposure was covered by a forward foreign exchange contract the asset, liability or other obligation was recorded at the contracted rate each month end and the resultant mark-to-market gains and losses were recognized as cost of sales in the current period, generally consistent with the period in which the gain or loss of the underlying transaction was recognized. Cash flows associated with derivative transactions were classified in the statement of cash flows in a manner consistent with those of the exposure being hedged.
 
F-17
 
 
European Micro Holdings, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
As of June 30, 2003(continued)
 
6 Related Party Information

 
There have not been any related party sales or purchases since June 2001. During February 2003, John B. Gallagher was paid $30,000 for his work on the Big Blue Products, Arlington Computer Products and the former shareholder of Sunbelt lawsuits. During the same period Harry Shields was paid $32,623 as reimbursement of legal fees related to the negotiation of banking terms during the period of noncompliance with the loan covenants.

Due from/to related parties

a)  
No amounts were due from related parties at June 30, 2003.
 
b)  
Due to related parties consists of a note payable to Harry Shields in the amount of $192,000.
 
Nature of related party relationships

Technology Express
 
Until 1996, Technology Express was a full service authorized reseller of computers and related products based in Nashville, Tennessee, selling primarily to end-users. Technology Express was sold to Inacom Computers in 1996. Concurrently with the sale, Mr. Shields founded a new computer company with the name Technology Express. This company was a distributor of computer products. Harry D. Shields, who is Co-Chairman, Co-President, a Director and shareholder (owning 31% of the outstanding shares) of European Micro Holdings, Inc., was president of Technology Express and owned 100% of the outstanding shares of capital stock of that company. Jay Nash, who is Chief Financial Officer, Treasurer and Secretary of European Micro Holdings, Inc., had been an employee of Technology Express since 1992.

Harry Shields
 
Harry D. Shields is Co-Chairman, Co-President, a Director and shareholder (owning 31% of the outstanding shares) of European Micro Holdings, Inc.

John B. Gallagher

John B. Gallagher is Co-Chairman, Co-President, Director and shareholder (owning 39% of the outstanding shares) of European Micro Holdings, Inc. He was also the president of American Micro Computer Center and owns 50% of the outstanding shares of capital stock in that company.
 
F-18
 
 
European Micro Holdings, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
As of June 30, 2003(continued)
7 Segment Information

 
The Company operated predominately in a single industry segment as a wholesale distributor of computer-based technology products and services. Geographic areas in which the Company operated included North America (United States and Canada), Europe (Austria, Belgium, Denmark, Finland, France, Germany, Great Britain, Greece, Holland, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and Sweden), and Other (Singapore). The Company’s reportable operating segments were based on geographic location generating the revenue, and the measure of segment profit was income from operations. The accounting policies of the segments were the same as those described in Note 1 - Summary of Significant Accounting Policies and Organization.

Financial information by geographic segments is as follows (in thousands): 
 
   
Year Ended June 30, 
  
   
2003
  
2002
  
Net Sales:
              
North America
  
$
-
  
$
3,153
  
Europe
    
-
    
7,777
  
Other
    
-
    
-
  
Total
  
$
-
  
$
10,930
  
               
Income (Loss) From Operations:
              
North America
  
$
(121
)
$
(517
)
Europe
    
3
    
(672
)
Other
    
-
    
(67
)
Total
  
$
(118
)
$
(1,256
)
               
Identifiable Assets:
              
North America
  
$
71
  
$
127
  
Europe
    
1,207
    
1,593
  
Other
    
-
    
23
  
Total
  
$
1,278
  
$
1,743
  

The Company did not have any suppliers where purchases were in excess of 10% as a percentage of total sales in the years ended June 30, 2003 and 2002.

The Company did not have any customers with sales in excess of 10% as a percentage of total sales in the years ended June 30, 2003 or 2002.  
 
F-19
 
European Micro Holdings, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements
As of June 30, 2003(continued)
 
8 Stockholders’ Equity, Stock Options and Incentive Plans

Equity Line of Credit

On August 24, 2000, European Micro Holdings, Inc. entered into an Equity Line of Credit (the “Equity Credit Line”). The Company incurred costs of $217,000 to obtain and execute the Equity Line of Credit. On December 20, 2000, the Company raised $50,000 by issuing 25,020 shares of common stock under the Equity Line of Credit. The Company and the investor agreed to terminate the Equity Line of Credit effective May 15, 2001. In connection with such termination, all outstanding warrants held by the investor and the placement agent were terminated. The Company agreed to issue the placement agent warrants to purchase 500,000 shares of common stock at $5.00 per share, which warrants become exercisable only if the closing bid price of such common stock is $4.00 per share or more for ten consecutive trading days. These warrants expired on August 23, 2005. Since the closing bid price of the common stock was never $4.00 for ten consecutive trading days, the warrants never became exercisable, and as such no expense was recognized.

Employee Stock Purchase Plan

In January 1998, European Micro Holdings, Inc. adopted the 1998 Employee Stock Purchase Plan (the “employee plan”). A total of 50,000 common shares have been reserved for issuance under the plan. The shares issued under the employee plan will be purchased at 85% of market value or such higher percentage (not in excess of 100%) as may be established by the employee plan committee. The employee plan shall remain in effect until terminated by an action of the Board. No shares had been issued as of June 30, 2003.

Stock Incentive Plan

 
In January 1998, European Micro Holdings, Inc. adopted the 1998 Stock Incentive Plan (the “Plan”). A total of 500,000 common shares have been reserved for issuance under the Plan. The committee may grant to such participants as the committee may select options entitling the participants to purchase shares of common stock for the Company in such numbers, at such prices and on such terms and subject to such conditions, consistent with the terms of the Plan, as may be established by the committee. The Plan shall remain in effect until terminated by an action of the Board.

  A summary of the Company’s stock incentive plan is as follows:

   
2003
  
2002
  
   
Number of
Shares
  
Weighted Average Exercise Price
  
 
Number of Shares
  
Weighted Average Exercise Price
  
Outstanding at beginning of year
    
-
          
317,500
  
$
6.84
  
Granted
   
-
          
-
        
Exercised
    
-
          
-
        
Forfeited
    
-
          
(317,500
)
  
($6.84
)
Outstanding at year end
    
-
          
-
        
Available for grant at year end
    
500,000
          
500,000
        
 
Warrants issued to placement agent are not part of the stock incentive plan and as such are not included in the above tables.

F-20
 
 
European Micro Holdings, Inc. and Subsidiaries
 
Notes to the Consolidated Financial Statements
As of June 30, 2003(continued)
 
9 Subsequent Events

In December 2001, a former shareholder of Sunbelt served a statutory demand upon European Micro UK in the sum of 92,710 pounds sterling. This sum was subsequently reduced to 73,940 pounds sterling. On April 19, 2002 Judge Kershaw QC granted the European Micro UK an injunction preventing the former shareholder from presenting a petition in this sum based upon the statutory demand. On July 31, 2002 the Court of Appeal dismissed European Micro UK’s claim and ordered the costs to be paid. In August 2003, the debt plus costs and interest owed the former shareholder of Sunbelt, was assigned to Harry Shields, a shareholder of European Micro Holdings, Inc., for the sum of 107,000 pounds sterling. This amount is included in due to related parties in the accompanying consolidated statement of net assets in liquidation as of June 30, 2003. This amount plus interest of 9,483 pounds sterling was repaid by European Micro UK to Harry Shields on August 10, 2004.
 
In October 2003, the Company and its affiliated defendants entered into a settlement agreement with Big Blue Products whereby the plaintiffs discontinued the litigation and released all claims against the defendants. The parties bore their own legal costs and expenses and exchanged mutual releases. (See Note 4)
 
On July 12, 2005, the Company declared a cash dividend in the aggregate amount of $200,000 on the issued and outstanding shares of Common Stock held by shareholders of record as of August 1, 2005. The dividend was paid on September 1, 2005. As of July 31, 2006, liquidation is almost complete with the only asset being cash in the approximate amount of $20,000.
 
F-21