Cash used in operating activities in the first nine months of fiscal year 2003 was $1,205 compared to cash provided by operating activities in the first nine months of fiscal year 2002 of $2,596. The cash used in operating activities during the period was primarily a result of our net loss and an increase in accounts receivable offset by an increase in accounts payable. Additionally, there was an increase in other current assets. The cash provided by operating activities during the nine months ended June 30, 2002 was a result of large reductions in accounts receivable, which were somewhat offset by a decrease in accounts payable.

        Cash used in investing activities was $1,000 for the first nine months of fiscal 2003 compared to cash provided by investing activities of $2,461 for the same period last year. Cash used in investing activities of $1,000 for the nine months ended June 30, 2003 was primarily a result of the short term loan made to our majority stockholder, Applied Digital. The cash provided by investing activities of $2,461 in the nine months ended June 30, 2002 was primarily a result of the sale of the Shirley, New York facility, in January 2002.

         Cash used in financing activities was $50 for the nine months ended June 30, 2003 versus cash used in financing activities of $1,491 for the nine months ended June 30, 2002. The $50 of cash used in financing activities in the first nine months of this year was a combination of payments made to pay down our borrowings on our line of credit with Applied Digital and payments made on our capital lease obligation. The $1,491 of cash used in financing activities in the first nine months of last year was primarily a combination of paying off the mortgage on the Shirley, New York facility and paying down the line of credit to Applied Digital.

        Our business activities are capital intensive and, consequently, we finance our accounts receivable and inventory. Failure to obtain adequate product financing on a timely basis could have a material adverse affect on our business, results of operations, financial condition and cash flows. Our current financing agreements with IBM Credit LLC provide financing on inventory purchases up to $2,500. Borrowing for purchases is based upon 75% of all eligible receivables due within 90 days and up to 100% of all eligible inventories. IBM Credit may grant temporary increases, thereby increasing the line of credit in order to accommodate high volume sale opportunities. Interest for balances not paid within the interest free period provided in the agreements accrues at prime plus 6.5%.

        Combined borrowings under the financing arrangements described above amounted to $1,696 and $236 at June 30, 2003 and September 30, 2002, respectively, and are included in either accounts payable or accrued expenses and other liabilities.

        On June 30, 2003, our majority stockholder, Applied Digital, made cash payments to IBM Credit totaling $30 million in satisfaction of its obligations to IBM Credit. Under the terms of its agreement with IBM Credit, Applied Digital had pledged its shares of our common stock as collateral for amounts outstanding under the credit agreement, and IBM Credit had a security interest in our receivables and inventories, up to the amount advanced to us from Applied Digital under the line of credit. We understand that Applied Digital has fully satisfied its obligations to IBM Credit and, accordingly, IBM Credit’s security interest in the shares of common stock owned by Applied Digital and in our receivables and inventories have been released under Applied Digital’s credit agreement. As disclosed above, IBM Credit will continue to have a security interest in our receivables and inventories to the extent we borrow under our existing financing agreements with IBM Credit.

        We believe that our present financing arrangements with IBM Credit and current cash position will be sufficient to fund our operations and capital expenditures through at least June 30, 2004 without utilizing any additional loans. Our long-term capital needs may require additional sources of credit. There can be no assurances that we will be successful in our ability to negotiate additional sources of credit. Our inability to have continuous access to such financing at reasonable costs may materially and adversely impact our long-term financial condition, results of operations and cash flows.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK

        Certain statements in this report, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. We intend that such forward-looking statements be subject to the safe harbors created thereby. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: the ability to retain key personnel; the continued development of our technical, sales, marketing and management capabilities; relationships with and dependence on third-party suppliers; anticipated competition; uncertainties relating to economic conditions where we operate; uncertainties relating to government and regulatory policies; uncertainties relating to customer plans and commitments; rapid technological developments and obsolescence in the industries in which we operate and compete; potential performance issues with suppliers and customers; governmental export and import policies; global trade policies; worldwide political stability and economic growth; the highly competitive environment in which we operate; potential entry of new, well-capitalized competitors into our markets; our ability to maintain available sources of financing; and changes in our capital structure and cost of capital. The words “believe”, “expect”, “anticipate”, “intend” and “plan” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

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