UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

For the fiscal year ended December 31, 2003
Commission File No. 000-12739

AESP, INC.

(305) 944-7710

SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE EXCHANGE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE EXCHANGE ACT:
 
Common Stock $.001 Par Value

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

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES o NO þ

     The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing bid price of the Company’s common stock, $.001 par value per share (the “Common Stock”) as of June 27, 2003 of $.63 per share (as reported on the NASDAQ SmallCap Market), was approximately $2,798,197. There is no non-voting stock.

     The number of shares of the Company’s Common Stock which were outstanding as of March 26, 2004 was 6,143,596.

DOCUMENTS INCORPORATED BY REFERENCE

     Certain exhibits listed in Part IV of this Annual Report on Form 10-K are incorporated by reference from prior filings made by the Registrant under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended.

AESP, INC.

TABLE OF CONTENTS

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Forward-looking statements

     Unless the context otherwise requires, references to “AESP, Inc.,” “AESP,” “The company,” “we,” “our” and “us” in this Annual Report on Form 10-K includes AESP, Inc. and its subsidiaries. The matters discussed in this annual report on Form 10-K contain or may contain forward-looking statements about such matters as our operations, our financial performance and our prospects within the meaning of Section 21E of the Securities Exchange Act of 1934, which are intended to be covered by the safe harbors created thereby. These forward-looking statements involve risks, uncertainties, and assumptions, including, in addition to those described below, in “Risk Factors Related to Our Operations,” in “Risk Factors Related to Our Financial Condition And Results Of Operations,” and elsewhere in this annual report on Form 10-K:

	•		the Company’s ability to refinance its remaining U.S. line of credit, which is currently due April 20, 2004,
	•		competition from other manufacturers and distributors of computer networking products both nationally and internationally,
	•		Our ability to generate sales of our products at sufficient gross margins to operate our business on a cash flow and profitable basis,
	•		the balance of the mix between original equipment manufacturer sales (which have comparatively lower gross profit margins with lower expenses) and networking sales (which have comparatively higher gross profit margins with higher expenses) from period to period,
	•		our dependence on third parties for manufacturing and assembly of products, and
	•		the absence of supply agreements.

These and additional factors are discussed herein.

     You should carefully consider the information incorporated by reference, and information that we file with the Securities and Exchange Commission (“SEC”) from time to time. The words “may,” “will,” “expect,” “anticipate,” “believe,” “continue,” “estimate,” “project,” “intend,” and similar expressions used in this Form 10-K are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly release any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. You should also know that such statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions. Should any of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may differ materially from those included within the forward-looking statements.

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PART I

ITEM 1. BUSINESS.

THE COMPANY

     AESP, Inc. operates through two operating segments, the U.S. and Western Europe. The U.S. operating segment distributes two principal products, Signamax Connectivity Systems (“Signamax”) and Advanced Electronic Manufacturing (“AEM”), both based in North Miami, Florida. The Western Europe operating segment principally distributes Signamax products and other manufacturers’ product lines through the European Distribution Group, which is based at the offices of our European subsidiaries. We also distribute our products through exclusive distributors in Russia and the Ukraine.

     U.S. OPERATING SEGMENT

        SIGNAMAX CONNECTIVITY SYSTEMS

     Signamax is responsible for the worldwide design and development, as well as the North and South American marketing and sales of Signamax computer networking products. The Signamax mission is to provide for total end-to-end network connectivity needs, from the server to the user’s workstation. Signamax operates under two product lines, Network Connectivity products (active networking line) and Premise Connectivity products (passive networking line).

     The Signamax Network Connectivity line offers a wide range of high performance, cost-effective options for Ethernet applications, including media converters, KVM (keyboard, video & mouse) switches and other switches and network interface cards. This line focuses on the growing demand for high-speed, high bandwidth connectivity.

     The Signamax Premise Connectivity line enables the user to build a network of wiring solutions meeting current industry standards for the equipment room, distribution cabling and cross-connects to work areas. This line includes patch panels, wall outlets, patch cords and accessories for a wide range of copper and fiber optic applications.

     The Network Connectivity and Premise Connectivity lines have been designed to work together as a team to offer complete solutions for most network needs.

     Industry professionals believe that market trends will lead to an increased demand for networking and computer connectivity products designed to maximize and enhance the functionality of computers, and thereby create a continuing substantial market for our products. Signamax’s goal is to design, manufacture and market computer networking products which can integrate any computer into any network at any time. Our primary focus is to anticipate technological advancements and consumer preference as far in advance as possible, develop new products and improved features to meet such market demands and transform ideas from concept to market as quickly as possible. Our strategic objective is to become a leader in the computer networking equipment market, and to make the brand name “Signamax” synonymous with state-of-the-art hardware in this segment.

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        ADVANCED ELECTRONIC MANUFACTURING

     Our AEM group manufactures custom, private labeled products, for U.S. companies primarily in the communications, computer and medical markets. AEM works closely with technical and sales personnel at our customers to transform conceptual designs into viable subassemblies or fully marketable end-products. Our goal is to become an extension of our customer’s technical, material acquisition and production departments, thereby enabling our customer to get to market faster with higher quality products.

     WESTERN EUROPE OPERATING SEGMENT

        EUROPEAN DISTRIBUTION GROUP

     This group consists of our European subsidiaries in Sweden, Norway, Germany and the Czech Republic. They offer Signamax and their own branded product lines. Each subsidiary runs its own sales organization with an in-house sales force. Primary customers include installers, distributors and mail order catalogs. We have recently organized a new subsidiary, Signamax GmbH, which is responsible for coordinating the sales and distribution efforts of our Signamax line of products throughout Europe, the Middle East and Africa.

     For both operating segments we arrange with various manufacturers to manufacture and assemble our products using primarily industry standard design and manufacturing specifications provided by us (in the case of Signamax and the European Distribution Group) and based on the requirements of our customers with respect to products sold by our AEM Group. Our manufacturers are located primarily in the Far East, allowing us to obtain competitive pricing for our products due to comparatively lower labor costs in the production of our products. We also assemble a small percentage of our products at our North Miami and Pennsylvania facilities, as well as at the offices of our European subsidiaries. Typical customers are electrical, datacom and telecom distributors for Signamax and U.S. manufacturers for AEM. Our networking products are marketed under the name “Signamax Connectivity Systems” and our AEM products are private labeled under the customer’s name. We generally do not offer our products to end users.

     Our strategy is to increase revenues and operating income through organic growth combined with growth through acquisitions.

     We were incorporated in Florida in 1983. Our principal executive offices are at 1810 N.E. 144th Street, North Miami, Florida 33181, and our telephone number is (305) 944-7710.

RISK FACTORS RELATED TO OUR OPERATIONS

     In addition to other information contained in or incorporated by reference into this Form 10-K, you should understand the following risk factors related to our operations:

Our liquidity is limited, the remaining balance of our U.S. bank line of credit is due shortly and our auditors have placed a going concern modification on our consolidated financial statements at December 31, 2003.

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     We had net losses of $2.7 million, $2.3 million and $4.2 million in 2003, 2002 and 2001, respectively. We also have no working capital and a current ratio of 1.00 at December 31, 2003. Further, our U.S. bank line of credit in the amount of $631,000 is due on April 20, 2004. While we expect to have sufficient funds for the purpose of repaying our U.S. bank line of credit and for working capital, there can be no assurance of this fact. Our failure to repay our lender (or to obtain additional extensions of the maturity date of our line of credit) or to have sufficient working capital to operate our business could have a material adverse impact on us. We are currently seeking to raise additional capital through sales of our equity securities to fund repayment of our bank line of credit and for working capital. There can be no assurance we will be able to raise additional funds or as to the dilution that may result from such sales. Our independent certified public accountants have included an explanatory paragraph in their report with respect to our consolidated financial statements at December 31, 2003. The paragraph states that our recurring losses from operations, working capital deficit, failure to maintain compliance with the financial covenants of our financing arrangements and maturities during 2004 of our lines of credit with financial institutions raise substantial doubt about our ability to continue as a going concern. See Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” and Item 7. “Management’s Discussion of Financial Position and Results of Operations”.

Our industry experiences rapid technological change which may decrease revenues

     In general, the computer industry is characterized by rapidly changing technology. We must continuously update our existing products to keep them current with changing technology and must develop products to take advantage of new technologies that could render existing products obsolete. Our personnel, through discussions with customers, attendance at trade and association meetings and industry experience, identify new and improved technologies and work closely with our vendors, who are responsible for the cost of developing and building these products. We do not directly spend significant funds on research and development but instead rely on our suppliers for developmental expertise. These products must be compatible with the computers and other products with which they are used. Our future prospects are dependent in part on our ability to develop new products with our vendors that address new technologies and achieve market acceptance. We may not be successful in these efforts. If we were unable, due to resource constraints or technological or other reasons, to develop and introduce such products in a timely manner, this inability could have a material adverse effect on our revenues. In addition, due to the uncertainties associated with the evolving markets which we address, we may not be able to respond effectively to product demands, fluctuations, or to changing technologies or customer requirements and specifications, thereby decreasing our future revenues.

The computer networking industry is cyclical which could make our revenues more volatile

     The computer networking industry has been affected historically by general economic downturns, which have had an adverse economic effect upon manufacturers, distributors and retailers of computers and computer-related products. General economic downturns have traditionally had adverse effects upon the computer-related industry due to the restrictions on expenditures for products of this industry during recessionary periods. We may not be able to predict or respond to such cycles within the industry, which could have a material adverse effect on our future revenues.

     The computer networking industry is also characterized by inevitable price erosion across the life cycle of products and technologies. In the face of constantly shrinking gross margins, our strategy is to seek out low cost producers without sacrificing quality and to seek to develop and maintain efficient internal operations allowing us to control our internal costs and expenses.

     While the market for computer networking products is one of the fastest growing segments of the technology industry, the technology industry has historically experienced

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cyclical downturns. Any such downturns, unexpected changes in technology or shifts in the distribution channel for computer networking equipment could have a material adverse effect on our revenues and results of operations.

We are dependent on third parties for manufacturing and assembly; the lack of supply agreements could disrupt our delivery of inventory, which could materially increase our material costs and/or decrease our revenues

     We are dependent on a number of manufacturers, both domestic and foreign, for the manufacture and assembly of our products pursuant to our design specifications. Although we purchase our products from several different manufacturers, we often rely on an individual manufacturer to produce a particular line of products. Although we have several different product lines, and despite our efforts to minimize such reliance by having other manufacturers available should the need arise, these manufacturers are currently not bound by contract other than by individual purchase orders to supply us with our products. The loss of one or more manufacturers of our products may materially increase our material costs and/or decrease our revenues through an inability to deliver timely product to our customers. While most of the products sold by us are available from multiple sources, we may not be able to replace lost manufacturers of our products with others offering products of the same quality, with timely delivery and/or similar terms.

     Over the last five years, we have progressively expanded our supplier base. Presently, we work with approximately 75 suppliers. No source of supply accounted for more than 10% of our purchases during 2003, 2002 or 2001. We do not enter into supply or requirements contracts with our suppliers. We believe that purchase orders, as opposed to supply or requirement agreements, provide us with more flexibility in responding quickly to customer demand. Nevertheless, the loss of one or more of our suppliers could increase our product costs and negatively affect our revenues by increasing delivery times.

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We utilize foreign suppliers and manufacturers which may increase our costs

     Most of the components we utilize in the manufacture and assembly of our products are obtained from foreign countries and a majority of our products are manufactured or assembled in foreign countries, such as the United Kingdom, Czech Republic, China and Taiwan. The risks of doing business with companies in these areas include potential adverse changes in the diplomatic relations of foreign countries with the United States, changes in the relative purchasing power of the United States dollar, hostility from local populations, changes in exchange controls and the instability of foreign governments, increases in tariffs or duties, changes in China’s or other countries’ most favored nation trading status, changes in trade treaties, strikes in air or sea transportation, and possible future United States legislation with respect to import quotas on products from foreign countries and anti-dumping legislation, any of which could result in delays in manufacturing, assembly and shipment and our inability to obtain supplies and finished products and/or commercially reasonable costs. Alternative sources of supply, manufacture or assembly may be more expensive. We utilize the services of an unaffiliated trading company with offices in China and Taiwan which assists us in working with our suppliers in the Far East. Although we have not encountered significant difficulties in our transactions with foreign suppliers and manufacturers in the past, we may encounter such difficulties in the future.

We are dependent on third parties for distribution; a loss of any key distributors could decrease our revenues

     Substantially all of our revenues are derived from the sale of our products through third parties. Domestically, our products are sold to end users primarily through original equipment manufacturer customers, wholesale distributors, value added resellers, mail order companies, computer superstores and dealers. Internationally, our products are sold through wholesale distributors and mail order companies, dealers, value added resellers, as well as to original equipment manufacturer customers. Accordingly, we are dependent on the continued viability and financial stability of our resellers. Our resellers often offer products of several different companies, including, in many cases, products that are competitive with our products. Our resellers may discontinue purchasing our products or providing our products with adequate levels of support. The loss of, or a significant reduction in sales volume to, a significant number of our resellers could have a material adverse effect on our revenues and results of operations.

We are dependent on significant customers; the loss of which could decrease revenues

     Our exclusive distributor in Russia accounted for 12% of our net sales for 2003, 10% of our net sales in 2002 and 14% of our net sales in 2001. We are generally sell our products to our Russian distributor on a paid-in-advance basis. During these same periods, our top ten customers (including our Russian distributor) accounted for 33%, 33% and 27%, respectively, of our net sales. No customer (other than our Russian distributor) accounted for more than 10% of our net sales for the three years ended December 31, 2003. The loss of one or more significant customers could have a material adverse effect on our cash flow and results of operations.

We maintain significant inventory which puts us at risk for additional obsolescence write-offs

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     Although we monitor our inventory on a regular basis, we need to maintain a significant inventory in order to ensure prompt response to orders and to avoid backlogs. We may need to hold such inventory over long periods of time and the capital necessary to hold such inventory restricts the funds available for other corporate purposes. Holding inventory over long periods of time increases the risk of inventory obsolescence. A significant amount of obsolete inventory could increase our expenses and have a material adverse effect on our revenues and our results of operations.

     We recorded provisions for inventory obsolescence totaling approximately $210,000 in 2003, $538,000 in 2002 and $1,100,000 in 2001 due to the significant decrease in demand for our products because of lower spending on technology due to a generally sluggish economy, as well as our ongoing transition of focusing our core business on networking products instead of PC connectivity products. These provisions were calculated based on the carrying value of specific current inventory balances compared to current sales volumes and prices and estimated future sales price analysis prepared by our sales departments for our products in each of our geographic areas of operations.

Competitive conditions could increase our costs, reduce our revenues and otherwise adversely affect our results of operations

     We compete with many companies that manufacture, distribute and sell similar products. In our active networking product line, we compete with hundreds of companies, including Cisco, 3Com, Transition Networks and Allied Telesyn. In this market, we believe we compete favorably on service and value, offering a high performance to price ratio. In our passive networking product lines, we compete with approximately 30 – 50 companies, such as Ortronics, Tyco Electrical, Netconnect and Leviton. In these markets, we stress our breadth of products, service, price and performance. For our AEM products, we compete with hundreds of relatively small and several large companies worldwide, including Aim Electronics, ASKA Communications, Condor Power Supplies and AsiaLink International Technology. In this market, we compete favorably on quality and additional services such as product availability and design protection. While these companies are largely fragmented throughout different sectors of the computer connectivity industry, many of these companies have greater assets and possess greater financial and personnel resources than we do. Some of these competitors also carry product lines that we do not carry and provide services which we do not provide. Competitive pressure from these companies currently adversely affect our business and will likely continue to affect our business and financial condition in the future by causing erosion of gross margins in these difficult economic times. In the event that more competitors begin to carry products which we carry and price competition with respect to our products significantly increases, competitive pressures could force us to reduce the prices of our products, which would result in reduced profit margins. Prolonged price competition would have a material adverse effect on our operating results and financial condition. A variety of other potential actions by our competitors, including increased promotion and accelerated introduction of new or enhanced products, could also have a material adverse effect on our revenues and results of operations. We may not be able to compete successfully in the future.

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Our growth strategy includes future acquisitions; we may not be able to complete any acquisitions on suitable terms, which could adversely affect our results of operations and future growth

     One element of our growth strategy involves growth through the acquisition of other companies, assets and/or product lines that would complement or expand our business. We are seeking companies that market to the networking, telecommunications and cable audio/video and computer industries. We believe that acquisitions, mergers, asset purchases or other strategic alliances in these categories should enable us to achieve operating leverage on our existing resource base. Our ability to expand by acquisition has been, and will continue to be limited by the availability of suitable acquisition candidates, in both the United States and internationally, and by our financial condition and the price of our common stock. Our ability to grow by acquisition is dependent upon, and will be limited by, the availability of suitable acquisition candidates and capital, and by restrictions contained in our credit agreements, which restrictions include maintaining certain minimum ratios of assets and liabilities and not permitting any indebtedness, guarantees or liens which could materially affect our ability to repay our loans. In addition, acquisitions involve risks that could adversely affect our costs and operating results, including the assimilation of the operations and personnel of acquired companies, the possible amortization of acquired intangible assets and the potential loss of key employees of acquired companies. We may not be able to complete any acquisitions on suitable terms. No material commitments or binding agreements have been entered into to date, and we may not complete any future acquisitions. Other than as required by our articles of incorporation, by-laws, and applicable law, our shareholders generally will not be entitled to vote upon such acquisitions.

We rely on executive officers and key employees

     Our continued success is dependent to a significant degree upon the services of our executive officers and key employees throughout our organization and upon our ability to attract and retain qualified personnel experienced in the various phases of our business. Our ability to operate successfully could be jeopardized if one or more of our executive officers and key employees were unavailable and capable successors were not found.

Our principal shareholders may control us through the election of the entire board of directors

     Assuming no exercise of outstanding warrants and options, Messrs. Stein and Briskin own collectively 1,602,014 shares of our common stock, representing approximately 26% of our outstanding common stock. Since our articles of incorporation and bylaws do not provide for cumulative voting, as a result of their ownership of their shares of common stock, Messrs. Stein and Briskin are effectively able to control us through the election of our entire board of directors and the appointment of our officers.

Control by our principal shareholders may limit shareholders’ ability to receive a premium in a change of control transaction, which may adversely affect the market price of our common stock

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     Because of their ownership of 26% of our common stock, it is unlikely that we could, without Messrs. Stein’s and Briskin’s approval, be able to consummate transactions involving the actual or potential change in our control, including transactions in which the holders of our common stock might otherwise receive a premium for their shares over then current market prices.

Our stock may be subject to great price volatility

     The market price of our common stock has fluctuated in the past and is likely to continue to be highly volatile and could be subject to wide fluctuations. In addition, the stock market generally, and technology-related securities in particular, may experience extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of companies. Such fluctuations, and general economic and market conditions, may adversely affect the market price of our common stock.

Our stock may no longer continue to meet the listing requirements of the Nasdaq SmallCap Market

     Our common stock is currently traded on the Nasdaq SmallCap Market. In the event we are no longer in compliance with the Nasdaq SmallCap Market continued listing criteria, which require, among other things, that the market value of our publicly held shares is not less than $1,000,000 and that the closing bid price of our publicly held shares is not less than $1.00 for more than 30 consecutive trading days (which has occurred in the past and may occur in the future), then Nasdaq may delist our common stock. If our shares are delisted, we cannot assure you that our shares will be as liquid as they have historically been on the Nasdaq SmallCap Market. Further, the market price for our shares may become more volatile than it has been historically.

If our common stock is deemed a “penny stock”, its liquidity will be adversely affected

     If the market price for our common stock falls and remains below $1.00 per share (which has occurred in the past and may occur in the future), our common stock may be deemed to be penny stock. If our common stock is considered penny stock, it would be subject to rules that impose additional sales practices on broker-dealers who sell our securities. For example, broker-dealers must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. Also, a disclosure schedule must be prepared before any transaction involving a penny stock and disclosure is required about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Monthly statements are also required to be sent disclosing recent price information for the penny stock held in the account as well as information on the limited market in penny stocks. Because of these additional obligations, some brokers may not handle transactions in penny stocks. If our stock is deemed a “penny stock”, it could have an adverse effect on the liquidity of our common stock.

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The exercise of a substantial number of warrants would increase the amount of our common stock in the trading market, which could substantially affect the market price of our common stock

     We distributed a warrant dividend to the holders of our common stock as of the record date of April 10, 2003. We issued to holders of record on the record date one warrant for each common share which they owned on that date, or an aggregate of 5,984,000 warrants. The warrants became exercisable September 23, 2003, upon the effectiveness of the registration statement registering our sale of the shares of common stock underlying the warrants. The warrants expire on September 23, 2004, unless our board extends the expiration date of the warrants. We recently reduced the exercise price of the warrants to $1.25 for the 90 day period ending June 15, 2004. In the event of the exercise of a substantial number of warrants, the resulting increase in the amount of our common stock in the trading market could substantially affect the market price of our common stock. See Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” for a description of the warrant dividend.

Anti-takeover provisions may discourage certain transactions

     Our articles of incorporation and by-laws contain provisions that may have the effect of discouraging certain transactions involving an actual or threatened change of control of us. In addition, our board of directors has the authority to issue up to 1,000,000 shares of preferred stock in one or more series and to fix the preferences, rights and limitations of any such series without shareholder approval. In addition, our executive officers (Messrs. Stein and Briskin) have provisions in their employment agreements requiring us to pay each of them $750,000 in the event of a change in control of our company. Furthermore, such payments which exceed a certain level of compensation may not be deductible by us for federal corporate income tax purposes. The ability to issue preferred stock and the change in control payments could have the effect of discouraging unsolicited acquisition proposals or making it more difficult for a third party to gain control of our company, or otherwise could adversely affect the market price of our common stock.

BUSINESS OPERATIONS

General

     The computer networking market consists of wholesale distributors: and three resale categories: retail stores, catalog companies and web-based selling organizations. Our strategy is to market our Signamax branded products to all four of these customer groups.

     Distributors of computer networking products range in size from channel dominant companies with annual sales of over $1 billion to independent or specialized distributors with annual sales of $1-3 million. Small distributors dominate the channel, reflecting both the specialized nature of technology and the variety of original equipment manufacturers and end-user customers for networking hardware.

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     In general, the computer networking industry is characterized by rapidly changing technology. We must continuously update our existing products to keep them current with changing technology and we must develop new products to take advantage of new technologies that could render existing products obsolete. Our personnel, through discussions with customers, attendance at trade and association meetings and industry experience, identify new and improved technologies and work closely with our vendors, who are responsible for the cost of developing and building these products. We do not directly spend significant funds on research and development but instead relies on its suppliers for development expertise. These products must be compatible with the computers and other products with which they are used. Our future prospects are dependent in part on our ability to develop new products that address new technologies and achieve market acceptance. We may not be successful in these efforts. If we were unable, due to resource constraints or technological or other reasons, to develop and introduce such products in a timely manner, this inability could have a material adverse effect on our future results of operations. In addition, due to the uncertainties associated with the evolving markets which we address, we may not be able to respond effectively to product demands, fluctuations, or to changing technologies or customer requirements and specifications. See “Risk Factors Related to our Operations.”

     The computer networking industry has been affected historically by general economic downturns, which have had an adverse economic effect upon manufacturers, distributors and retailers of computers and computer-related products. General economic downturns have traditionally had adverse effects upon the computer-related industry, due to the restrictions on expenses for products of this industry during recessionary periods. We may not be able to predict or respond to such cycles within the computer industry.

     The computer networking industry is also characterized by inevitable price erosion across the life cycle of products and technologies. In the face of constantly shrinking gross margins, our strategy is to seek out low cost producers without sacrificing quality and to seek to develop and maintain efficient internal operations, allowing us to control our internal costs and expenses.

     While the market for computer networking hardware has historically been one of the fastest growing segments of the technology industry, the technology industry is currently recovering from a cyclical downturn. If this recovery stalls, or if there are unexpected changes in technology or shifts in the distribution channel for computer networking equipment, these developments could have a materially adverse effect on us.

     Our AEM products are generally sold to U.S. manufacturers who require superior pricing at equal to or better quality than they are currently receiving from their U.S. vendors. These customers normally range in annual sales from $5 million to $100 million. Due to a wider range of industries served, our AEM business is less dependent on the health of any one industry and is, therefore, less affected by any particular industry cycle.

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Products and Services

     Our product line consists primarily of two main categories: Signamax computer networking products and AEM custom, private label products. In our European operations, we also distribute third party computer networking products.

     Computer networking products are products which connect a computer to another computer, a network server, the Internet, a public switched telephone network or another enterprise. Networking products are divided into two sub-categories: active and passive. Active networking products include network interface cards, media converters and switches. Passive networking products include patch panels, patch cables and wall outlets.

     We are constantly expanding and changing our product line within the aforementioned categories to expand the total number of products we can offer customers, to attract new customers, to penetrate new geographic and vertical markets and to increase gross sales. By expanding our product line to include products for different voltages, frequencies and connection configurations, and warehousing these products near potential customers, we have successfully expanded our sales activities into a number of Western and Eastern European countries.

     In order to provide assistance to our customers and to be competitive with other companies in our industry, we offer our customers several services. These services include: enhanced packaging; custom packaging; technical and design support (where the customer receives advice from us on which product or design specification is appropriate for a particular situation); assembly support (where a customers relies on us to assemble the component parts the customer traditionally had done itself); training (where the customer receives training from us on the different capabilities and applications of our products); and quality control.

     AEM custom, private label products are normally made in partnership with our customers, whereupon we work closely with technical and sales personnel at our customers to transform conceptual designs into viable subassemblies or fully marketable end-products.

Manufacturing and Suppliers

     All our products have been manufactured to our specifications. Those specifications are derived either from specifications provided to us by our AEM customers or from industry standard specifications, in the case of Signamax or European subsidiary products.

     Due to the high volume and labor intensive nature of manufacturing computer networking products, most of the products we sell are manufactured outside the United States in such countries as Taiwan, the Peoples’ Republic of China, the United Kingdom and the Czech Republic. We utilize the services of an unaffiliated trading company with offices in Taiwan and China which assists us in working with our suppliers in the Far East. The trading company acts as a manufacturers representative by coordinating our orders and shipments with our Far East suppliers in exchange for payment based on a percentage of orders invoiced to us. We have made no long-term commitment to the trading company and is able to terminate the arrangement on short notice. We also assemble a small percentage of our products at our North Miami, Florida and Pennsylvania facilities and at our European subsidiaries.

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     For the production of each specific type of product, we usually maintain an on-going relationship with several suppliers to insure against the possibility of problems with one supplier adversely impacting our business. For the production of AEM products, we usually use a single supplier for each product, with other factories providing competitive price quotes and being available to supply the same product if a primary supplier fails to supply us with the required product for reasons outside our control. However, we may not be able to easily replace a sole source of supply if required. In an effort to produce defect-free products and maintain good working relationships with our suppliers, we keep in contact with our suppliers, regularly inspecting the manufacturing facilities of our suppliers and implementing quality assurance programs in our suppliers’ factories.

     Over the last five years, we have progressively expanded our supplier base. Presently, we work with approximately 75 suppliers. No source of supply accounted for more than 10% of our purchases during 2003, 2002 or 2001. We do not enter into supply or requirements contracts with our suppliers. We believe that purchase orders, as opposed to supply or requirement agreements, provide us with more flexibility in responding quickly to customer demand. Nevertheless, the loss of one or more of our suppliers could have an adverse impact on us.

     Most of the components we utilize in the manufacture and assembly of our products are obtained from foreign countries and a majority of our products are manufactured or assembled in foreign countries, such as the United Kingdom, the Peoples’ Republic of China, the Czech Republic, and Taiwan. The risks of doing business with companies in these areas include potential adverse changes in the diplomatic relations of foreign countries with the United States, changes in the relative purchasing power of the United States dollar, hostility from local populations, changes in exchange controls and the instability of foreign governments, increases in tariffs or duties, changes in China’s or other countries’ most favored nation trading status, changes in trade treaties, strikes in air or sea transportation, and possible future United States legislation with respect to import quotas on products from foreign countries and anti-dumping legislation, any of which could result in delays in manufacturing, assembly and shipment and our inability to obtain supplies of finished products. Alternative sources of supply, manufacture or assembly may be more expensive. Although we have not encountered significant difficulties in our transactions with foreign suppliers and manufacturers in the past, we may encounter such difficulties in the future. See “Risk Factors Related to Our Operations.”

Quality Control

     Our goal is to provide our customers with defect-free products. Working with our primary manufacturers and often with our manufacturers of various component parts, we have instituted quality control measures at five stages throughout the manufacturing process. At the first stage, we work with our primary manufacturers to institute a general quality control check upon the entry of the various component parts into the primary manufacturers’ factory (a.k.a. the incoming inspection). At the second stage, the primary manufacturer checks to ensure that the component parts function properly. The third and fourth stages of quality control occur after each molding process, with the final product being subject to quality control at the time of shipment to us. The fifth and final stage of quality control occurs at one of our distribution warehouses (North Miami, Germany, Czech Republic, Sweden and Norway). At this final stage of quality

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control, we test a certain percentage of each shipment of products we receive to ensure the products meet our quality standards.

     In 1998, we were certified as being in compliance with the “ISO 9001” standard. The ISO 9001 standard is an international manufacturing standard which is becoming more prevalent across numerous industries. Almost all of our current suppliers are either ISO 9001 compliant or in the process of implementing ISO 9001 procedures.

Customer Base

     Our customer base is divided into two primary categories: AEM customers and Signamax and European computer networking customers. AEM customers are generally manufacturers of computers and computer-related equipment, communications equipment and medical devices, which use our products as part of their finished products. Signamax and European computer networking customers are local and regional resellers, value-added resellers and distributors, educational institutions, web-based selling organizations and catalog houses. The resale mass merchandising market represents a significant growth area for us. We generally do not offer our products directly to end-users.

     Substantially all of our revenues are derived from the sale of our products through third parties. Domestically, our products are sold to end users primarily through AEM customers, wholesale distributors, value added resellers, mail order companies, computer superstores and dealers. In Europe, our products are sold through wholesale distributors, installers and mail order companies, dealers, value added resellers and web-based distributors. Accordingly, we are dependent on the continued viability and financial stability of our resale customers. Our resale customers often offer products of several different companies, including, in many cases, products that are competitive with our products. Our resale customers may not continue to purchase our products or provide us with adequate levels of support. The loss of, or a significant reduction in sales volume to, a significant number of our resale customers could have a material adverse effect on our results of operations. See “Risk Factors Related to Our Operations.”

     Sales to our exclusive distributor in Russia, AESP-Russia, accounted for 12% of our net sales for 2003, 10% of our net sales for 2002 and 14% of our net sales for 2001. We generally sell our products to our Russian distributor on a paid-in-advance basis. Our top 10 customers (including AESP-Russia) accounted for approximately 33%, 33% and 27% of our net sales for the years ended December 31, 2003, 2002, and 2001, respectively. Other than AESP-Russia, no customer accounted for more than 10% of our net sales in 2003, 2002 or 2001. International sales are a significant portion of our consolidated worldwide sales. See Note 6 of Notes to the Consolidated Financial Statements for the disclosure on the geographic areas of our business.

     We believe that due to the vagaries of the computer networking industry, it is likely that some customers who are significant customers in one period may become insignificant customers in future periods and vice versa. However, the loss of one or more significant

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customers during any particular period could have a material adverse impact on our future business and results of operations.

Marketing and Sales

     In the U.S. our Signamax marketing and sales efforts are directed by our Sales and Marketing department. From a marketing perspective, this department is responsible for, among other things, publishing our catalogs for each product line, assisting our sales group in preparing for sales shows, advertising our products in industry publications, working with mail-order catalogs to prepare advertising space in such catalogs, and providing designs for packaging our products. From the sales perspective, this department is responsible for, among other things, contacting potential customers with information and prices for our products, managing our roster of manufacturing representatives, following leads from trade shows, providing customer support and visiting customers on a regular basis. The department is divided in responsibility by product line and/or geographic location.

     AEM sales are handled by salespersons located in our headquarters in North Miami, Florida as well as through key independent sales representatives. Our AEM sales force is responsible for preparing company brochures, marketing and sales campaigns, generating and responding to customer leads and requests, providing customer support and visiting customers on a regular basis.

     All AEM customers receive their shipments from our North Miami warehouse, California third party warehouse or directly from the factory manufacturing their products. Signamax sales are generally handled from our headquarters in North Miami, Florida and from our German, Swedish, Norwegian, and Czech Republic offices and warehouses.

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Competition

     In our Signamax products, we compete with many companies that manufacture, distribute and sell computer networking products. In our active networking product line, we compete with hundreds of companies worldwide, including Cisco, 3Com, Transition Networks and Allied Telesyn. In this market, we compete favorably on service and value, offering a high performance to price ratio. In our passive networking product lines, we compete with approximately 30 to 50 companies worldwide, such as Ortronics, Tyco Electrical, Netconnect and Leviton. With these markets, we stress our breadth of products, service, price and performance. For our AEM products, we compete with hundreds of relatively small and several large companies worldwide, including Aim Electronics, ASKA Communications, Condor Power Supplies and AsiaLink International Technology. In this market, we compete favorably on quality and additional services such as product availability and design protection. While these companies are largely fragmented throughout different sectors of our industries, many of these companies have greater assets and possess greater financial and personnel resources than we do. Some of these competitors also carry product lines which we do not carry and provide services which we do not provide. Competitive pressure from these companies may materially adversely affect our business and financial condition in the future. In the event that more competitors begin to carry products which we carry and price competition with respect to our products significantly increases, competitive pressures could force us to reduce the prices of our products, which would result in reduced profit margins. In our Norwegian market sales volume has been adversely affected by a competitive situation involving former employees who established a competing company. Prolonged price competition would have a material adverse effect on our operating results and financial condition. A variety of other potential actions by our competitors, including increased promotion and accelerated introduction of new or enhanced products, could also have a material adverse effect on our results of operations. We may not be able to compete successfully in the future. See “Risk Factors Related to our Operations.”

Strategy to Increase Signamax Networking Products & AEM Customer Base

     We intend to increase our revenues and income in the networking and original equipment manufacturer markets by continuing to broaden our customer base in existing markets and by expanding into new markets. In order to increase our national and international customer base, we intend to continue to market to large distributor catalog companies, to increase both our product lines and inventory and to expand our sales reach in the U.S., Eastern and Western Europe and in the future into Latin America, the Middle East and Africa. To expand our original equipment manufacturer customer base, we intend to expand our business with computer product and networking hardware manufacturers, and to solicit manufacturers in other fast-growing vertical markets, such as networking, telecommunications, medical instrumentation and cable television.

Strategic Acquisitions

     The other element of our growth strategy involves growth through the acquisition of other companies, assets and/or product lines that will compliment or expand our business. We are seeking companies which market to the networking, telecommunications, cable audio/video and computer industries. We believe that acquisitions, mergers, asset purchases or other strategic

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alliances in these categories should enable us to achieve operating leverage on our existing resource base.

     Our ability to expand by acquisition has been, and will continue to be, limited by the availability of suitable acquisition candidates, in both the United States and internationally, and by our financial condition and the market price of our common stock. Our ability to grow by acquisition is also impacted by restrictions contained in our credit agreements. See “Risk Factors Related to our Operations” for factors that impact our ability to complete acquisitions and for risks relating to acquisitions that we complete.

Corporate Organization

     Our operations are divided into six departments: (1) the Sales and Marketing Department, (2) the International Sales Department (including sales offices in Sweden, Germany, the Czech Republic, and Norway), (3) the Purchasing Department, (4) the Operations Department (including shipping, warehouse and quality control and production groups), and (5) the Finance/Accounting Department (including MIS). The Sales and Marketing Department covers sales in the United States, Canada, and Latin America. Account Managers and Customer Service Representatives service this department from our North Miami, Florida headquarters. The International Sales Department covers sales in Eastern and Western Europe, with offices in Sweden, Germany, the Czech Republic, and Norway, and exclusive distributors in Russia and Ukraine. See Note 6 of Notes to the Consolidated Financial Statements for disclosure on our operating segments.

Employees

     As of December 31, 2003, we employed personnel at the following locations:

     Company wide, 30 employees work in administration/accounting, 47 employees work in sales and marketing, and 40 employees work in operations. None of our employees are covered by collective bargaining agreements. We believe that our relationship with our employees is good.

Government Regulation

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     We are not currently subject to direct regulation by any government agency, other than regulations applicable to businesses generally, and there are currently few laws or regulations directly applicable to networking and computer connectivity products. There can be no assurance that laws or regulations adopted in the future relating to our business will not adversely affect our business.

License Agreement with Developer of Battery Restoration Technology

     In December 2003, we entered into a license agreement with Daidone-Steffens, LLC, an entity affiliated with Terrence Daidone, one of our directors. The license will permit us to use battery restoration technology currently being developed to revitalize used cell phone batteries and other battery products and market the restored batteries exclusively in the southeastern United States and on a non-exclusive basis worldwide.

     The licensor is presently completing the development process of its technology and expects to build a battery restoration line at our North Miami, Florida facility during 2004 (at a cost to us of approximately $150,000). No upfront fees were paid with respect to this license. However, we agreed;

	•		To issue a ten year option to the licensor to purchase 300,000 shares of our common stock at an exercise price of $.90 (vesting 100,000 shares once the production line is in place and thereafter ratably over a four-year period;
	•		To purchase all of our battery requirements from the licensor for cost plus 22%, and
	•		To pay a royalty of $.50 for each battery sold.

     We intend to market restored batteries in the southeastern United States and through our existing logistics base in Europe, Russia and the Ukraine.

     There can be no assurance that the licensor’s technology will be commercially feasible or that we can develop a profitable and cash flow positive operation using the licensed technology. We intend to raise capital to fund our operations with respect to this project. We cannot assure you that the required funding will be available to fund our obligations under this agreement.

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ITEM 2. PROPERTIES

     Our executive offices are located in North Miami, Florida. The table set forth below identifies the principal properties we currently utilize as of December 31, 2003. All properties are leased, are in good condition and are adequate for our present requirements. RSB Holdings, Inc., a related party, owns our corporate headquarters, product assembly and central warehouse, and leases such property to us. Under the terms of our credit agreement with Commercebank, RSB Holdings has executed landlord waivers, permitting the lender the priority right to enter our premises and seize collateral in the event of a default under the credit agreement. See Note 9 of Notes to Consolidated Financial Statements for information regarding the financial terms of our leases.

ITEM 3. LEGAL PROCEEDINGS

     As of the date of this Form 10-K, we were not a party to any material legal proceedings, nor, to our knowledge, are any such proceedings threatened.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of our shareholders during the fourth quarter of the 2003 fiscal year.

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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     Our common stock has been quoted on the NASDAQ Small Cap Market under the symbol “AESP” since February 12, 1997. Our common stock purchase warrants were quoted on the NASDAQ Small Cap Market from February 12, 1997 until they expired by their terms on February 12, 2002. The following table sets forth the high and low bid prices for our common stock for each quarter during our two most recent fiscal years, as reported by NASDAQ:

     At March 24, 2004, the number of holders of record of our common stock was 68. However, we estimate that there are also approximately 1,250 beneficial holders of our common stock.

     We have never paid any dividends on our common stock and we do not intend to pay any cash dividends on our common stock for the foreseeable future. We intend to reinvest our earnings, if any, in the growth and expansion of our business. Other than limitations on our borrowing based upon a borrowing base formula and other limitations imposed on us by our credit facility, there are no restrictions that limit our ability to pay dividends.

     The market price of our common stock has been volatile in the past and is likely to continue to be highly volatile and could be subject to wide fluctuations. In addition, the stock market generally, and technology-related securities in particular, may experience extreme price and volume fluctuations that may be unrelated to or disproportionate to the operating

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performance of companies. Such fluctuations, and general economic and market conditions, may adversely affect the market price of our common stock.

     In December 2002, we completed the sale of 1,187,500 shares of our common stock in a private placement at a price of $1.00 per share (before underwriting commissions and expenses aggregating $245,000), yielding net proceeds of $943,000. The private placement was completed in accordance with the exemption from registration provided in Section 4(2) of the Securities Act of 1933, as amended, and Regulation D thereunder. The net proceeds of the placement were used for working capital. In connection with the placement, the Company issued warrants to designees of Newbridge Securities Corporation and View Trade Securities Inc., who acted as the placement agents, to purchase an aggregate of 118,750 shares at an exercise price of $1.10 per share. We have registered for public resale the shares of common stock and the shares of stock issuable upon the exercise of the warrants sold in this private placement.

     In June 2001, we completed a private placement of 573,900 shares of our common stock at a price of $2.00 per share before underwriting commissions and expenses of $210,800. The private placement was completed in accordance with the exemption from registration provided in Section 4(2) of the Securities Act of 1933, as amended, and Regulation D thereunder. We used the net proceeds of the placement (approximately $.9 million) to complete the acquisition of Intelek and for working capital. In connection with the placement, we issued a warrant to designees of Newbridge Securities Corporation, which acted as the placement agent, to purchase 57,390 shares of our common stock at an exercise price of $2.20 per share. Additionally, we have subsequently registered for resale in the public market all of the shares of common stock issued in the Intelek acquisition and sold in the private placement.

     The Company’s common stock is listed on the Nasdaq SmallCap Market and is required to comply with the Nasdaq SmallCap Marketplace Rules. One of those rules requires that the Company obtain shareholder approval of issuances of more than 20% of the Company’s outstanding shares of common stock before issuance. The Company’s 2002 private placement, in which shares of the Company’s authorized but unissued common stock equal to 24.8% of the Company’s then outstanding common stock were issued, did not comply with the Nasdaq Marketplace Rules. In order to correct the Company’s violation of the rule, the Company, effective January 16, 2003, with the consent of Nasdaq, exchanged 230,000 shares of common stock sold in the private placement for an equal number of the Company’s Series A preferred stock. The preferred stock was then automatically converted back into common stock upon the Company’s shareholders’ approval of the share issuances at a special shareholders’ meeting held on March 26, 2003.

     In June 2003, we distributed to the holders of our outstanding common stock (the “Warrant Dividend”), as of the record date of April 10, 2003, on a pro-rata basis, common stock purchase warrants to purchase one share of common stock for each share owned as of the record date (the “Warrants”). Warrants to purchase 5,984,000 shares were issued in the warrant distribution. The Warrants are presently non-transferable and do not currently trade. The Warrant exercise period commenced on September 23, 2003, which is the date following the date of effectiveness of a registration statement registering the sale of the shares of common stock underlying the Warrants and will continue for a period of one-year thereafter. We recently

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reduced the exercise price of the Warrants. The current exercise price of the Warrants is as follows:

•

Until June 15, 2004, the Warrants are exercisable at an exercise price of $1.25 per share, and

•

Thereafter, until September 23, 2004 (the current expiration date of the warrants), the Warrants are exercisable at an exercise price of $5.50 per share.

     Our Board reserves the right at any time to modify the exercise price, expiration date and any other terms of the Warrants, including the restriction on transferability.

     Any proceeds received by us from the exercise of the Warrants will be used for general working capital purposes or for acquisitions. Additionally, we will pay NASD licensed broker-dealers a fee of ten percent (10%) of the gross proceeds received upon the exercise of the Warrants for their services in connection with the solicitation of the exercise of the Warrants. Such fee will only be paid in accordance with applicable NASD rules.

     Our Articles of Incorporation and By-Laws contain provisions that may have the effect of discouraging certain transactions involving an actual or threatened change of control of our company. In addition, our Board of Directors has the authority to issue up to 1,000,000 shares of preferred stock in one or more series and to fix the preferences, rights and limitations of any such series without shareholder approval. Further, two of our executive officers (Messrs. Stein and Briskin), who collectively at present own approximately 26% of our outstanding common stock, have provisions in their employment agreements requiring us to pay, under certain circumstances, each of them $750,000 in the event of a change in control of our company. Furthermore, such payments which exceed a certain level of compensation may not be deductible for us for federal corporate income tax purposes. The ability to issue preferred stock and the change in control payments could have the effect of discouraging unsolicited acquisition proposals or making it more difficult for a third party to gain control of our company, or otherwise could adversely affect the market price of our common stock.

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ITEM 6. SELECTED FINANCIAL DATA

     The following table represents our selected consolidated financial information. The selected financial data set forth below should be read in conjunction with the Consolidated Financial Statements and notes thereto and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations which contains a description of the factors that materially affect the comparability from period to period of the information presented herein.