10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004______ _____________

or

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

For the transition period from_____________________ to____________________

Commission file number                       0-25226

EMERSON RADIO CORP.

(Exact name of registrant as specified in its charter)

DELAWARE	22-3285224
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
9 Entin Road Parsippany, New Jersey	07054
(Address of principal executive offices)	(Zip code)

(973) 884-5800

(Registrant’s telephone number, including area code)

(Former name, former address, and former fiscal year, if changed since last report)

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

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

     Indicate the number of shares outstanding of common stock as of November 4, 2004: 27,103,164.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II OTHER INFORMATION
	ITEM 1. Legal Proceedings
	ITEM 2. Changes in Securities and Use of Proceeds
	ITEM 3. Default Upon Senior Securities
	ITEM 4. Submission of Matters to a Vote of Security Holders
	ITEM 5. Other Information
	ITEM 6. Exhibits and Reports on Form 8-K
SIGNATURES
Lease Agreement
Common Stock Purchase Warrant Agreement
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO and CFO Pursuant to Section 906

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

EMERSON RADIO CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
(In thousands, except earnings per share data)

	Three Months Ended						Six Months Ended
	September			September			September			September
	30, 2004			30, 2003			30, 2004			30, 2003
Net revenues	$	83,129		$	78,873		$	156,059		$	133,044
Costs and expenses:
Cost of sales		67,495			65,422			124,529			108,389
Other operating costs and expenses		1,377			1,293			2,930			2,549
Selling, general and administrative expenses		10,171			10,081			20,934			19,399
Acquisition costs		(104	)		(29	)		(175	)		614
Stock based costs		1,563			19			1,563			37
		80,502			76,786			149,781			130,988
Operating income		2,627			2,087			6,278			2,056
Interest expense, net		(381	)		(400	)		(675	)		(822	)
Minority interest in net (income) loss of consolidated subsidiary		(472	)		136			(1,078	)		82
Income before income taxes and discontinued operations		1,774			1,823			4,525			1,316
Provision for income taxes		785			1,042			1,731			975
Income from continuing operations		989			781			2,794			341
Loss from discontinued operations, net of tax		—			(100	)		—			(105	)
Net income	$	989		$	681		$	2,794		$	236
Basic net income (loss) per share:
Continuing operations	$	0.04		$	0.03		$	0.10		$	0.01
Discontinued operations		—			(0.01	)		—			—
	$	0.04		$	0.02		$	0.10		$	0.01
Diluted net income (loss) per share:
Continuing operations	$	0.04		$	0.03		$	0.10		$	0.01
Discontinued operations		—			(0.01	)		—			—
	$	0.04		$	0.02		$	0.10		$	0.01
Weighted average shares outstanding:
Basic		27,076			27,560			26,855			27,488
Diluted		27,218			28,428			27,242			28,458

The accompanying notes are an integral part of the interim consolidated financial statements.

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EMERSON RADIO CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

	September 30, 2004			March 31, 2004
	(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	5,078		$	6,369
Accounts receivable (less allowances of $4,141 and $3,653, respectively)		37,733			19,948
Other receivables		1,883			2,821
Inventories		59,665			46,997
Prepaid expenses and other current assets		9,947			5,344
Deferred tax assets		5,476			5,887
Total current assets		119,782			87,366
Property and equipment – (net of accumulated depreciation and amortization of $8,364 and $7,442, respectively)		7,405			7,822
Deferred catalog expenses		1,399			1,695
Trademarks and other intangible assets (net of accumulated amortization of $4,073 and $3,845,respectively)		4,940			5,168
Deferred tax assets		14,279			15,263
Other assets		1,294			1,355
Total Assets	$	149,099		$	118,669
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current maturities of long-term borrowings	$	36		$	58
Short-term borrowings		14,961			4,762
Revolver – current		18,700			—
Accounts payable and other current liabilities		38,869			32,787
Accrued sales returns		2,786			2,521
Income taxes payable		819			509
Total current liabilities		76,171			40,637
Long-term borrowings		4,492			15,027
Minority interest		16,872			15,793
Shareholders’ Equity:
Preferred shares – 10,000,000 shares authorized, 3,677 shares issued and outstanding		3,310			3,310
Common shares — $.01 par value, 75,000,000 shares authorized; 52,783,131 shares issued and 27,103,164 shares outstanding		528			523
Capital in excess of par value		117,862			116,304
Accumulated other comprehensive losses		(88	)		(83	)
Accumulated deficit		(46,216	)		(49,010	)
Treasury stock, at cost, 25,679,967 shares		(23,832	)		(23,832	)
Total shareholders’ equity		51,564			47,212
Total Liabilities and Shareholders’ Equity	$	149,099		$	118,669

The accompanying notes are an integral part of the interim
consolidated financial statements.

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EMERSON RADIO CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
(In thousands)

	Six Months Ended
	September 30, 2004			September 30, 2003
Cash Flows from Operating Activities:
Income from continuing operations	$	2,794		$	341
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interest		1,078			(82	)
Depreciation and amortization		1,474			1,729
Stock based costs		1,563			37
Deferred tax expenses		1,395			1,068
Asset allowances, reserves and other		531			952
Changes in assets and liabilities:
Accounts receivable		(18,673	)		(13,595	)
Other receivables		938			2,002
Inventories		(12,404	)		(6,349	)
Prepaid expenses and other current assets		(4,307	)		3,840
Other assets		(156	)		(190	)
Accounts payable and other current liabilities		6,323			8,394
Income taxes payable		310			(637	)
Net cash used by continuing operations		(19,134	)		(2,490	)
Net cash from discontinued operations		24			1,974
Net cash used by operating activities		(19,110	)		(516	)
Cash Flows from Investing Activities:
Additions to property and equipment (continuing operations)		(523	)		(204	)
Other investing activity of discontinued operations		—			—
Net cash used by investing activities		(523	)		(204	)
Cash Flows from Financing Activities:
Net short-term borrowings		10,199			2,309
Purchase of common stock		—			(728	)
Proceeds from exercise of stock options and warrants		—			254
Long-term borrowings		76,689			54,735
Repayments of long-term borrowings		(68,546	)		(64,253	)
Net cash provided by financing activities		18,342			(7,683	)
Net decrease in cash and cash equivalents		(1,291	)		(8,403	)
Cash and cash equivalents at beginning of year		6,369			11,413
Cash and cash equivalents at end of period	$	5,078		$	3,010

The accompanying notes are an integral part of the interim
consolidated financial statements.

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EMERSON RADIO CORP. AND SUBSIDIARIES

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – BACKGROUND AND BASIS OF PRESENTATION

     The consolidated financial statements include the accounts of Emerson Radio Corp. (“Emerson”, consolidated – the “Company”) and its majority-owned subsidiaries, including Sport Supply Group, Inc. (“SSG”), which has been 53.2% owned since February 2002. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of the unaudited interim consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes; actual results could materially differ from those estimates.

     The Company operates in two business segments: consumer electronics and sporting goods. The consumer electronics segment designs, sources, imports and markets a variety of consumer electronic products and licenses the “Emerson_®” trademark for a variety of products domestically and internationally to certain licensees. The sporting goods segment, which is operated through SSG, manufactures and markets sports related equipment and leisure products to institutional customers in the United States.

     From July 2003 through October 2003, certain of SSG’s team dealer locations were discontinued. In November 2003, SSG sold all of the issued and outstanding capital stock of its wholly-owned subsidiary, Athletic Training Equipment Company, Inc. (“ATEC”). Collectively, SSG refers to these operations as “Discontinued Operations” and accordingly, the accompanying financial statements reflect these as discontinued operations. (See Note 11)

     The unaudited interim consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of our consolidated financial position as of September 30, 2004 and the results of operations for the three and six month periods ending September 30, 2004 and 2003. The unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and accordingly do not include all of the disclosures normally made in our annual consolidated financial statements. It is suggested that these unaudited interim consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended March 31, 2004 (“fiscal 2004”), included in our annual report on Form 10-K for fiscal 2004.

     Certain reclassifications were made to conform the prior year’s financial statements to the current presentation.

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     Due to the seasonal nature of both segments, the results of operations for the three and six month periods ending September 30, 2004 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the full year ending March 31, 2005 (“fiscal 2005”).

     Emerson and SSG have elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees: (“APB 25”) and related Interpretations in accounting for its employee stock options. Under APB 25, if the exercise price of employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. Emerson and SSG have adopted the disclosure-only provisions under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). For the purposes of SFAS 123 pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. Our pro forma information for the three and six months ended September 30, 2004 and 2003 is as follows:

	Three Months Ended						Six Months Ended
	September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
	(Unaudited)						(Unaudited)
Net income:(in thousands)
As reported	$	989		$	681		$	2,794		$	236
Add: Employee stock-based compensation expense, as recorded, net of tax		1,247			8			1,247			8
Less: Pro-forma employee stock-based compensation expense		(117	)		(7	)		(119	)		(14	)
Pro forma	$	2,119		$	682		$	3,922		$	230
Net income per common share:
Basic – as reported	$	.04		$	.02		$	.10		$	.01
Basic – pro forma	$	.08		$	.02		$	.15		$	.01
Diluted – as reported	$	.04		$	.02		$	.10		$	.01
Diluted – pro forma	$	.08		$	.02		$	.14		$	.01

NOTE 2 – COMPREHENSIVE INCOME

     Our comprehensive income for the three and six months ended September 30, 2004 and 2003 is as follows (in thousands):

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	Three Months Ended						Six Months Ended
	September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
	(Unaudited)						(Unaudited)
Net income	$	989		$	681		$	2,794		$	236
Interest rate swap		—			(4	)		(4	)		(8	)
Unrealized income (loss) on securities, net		(1	)		1			(1	)		(3	)
Recognition of unrealized losses related to investments included in net income		—			—			—			42
Comprehensive income	$	988		$	678		$	2,789		$	267

NOTE 3 – NET EARNINGS (LOSS) PER SHARE

     The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts):

	Three					Six
	Months Ended					Months Ended
	September 30, 2004		September 30, 2003			September 30, 2004		September 30, 2003
	(Unaudited)					(Unaudited)
Numerator:
Net earnings before discontinued operations for basic and diluted earnings per share	$	989	$	781		$	2,794	$	341
Denominator:
Denominator for basic earnings per share – weighted average shares		27,076		27,560			26,855		27,488
Effect of dilutive securities:
Options and warrants		142		868			387		970
Denominator for diluted earnings per share – weighted average shares and assumed conversions		27,218		28,428			27,242		28,458
Basic and diluted earnings per share:
Continuing operations	$	.04	$	0.03		$	.10	$	0.01
Discontinued operations		—		(0.01	)		—		—
Basic and diluted earnings per share	$	.04	$	0.02		$	.10	$	0.01

NOTE 4- SHAREHOLDERS’ EQUITY

     Our outstanding capital stock at September 30, 2004 consisted of common stock and Series A convertible preferred stock in which the conversion feature expired effective March 31, 2002.

     At September 30, 2004, Emerson had outstanding approximately 307,000 options with exercise prices ranging from $1.00 to $3.00 and SSG

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had outstanding approximately 571,000 options with exercise prices ranging from $0.95 to $9.44. Subsequent to September 30, 2004, 425,000 options with exercise prices ranging from $2.97 to $3.26 were granted pursuant to the 2004 Emerson Employee Stock Incentive Plan.

     On August 1, 2002, in connection with a consulting agreement, Emerson granted 200,000 warrants with an exercise price of $2.20, of which 100,000 warrants vested after six months and 100,000 warrants vested one year from date of grant. In February 2003, 100,000 of these warrants were exercised. In November 2003, the remaining 100,000 of these warrants were exercised under a cashless exercise and 45,544 shares of common stock were issued. The warrants were valued using the Black-Scholes valuation model and were charged to earnings over the related service period of the consulting agreement with approximately $6,000 and $24,000 being charged to operations for the three and six months ended September 30, 2003, respectively. Since the warrants were fully exercised in fiscal 2004, no expense was charged for these warrants in the current year.

     In September 2003, the Company publicly announced the Emerson Radio Corp. common stock repurchase program. The program provides for share repurchase of up to 2,000,000 shares of Emerson’s outstanding common stock. As of September 30, 2004, the Company had repurchased 1,111,625 shares under this program, including no repurchases in the six month period ending September 30, 2004. During the quarter ended September 30, 2004, there were no shares repurchased under this program. Repurchase of the Company’s shares are subject to certain conditions under Emerson’s banking facility.

     On October 7, 2003, in connection with a consulting agreement, Emerson granted 50,000 warrants with immediate vesting and an exercise price of $5.00 per share with an expiration date of October 2008. These warrants were valued using the Black-Scholes valuation model, which resulted in $90,500 being charged to earnings during the quarter ended December 31, 2003. For the three and six months ended September 30, 2004, no expense was charged to operations for these warrants. As of September 30, 2004, these warrants had not been exercised.

     On August 1, 2004, in connection with a consulting agreement, Emerson granted 50,000 warrants with immediate vesting and an exercise price of $3.00 per share. These warrants were valued using the Black-Scholes valuation model, which resulted in $88,500 being charged to earnings during the quarter ended September 30, 2004. As of September 30, 2004, these warrants had not been exercised.

     During the quarter ended September 30, 2004, 725,000 of Emerson’s stock options were exercised in a cashless manner, resulting in 472,781 shares of Emerson’s common stock being issued. Such exercises were accounted for in accordance with Emerging Issues Task Force Issue 84-18: Stock Option Pyramiding (EITF 84-18), which resulted in a non-cash, pre-tax charge of approximately $1.5 million in the quarter ended September 30, 2004.

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NOTE 5 – INVENTORY

     Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for the consumer electronics segment and the average cost method is used for the sporting goods segment. As of September 30, 2004 and March 31, 2004, inventories consisted of the following (in thousands):

	September 30, 2004			March 31, 2004
	(Unaudited)
Raw materials	$	1,205		$	1,138
Work-in-process		67			67
Finished goods		61,122			48,878
		62,394			50,083
Less inventory allowances		(2,729	)		(3,086	)
	$	59,665		$	46,997

NOTE 6 – INCOME TAXES

     We have tax net operating loss carry forwards included in net deferred tax assets that are available to offset future taxable income and can be carried forward for 15 to 20 years. Although realization is not assured, we believe it is more likely than not that all of the net deferred tax assets will be realized through tax planning strategies available in future periods and through future profitable operating results. The amount of the deferred tax asset considered realizable, however, could be reduced or eliminated if certain tax planning strategies are not successfully executed or estimates of future taxable income during the carryforward period are reduced. If we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

NOTE 7 – RELATED PARTY TRANSACTIONS

     Effective March 1997, Emerson entered into a Management Services Agreement with SSG, under which each company provides various managerial and administrative services to the other company for fees at terms which reflect arms length transactions. These charges have been eliminated in consolidation, but are included in the determination of net income in the segment information presented in Note 10.

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NOTE 8 – BORROWINGS

     As of September 30, 2004 and March 31, 2004, short-term borrowings consisted of the following (in thousands):

	September 30,		March 31,
	2004		2004
	(Unaudited)
Foreign bank loan	$	14,961	$	4,762

     As of September 30, 2004 and March 31, 2004, long-term borrowings consisted of the following (in thousands):

	September 30,		March 31,
	2004		2004
	(Unaudited)
Emerson Revolver	$	18,700	$	8,000
Sport Supply Revolver		4,467		6,972
Equipment notes and other		61		113
		23,228		15,085
Less Emerson Revolver — current		18,700		—
Less current maturities		36		58
Long term debt and notes payable	$	4,492	$	15,027

     Emerson Credit Facility – On June 28, 2002, Emerson entered into a $40 million Revolving Credit and Term Loan Agreement (the “Emerson Loan Agreement”) with several U.S. financial institutions. The Emerson Loan Agreement provides for a $25 million revolving line of credit (the “Emerson Revolver”). The Emerson Loan Agreement also provided for a $15 million term loan, which was repaid in full in fiscal 2004. The $25 million revolving line of credit replaced Emerson’s $15 million senior secured facility and provides for revolving loans, subject to individual maximums which, in the aggregate, are not to exceed the lesser of $25 million or a “Borrowing Base” as defined in the Emerson Loan Agreement. The Borrowing Base amount is established by specified percentages of eligible accounts receivables and inventories and bears interest ranging from Prime plus 0.50% to 1.25% or, at Emerson’s election, LIBOR plus 2.00% to 2.75% depending on certain financial covenants. The interest rate charged on the Term Loan ranged from prime plus 1.00% to 1.75% or, at Emerson’s election, LIBOR plus 2.5% and 3.25% depending on certain financial covenants and amortized over a three-year period. Pursuant to the Emerson Loan Agreement, Emerson is restricted from, among other things, paying certain cash dividends, repurchasing Emerson’s common stock and entering into certain transactions without the lender’s prior consent and is subject to certain net worth and leverage financial

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covenants. Amounts outstanding under the Emerson Loan Agreement are secured by substantially all of Emerson’s tangible assets.

     As of September 30, 2004, there was approximately $18.7 million outstanding under the Emerson Revolver and Emerson was in compliance with the covenants contained in the Emerson Loan Agreement. The Emerson Revolver expires in June 2005, and accordingly, all amounts outstanding under this facility have been presented as a current liability. Prior to expiration Emerson intends to renew its banking facility or enter into a new banking facility with similar or more favorable terms than those presently existing.

     Sport Supply Credit Facility – During the quarter ending December 31, 2003, SSG amended its Loan and Security Agreement (the “SSG Loan Agreement”) to finance its working capital requirements through October 31, 2007. Under this amendment, SSG’s line of credit was reduced from $25 million to $20 million; its borrowing rates were reduced from LIBOR plus 2.5% to LIBOR plus 2.25%; and its inventory and accounts receivable borrowing bases were increased. The SSG Loan Agreement provides for revolving loans and letters of credit which, in the aggregate, cannot exceed the lesser of $20 million or a “Borrowing Base” amount based upon specified percentages of eligible accounts receivable and inventories. Amounts outstanding under the SSG Loan Agreement are secured by substantially all of the assets of SSG and its subsidiaries. Pursuant to the SSG Loan Agreement, SSG is restricted from, among other things, paying cash dividends and entering into certain transactions without the lender’s prior consent and it is required to maintain certain net worth levels.

     The SSG Loan Agreement allows its lender, under certain circumstances, to accelerate payment upon the occurrence of an event that has a material adverse affect upon the business, operations, properties, assets, goodwill, or condition (financial or otherwise) of SSG on a consolidated basis. Effective February 2004, SSG’s lender amended the SSG Loan Agreement to make this clause effective only in the event that net availability under the facility falls below a certain level. Additionally, the SSG Loan Agreement requires SSG to maintain a depository account in favor of SSG’s lender. As of September 30, 2004, there was approximately $4.5 million outstanding under the SSG Loan Agreement and SSG was in compliance with the covenants in the SSG Loan Agreement.

     As of September 30, 2004, the carrying value of these credit facilities approximated fair value.

NOTE 9 – SEGMENT INFORMATION

     The following table presents certain operating segment information for each of the three and six months ended September 30, 2004 and 2003 (in thousands):

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	Three Months Ended				Three Months Ended
	September 30, 2004				September 30, 2003
	Consumer Electronics		Sporting Goods		Consumer Electronics		Sporting Goods
	(Unaudited)				(Unaudited)
Net revenues from external customers	$	59,880	$	23,249	$	56,440	$	22,433
Income (loss) before income taxes and discontinued operations	$	824	$	950	$	2,141	$	(318	)
Segment assets	$	106,205	$	42,894	$	80,841	$	53,625

	Six Months Ended				Six Months Ended
	September 30, 2004				September 30, 2003
	Consumer Electronics		Sporting Goods		Consumer Electronics		Sporting Goods
	(Unaudited)				(Unaudited)
Net revenues from external customers	$	107,706	$	48,353	$	88,090	$	44,954
Income (loss) before income taxes and discontinued operations	$	2,338	$	2,187	$	1,504	$	(188	)

NOTE 10 — LEGAL PROCEEDINGS

Putative Class Actions

     Between September 4, 2003 and October 30, 2003, several putative class action lawsuits were filed in the United States District Court for the District of New Jersey against Emerson and Messrs. Geoffrey Jurick, Kenneth Corby and John Raab (the “Individual Defendants”) on behalf of purchasers of our publicly traded securities who bought shares between January 29, 2003 and August 12, 2003 (the “Class Period.”) On December 17, 2003, the Court entered a Joint Stipulation and Order consolidating these putative class actions under the caption In Re Emerson Radio Corp. Securities Litigation, 03cv4201 (JLL) (the “Consolidated Action.”) Further to that Stipulation and Order, lead plaintiff was appointed and co-lead counsel and co-liaison counsel were approved by the Court in the Consolidated Action. Consistent with the Stipulation and Order, the plaintiffs filed an Amended Consolidated Complaint (the “Amended Complaint”) that, among other things, added Jerome Farnum, one of Emerson’s directors, as a defendant in the litigation.

     Generally, the Amended Complaint alleges that Emerson and the Individual Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated there under, by (i)

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issuing certain positive statements during the Class Period regarding our ability to replace lost revenues attributable to our Hello Kitty® license and (ii) omitting to disclose that Emerson suffered allegedly soured relationships with its largest retail customers. The Amended Complaint further alleges that these statements were materially false and misleading when made because Emerson allegedly misrepresented and omitted certain adverse facts which then existed and disclosure of which was necessary to make the statements not false and misleading. The Defendants deny all allegations and have moved to dismiss the Complaint in its entirety for failure to state a claim. Emerson and the Individual Defendants intend to defend the lawsuit vigorously.

Other Matters

     The Company is a party to various other litigation matters, in most cases involving ordinary and routine claims incidental to its business. The Company cannot estimate with certainty its ultimate legal and financial liability with respect to such pending litigation matters. However, the Company believes, based on its examination of such matters, that its ultimate liability will not have a material adverse effect on its financial position, results of operations or cash flows.

NOTE 11 – DISCONTINUED OPERATIONS

     From July 2003 through October 2003, certain of SSG’s team dealer locations were closed. In November 2003, SSG sold all of the issued and outstanding capital stock of its wholly owned subsidiary, ATEC. These closures and sale of stock, and related discontinued operations resulted in a loss of approximately $100,000 and $105,000 for the three and six months ended September 30, 2003, respectively. The results of these transactions are presented as discontinued operations in the accompanying Consolidated Statement of Operations for the three and six month periods ended September 30, 2003. (See Note 1)

     The following table summarizes the results of these discontinued operations, net of related income taxes, as applicable (in thousands). (See Note 6)

	Three Months Ended					Six Months Ended
	September 30, 2004		September 30, 2003			September 30, 2004		September 30, 2003
Net revenues-ATEC	$	—	$	2,361		$	—	$	4,651
Net revenues-Team Dealers		—		1,281			—		2,674
Net revenues-Total	$	—	$	3,642		$	—	$	7,325
Income from operations-ATEC	$	—	$	180		$	—	$	296
Loss from operations-Team Dealers		—		(280	)		—		(401	)
Total discontinued operations, net of tax	$	—	$	(100	)	$	—	$	(105	)

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Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

     Management’s Discussion and Analysis of Results of Operation is presented in three parts: consolidated operations, the consumer electronics segment and the sporting goods segment.

     The following discussion of our operations and financial condition should be read in conjunction the Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

     In the following discussions, most percentages and dollar amounts have been rounded to aid presentation. Accordingly, all amounts are approximations.

Forward-Looking Information

     This report contains various forward-looking statements made pursuant to the safe harbor provisions under the Private Securities Litigation Reform Act of 1995 (the “Reform Act”) and information that is based on management’s beliefs as well as assumptions made by and information currently available to management. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. When used in this report, the words “anticipate”, “believe”, “estimate”, “expect”, “predict”, “project”, and similar expressions are intended to identify forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements which speak only as of the date hereof, and should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including the statements under “Risk Factors” set forth in our Form 10-K for the fiscal year ended March 31, 2004 and other filings with the Securities and Exchange Commission (the “SEC”). We undertake no obligation to publicly release the results on any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

     We make available through our internet website free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to such reports and other filings made by us with the SEC, as soon as practicable after we electronically file such reports and filings with the SEC. Our website address is www.emersonradio.com. The information contained in this website is not incorporated by reference in this report.

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Consolidated Operations:

     The following table sets forth, for the periods indicated, certain items related to our consolidated statements of operations as a percentage of net revenues for the three and six months ended September 30, 2004 and 2003. A detailed discussion of the material changes in operating results is set forth under the discussion of our two operating segments: consumer electronics and sporting goods.

	Three Months ended						Six Months ended
	September 30						September 30
	2004			2003			2004			2003
	(Unaudited)						(Unaudited)
Net revenues (in thousands)	$	83,129		$	78,873		$	156,059		$	133,044
		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		81.2	%		83.0	%		79.8	%		81.5	%
Other operating costs and expenses		1.7	%		1.6	%		1.9	%		1.9	%
Selling, general and administrative expenses		12.2	%		12.8	%		13.4	%		14.6	%
Acquisition costs		(0.1	%)		—			(0.1	%)		0.5	%
Stock based costs		1.8	%		—			1.0	%		—
Operating income		3.2	%		2.6	%		4.0	%		1.5	%
Interest expense		0.5	%		0.5	%		0.4	%		0.6	%
Minority interest		0.6	%		(0.2	%)		0.7	%		(0.1	%)
Provision for income taxes		0.9	%		1.3	%		1.1	%		0.7	%
Loss from discontinued operations		—			0.1	%		—			0.1	%
Net income		1.2	%		0.9	%		1.8	%		0.2	%

Net Revenues — Consolidated net revenues for the three and six month periods ended September 30, 2004 increased to $83.1 million from $78.9 million ($4.2 million or 5.4%) and to $156.1 million from $133.0 million ($23.1 million or 17.3%) respectively, as compared to the same periods ended September 30, 2003. The increase for the three month period ended September 30, 2004 is attributable to increases of $3.4 million in the consumer electronics segment and $816,000 in the sporting goods segment. The increase for the six month period ended September 30, 2004 is attributable to increases of $19.6 million in the consumer electronics segment and $3.4 million in the sporting goods segment. Increases in both segments for both periods were due primarily to increases in units sold, and to a lesser degree, higher pricing agreements.

Cost of Sales – Cost of sales, as a percentage of consolidated net revenues, decreased to 81.2% from 83.0% and to 79.8% from 81.5% for the three and six month periods ended September 30, 2004 as compared to the same period in the prior year. The decrease in cost of sales as a percentage of net revenues for both periods were primarily the result of increased licensing revenues in the consumer electronics segment and higher margin sales in both the consumer electronics and sporting goods segments. In absolute terms, cost of sales increased to $67.5 million from $65.4 million ($2.1 million or 3.2%) and to $124.5 million from $108.4

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million ($16.1 million or 14.9%) for the three and six month periods of fiscal 2005 as compared to the same periods in fiscal 2004. The increases for both segments and periods were primarily due to higher unit volumes.

Other Operating Costs and Expenses — Other operating costs and expenses are associated with the consumer electronics segment. As a percentage of consolidated net revenues, other operating costs and expenses increased to 1.7% from 1.6% for the three months ended September 30, 2004 as compared to the same period in the prior year, and was relatively unchanged at 1.9% for the six month period ended September 30, 2004 as compared to the same period in fiscal 2004. In absolute terms, other operating costs and expenses increased to $1.4 million from $1.3 million ($84,000 or 6.5%) and to $2.9 million from $2.6 million ($381,000 or 14.7%) for the three and six month periods of fiscal 2005 as compared to the same periods in fiscal 2004.

Selling, General and Administrative Expenses (“S,G&A”) — S,G&A, as a percentage of consolidated net revenues, decreased to 12.2% for the three months ended September 30, 2004 as compared to 12.8% for the three months ended September 30, 2003, and decreased to 13.4% from 14.6% for the six month period ended September 30, 2004 as compared to the same period in fiscal 2004. In absolute terms, S,G&A expenses increased to $10.2 million from $10.1 million ($77,000 or 0.8%) for the three month period ended September 30, 2004 as compared to the same period in fiscal 2004, and increased to $20.9 million from $19.4 million ($1.5 million or 7.8%) for the six month period ended September 30, 2004 as compared to the prior year period. The increases for both the three and six month periods are due to increases in the consumer electronics segment, partially offset by decreases in the sporting goods segment.

Acquisition Costs – Acquisition costs are associated with the consumer electronics segment. For the three and six month periods ending September 30, 2004, adjustments to acquisitions costs incurred in the prior year were recorded in fiscal 2005, resulted in a reduction in such costs of $104,000 and $175,000, respectively. For the three month period ended September 30, 2003, there was a reduction to acquisition costs of $29,000, and for the six month period ended September 30, 2003, acquisition costs totaled $614,000, or 0.5% of consolidated net revenues.

Stock Based Costs — Stock based costs are associated with the consumer electronics segment and relate to the cost of warrants associated with consulting service agreements and stock options exercised in a cashless manner (See Note 4 to accompanying financial statements). In absolute terms, stock based costs were approximately $1.6 million for the three and six month periods ended September 30, 2004, as compared to $19,000 and $37,000 for the three and six month periods ended September 30, 2003, respectively.

Interest Expense, Net – Interest expense decreased $19,000 to $381,000 (0.5% of net revenues) from $400,000 (0.5% of net revenues) for the three months ended September 30, 2004 as compared to the same period in fiscal

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2004. For the six months ended September 30, 2004, interest expense decreased $147,000, or 17.9%, to $675,000 (0.4% of net revenues) from $822,000 (0.6% of net revenues) for the same period in fiscal 2004. The decrease in interest expense was primarily the result of lower average borrowings in the sporting goods segment.

Minority Interest in Net Income of Consolidated Subsidiary – Minority interest in net income of consolidated subsidiary represents that portion of the sporting goods segment net income for the three and six month periods ended September 30, 2004 and 2003 that was attributable to SSG shareholders other than Emerson, and therefore not included in the consolidated statements of operations. (See Note 1)

Provision for Income Taxes – The provision for income taxes decreased $257,000, or 24.7%, to $785,000 for the three months ended September 30, 2004 from approximately $1.0 million for the three months ended September 30, 2003. For the six months ended September 30, 2004, the provision for income taxes increased $756,000 to $1.7 million as compared to approximately $1.0 million for the six months ended September 30, 2003. The increase in the provision for income taxes for the six month ending September 30, 2004 was primarily due to an increase in pre-tax profit in the consumer electronics segment.

Loss from Discontinued Operations – From July 2003 through October 2003, SSG ceased operations of several of its Team Dealer locations. In November 2003, SSG sold all of the issued and outstanding shares of capital stock of its wholly owned subsidiary — ATEC. There were no amounts recorded for these operations (the “discontinued operations”) for the three and six month periods ended September 30, 2004 as compared to a loss of approximately $100,000 and $105,000 for the three and six month periods ended September 30, 2003, respectively.

Net Income (Loss) — As a result of the foregoing factors, we earned net income of $989,000 (1.2% of net revenues) and $2.8 million (1.8% of net revenues) for the three and six months ended September 30, 2004 as compared to $681,000 (0.9% of net revenues) and $236,000 (0.2% of net revenues) for the same periods in fiscal 2004.

Consumer Electronics Segment:

     The following table summarizes certain financial information relating to the consumer electronics segment for the three and six month periods ended September 30, 2004 and 2003 (in thousands):

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	Three Months Ended September 30						Six Months Ended September 30
	2004			2003			2004			2003
	(Unaudited)						(Unaudited)
Net revenues	$	59,880		$	56,440		$	107,706		$	88,090
Cost of sales		50,994			49,054			90,403			75,669
Other operating Costs		1,377			1,293			2,930			2,549
Selling, general and administrative costs		4,425			3,861			9,005			7,284
Acquisition costs		(104	)		(29	)		(175	)		614
Stock based costs		1,563			6			1,563			24
Operating income		1,625			2,255			3,980			1,950
Interest expense, net		329			250			564			528
Income before income taxes taxes		1,296			2,005			3,416			1,422
Provision for income taxes		785			1,111			1,731			975
Net income	$	511		$	894		$	1,685		$	447

Net Revenues — Consumer electronics net revenues for the three months ended September 30, 2004 increased $3.4 million, or 6.1%, to $59.9 million from $56.4 million for the three months ended September 30, 2003. For the six months ended September 30, 2004, net revenues increased $19.6 million, or 22.3%, to $107.7 million from $88.1 million for the six months ended September 30, 2003. Consumer electronics net revenues are comprised of Emerson branded product sales, themed product sales and licensing revenues. Emerson branded product sales are earned from the sale of products bearing the Emerson or HH Scott brand name; themed product sales represent products sold bearing a certain theme or character; and licensing revenues are derived from licensing the Emerson and HH Scott brand names to licensees for a fee. The increase in net revenues for the three and six month periods was comprised of:

i)

An increase in revenues from the sale of Emerson branded product of $5.2 million, or 10.1%, to $54.2 million from $49.0 million for the three months ending September 30, 2004 as compared to the same period in fiscal 2004. Revenues for the six months ending September 30, 2004 of Emerson branded product increased $20.3 million, or 26.2%, to $97.5 million from $77.2 million for the same period in fiscal 2004. These revenue increases were primarily due to increased orders from our primary customers associated with an overall improving economy.

ii)

A decrease in themed product sales to $3.0 million and $3.5 million from $5.4 million and $5.7 million for the three and six months ended September 30, 2004 and September 30, 2003, respectively. These decreases were primarily due to decreases in the Girlpower themed products, partially offset by the continued increased sales of Nickelodeon themed products.

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iii) Licensing revenues increased by approximately $655,000, or 31.9% to approximately $2.7 million for the second quarter of fiscal 2005 from $2.1 million in the second quarter of fiscal 2004. Licensing revenues increased by approximately $1.5 million, or 28.9%, to $6.7 million for the six months in fiscal 2005 as compared to $5.2 in the same period in fiscal 2004.

Cost of Sales — Cost of sales, as a percentage of consumer electronics net revenues, decreased for the three months ended September 30, 2004 to 85.2% from 86.9% for the three months ended September 30, 2003. For the six months ended September 30, 2004 cost of sales decreased to 83.9% from 85.9% for the six months ended September 30, 2003. In relative terms, the decreases in cost of sales for the three and six month periods were due to increased licensing revenues and higher margin sales. Higher margins resulted from a continuing shift in sales from our direct import to our domestic business. In absolute terms, costs of sales for the three months ended September 30, 2004 increased $1.9 million, or 3.9%, to $51.0 million from $49.1 million for the three months ended September 30, 2003. For the six months ended September 30, 2004, cost of sales increased $14.7 million, or 19.5%, to $90.4 million from $75.7 million for the six months ended September 30, 2003.

Gross profit margins continue to be subject to competitive pressures arising from lower pricing of the product categories in the consumer electronics market in which Emerson competes. Emerson’s branded products are generally placed in the low-to-medium priced category of the market.

Other Operating Costs and Expenses — Other operating costs and expenses, as a percentage of consumer electronics net revenues, remained relatively unchanged at 2.3% for the three month periods ended September 30, 2004 and September 30, 2003, and decreased to 2.7% for the six month period of fiscal 2005 compared to 2.9% for the same period in fiscal 2004. In absolute terms, other operating costs and expenses increased to $1.4 million from $1.3 million ($84,000 or 6.5%) and to $2.9 million from $2.6 million ($381,000 or 14.7%) for the three and six month periods ended September 30, 2004 as compared to the same periods in fiscal 2004. The increase for both the three and six month periods in absolute terms were primarily due to increased net revenues.

Selling, General and Administrative Expenses (“S,G&A”) — S,G&A, increased approximately $564,000 or 14.6%, to $4.4 million (7.4% of the consumer electronics net revenues) from $3.9 million (6.8% of the consumer electronics net revenues) for the three months ended September 30, 2004 as compared to the three months ended September 30, 2003. For the six months ended September 30, 2004, S,G&A expenses increased $1.7 million, or 23.6%, to $9.0 million (8.4% of the consumer electronics net revenues) from $7.3 million (8.3% of the consumer electronics net revenues). The increases in absolute terms for the three months ended September 30, 2004, were primarily due to increased advertising, payroll related and freight

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expenditures of approximately $300,000, $340,000 and $225,000, respectively, partially offset by decreases in various other S,G&A costs. The increase in absolute terms for the six months ended September 30, 2004, primarily resulted from: (i) advertising expenses of approximately $560,000; (ii) payroll related costs of approximately $373,000; (iii) legal fees of approximately $216,000; and (iv) freight costs of approximately $360,000.

Acquisition Costs – Acquisition costs incurred in the fourth quarter of fiscal 2004 were adjusted in the first and second quarters of fiscal 2005, resulting in a reduction of such costs of $104,000 and $175,000, respectively, as compared to a credit of $29,000 and expenses totaling $614,000 for the three and six months ended September 30, 2003. These costs were associated with contemplated acquisition transactions in fiscal 2004 that were not completed.

Stock Based Costs — Stock based costs relate to the cost of warrants issued in exchange for consulting services and, in the second quarter of fiscal 2005, to stock options exercised in a cashless manner (See note 4 to accompanying financial statements).

Interest Expense, net — Interest expense increased $79,000, or 31.6%, to $329,000 for the three months ended September 30, 2004, from $250,000 for the three months ended September 30, 2003. For the six months ended September 30, 2004, interest expense increased $36,000, or 6.8%, to $564,000 from $528,000 for the same period ended September 30, 2003. The increases in interest expense for the three and six month periods were the result of higher average borrowings used for increased inventory in preparation for the traditionally higher demand holiday season, and increasing inventory balances resulting from the continuing shift from our direct import to our domestic business.

Provision for Income Taxes — The provision for income taxes was approximately $785,000 and $1.7 million for the three and six months ended September 30, 2004, respectively, as compared to $1.1 million and $975,000 for the three and six month periods ended September 30, 2003. The increase in the provision for the six month period ended September 30, 2004 was primarily the result of higher pre-tax profit as compared to the same periods in fiscal 2004.

Net Income (Loss) — As a result of the foregoing factors, the consumer electronics segment earned net income of $511,000 (0.9% of net revenues) for the three months ended September 30, 2004 as compared to $894,000 (1.6% of net revenues) for the three months ended September 30, 2003. For the six months ended September 30, 2004 the consumer electronics segment earned $1.7 million (1.6% of net revenues) as compared to $447,000 (0.5% of net revenues) for the six months ended September 30, 2003.

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Sporting Goods Segment:

     The following table summarizes certain financial information relating to the sporting goods segment as reported by SSG for the three and six months ended September 30, 2004 and 2003 (in thousands):

	Three Months Ended September 30					Six Months Ended September 30
	2004		2003			2004		2003
	(Unaudited)					(Unaudited)
Net revenues	$	23,249	$	22,433		$	48,353	$	44,954
Cost of sales		16,501		16,368			34,126		32,720
Selling, general and Administrative		5,746		6,233			11,929		12,128
Operating income (loss)		1,002		(168	)		2,298		106
Interest expense, net		52		150			111		294
Income (loss) before income taxes and discontinued operations		950		(318	)		2,187		(188	)
Provision (benefit) for income taxes		—		(69	)		—		—
Loss from discontinued Operations		—		100			—		105
Net income (loss)	$	950	$	(349	)	$	2,187	$	(293	)

Net Revenues — Net revenues increased $816,000, or 3.6%, to $23.2 million from $22.4 million and increased $3.4 million, or 7.6%, to $48.4 million from $45.0 million for the three and six month periods ended September 30, 2004 and September 30, 2003, respectively. These increases were primarily the result of increased sales resulting from our increased marketing and selling efforts in a very competitive marketplace, and the resulting increases in unit volume.

Cost of Sales — Cost of sales increased by approximately $133,000 (0.8%) and $1.4 million (4.3%) for the three and six month periods ended September 30, 2004 as compared to same periods in the prior fiscal year. As a percentage of sporting goods net revenues, cost of sales decreased to 71.0% from 73.0%, and to 70.6% from 72.8% for the three and six month periods ended September 30, 2004 as compared to the same periods in the prior fiscal year. The improvements in cost of sales as a percentage of net revenues in both periods were the result of improved product gross margins, as well as pricing improvements.

Selling, General and Administrative Expenses (“S,G&A”) — S,G&A decreased approximately $487,000 (7.8%) and $199,000 (1.6%) for the three and six month periods ended September 30, 2004, respectively. As a percentage of sporting goods net revenues, SG&A decreased to 24.7% from 27.8% and to 24.7% from 27.0% for the three and six month periods ended September 30, 2004 as compared to the same periods of fiscal 2004. The decrease in SG&A expenses for the three month period were primarily a result of approximately $237,000 in staff related costs, $140,000 in facility

21

expenses and $52,000 in computer expenses. The decrease in SG&A expenses for the six month period were primarily the result of approximately $156,000 in facility expenses, $84,000 in license and royalty expenses and $84,000 in staff related costs. These decreases were partially offset by a $126,000 increase in selling and marketing expenses.

Interest Expense, net – Interest expense decreased $98,000 and $183,000 for the three and six month periods ended September 30, 2004 and 2003, respectively. The cash received from the sale of SSG’s ATEC subsidiary in November 2003 resulted in a reduction of SSG’s debt and reduced interest expense.

Provision for Income Taxes – For the three and six month periods ended September 30, 2004, SSG recorded no income tax provision due to the existence of prior net operating losses to offset current income, and no change in managements’ estimate of the extent to which deferred tax assets are realizable. (See Note 6)

Loss from Discontinued Operations – Discontinued operations reflect net operating losses related to our discontinued and sold team dealer operations, and the sale of SSG’s ATEC subsidiary for the three and six month periods ended September 30, 2003. (See Note 11)

Net Income — As a result of the foregoing factors, the sporting goods segment earned net income of approximately $950,000, or 4.1% of net revenues, for the three months ended September 30, 2004 as compared to a net loss of $349,000 for the three months ended September 30, 2003. For the six months ended September 30, 2004 the sporting goods segment earned net income of $2.2 million, or 4.5% of net revenues, as compared to a net loss of $293,000 for the six months ended September 30, 2003.

Liquidity and Capital Resources

     As of September 30, 2004, we had cash and cash equivalents of approximately $5.1 million compared to approximately $6.4 million at March 31, 2004. Working capital decreased to $43.5 million at September 30, 2004 as compared to $46.8 million at March 31, 2004. The decrease in cash and cash equivalents of approximately $1.3 million was primarily due to increases in cash used by operating activities, partially offset by increases in cash provided by financing activities, as described below.

     Cash flows used in continuing operating activities was approximately $19.1 million for the six months ended September 30, 2004,primarily related to increases in inventory and accounts receivable due to the traditional seasonality which results in higher levels of sales and higher requirements for inventory balances, and the continuing shift from the direct import to domestic business.

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     Net cash used by investing activities was approximately $523,000 for the six months ended September 30, 2004, which consisted primarily of machinery and office equipment fixed asset purchases.

     Net cash provided from financing activities was approximately $18.3 million for the six months ended September 30, 2004, due primarily to the net increase in borrowings needed to secure increased inventory levels for the upcoming holiday selling season.

     Emerson and SSG maintain credit facilities as described in Note 8 to our consolidated financial statements – Borrowings. At September 30, 2004, there were approximately $23.2 million of borrowings outstanding under these facilities and no letters of credit outstanding. Approximately $18.7 million of borrowings were outstanding under the Emerson Loan Agreement and $4.5 million of borrowings were outstanding under the SSG Loan Agreement. At September 30, 2004, Emerson and SSG were in compliance with the covenants in each of the loan agreements. The Emerson Revolver expires in June 2005, and accordingly, all amounts outstanding under this facility have been presented as a current liability. Emerson intends to renew its banking facility or enter into a new banking facility with similar or more favorable terms then those presently existing.

     Our foreign subsidiaries maintain various credit facilities, aggregating $85.0 million, consisting of the following:

• three letter of credit facilities totaling $30.0 million which is used for inventory purchases; and

• four back-to-back letter of credit facilities totaling $55 million.

     At September 30, 2004, our foreign subsidiaries pledged approximately $6.9 million in certificates of deposit to these banks to assure the availability of the $30.0 million of credit facilities. At September 30, 2004, there were approximately $22.1 million of letters of credit outstanding under these credit facilities. These letter of credit facilities require the foreign subsidiary to meet a net worth covenant which was complied with at September 30, 2004.

     At present, we believe that future cash flow from operations and our existing institutional financing noted above will be sufficient to fund all of our cash requirements for the next twelve months.

     The following summarizes our obligations at September 30, 2004 for the periods shown (in thousands):

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	Payment due by period
	Total		Less than 1 year		1 – 3 years		3 – 5 years		More than 5 years
Notes Payable	$	23,167	$	18,700		—	$	4,467	$	—
Capital lease obligations		61		36		25		—		—
Leases		7,346		2,110		4,542		694		—
Total	$	30,574	$	20,846	$	4,567	$	5,161	$	—

     There were no material capital expenditure commitments and no substantial commitments for purchase orders outside the normal purchase orders used to secure product as of September 30, 2004.

Critical Accounting Policies

     For the six month period ended September 30, 2004, there were no significant changes to our accounting policies from those reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2004.

Inflation, Foreign Currency, and Interest Rates

     Neither inflation nor currency fluctuations had a significant effect on our results of operations during the first and second quarters of fiscal 2005. Our exposure to currency fluctuations has been minimized by the use of U.S. dollar denominated purchase orders, and by sourcing production in more than one country. The consumer electronics segment purchases virtually all of its products from manufacturers located in various Asian countries.

     The interest on borrowings under our credit facilities is based on the prime and LIBOR rate. We believe that given the present economic climate, interest rates, while expected to rise, are not expected to increase significantly during the coming year.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     There have been no significant changes from items disclosed in Form 10-K for the fiscal year ended March 31, 2004.

Item 4. Controls and Procedures

     (a) Disclosure controls and procedures.

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, with the participation of our management,

24

including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

(b) Changes in internal controls over financial reporting.

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter to which this Quarterly Report on Form 10-Q relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings.

Putative Class Actions

     Between September 4, 2003 and October 30, 2003, several putative class action lawsuits were filed in the United States District Court for the District of New Jersey against Emerson and Messrs. Geoffrey Jurick, Kenneth Corby and John Raab (the “Individual Defendants”) on behalf of purchasers of our publicly traded securities who bought shares between January 29, 2003 and August 12, 2003 (the “Class Period.”) On December 17, 2003, the Court entered a Joint Stipulation and Order consolidating these putative class actions under the caption In Re Emerson Radio Corp. Securities Litigation, 03cv4201 (JLL) (the “Consolidated Action.”) Further to that Stipulation and Order, lead plaintiff was appointed and co-lead counsel and co-liaison counsel were approved by the Court in the Consolidated Action. Consistent with the Stipulation and Order, the plaintiffs filed an Amended Consolidated Complaint (the “Amended Complaint”) that, among other things, added Jerome Farnum, one of Emerson’s directors, as a defendant in the litigation.

     Generally, the Amended Complaint alleges that Emerson and the Individual Defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated there under, by (i) issuing certain positive statements during the Class Period regarding our ability to replace lost revenues attributable to our Hello Kitty® license and (ii) omitting to disclose that Emerson suffered allegedly soured relationships with its largest retail customers. The Amended Complaint further alleges that these statements were materially false and misleading

25

when made because Emerson allegedly misrepresented and omitted certain adverse facts which then existed and disclosure of which was necessary to make the statements not false and misleading. The Defendants deny all allegations and have moved to dismiss the Complaint in its entirety for failure to state a claim. Emerson and the Individual Defendants intend to defend the lawsuit vigorously.

     For other information on litigation to which the Company is a party, reference is made to Part 1 Item 3 — Legal Proceedings in our most recent annual report on Form 10-K.

ITEM 2. Changes in Securities and Use of Proceeds.

     In August 2004, in connection with a consulting arrangement, we granted warrants to purchase 50,000 shares of our common stock with an exercise price of $3.00 per share. These warrants were issued in a transaction not involving a public offering and exempt from registration under Section 4(2) of the Securities Act of 1933, as amended.

Share Repurchases:

     For the quarter ending September 30, 2004, we did not repurchase any shares under the Emerson Radio Corp.’s common stock share repurchase program. The share repurchase program was publicly announced in September 2003 to repurchase up to 2,000,000 shares of Emerson’s outstanding common stock. Share repurchases are made from time to time in open market transactions in such amounts as determined in the discretion of Emerson’s management within the guidelines set forth by Rule 10b — 18 under the Securities Exchange Act. Prior to the September 30, 2004 quarter, we repurchased 1,111,625 shares under this program. As of September 30, 2004, the maximum number of shares that are available to be repurchased under Emerson Radio Corp’s common share repurchase program was 888,375.

ITEM 3. Default Upon Senior Securities.

     (a) None

     (b) None

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

     The Annual Meeting of the Company’s shareholders was held on August 6, 2004, at which time the shareholders (i) elected the following slate of nominees as the Board of Directors: Robert H. Brown, Jr., Peter G. Bunger, Jerome H. Farnum, Herbert A. Morey and Geoffrey P. Jurick; (ii) approved Emerson’s 2004 Employee Stock Incentive Plan; and (iii) approved Emerson’s 2004 Non-Employee Outside Director Stock Option Plan. There were 27,037,608 shares of outstanding capital stock of the company entitled to

26

vote at the record date for this meeting and there were present at such meeting, in person or by proxy, stockholders holding 15,832,214 shares of the Company’s Common Stock, which represented 58.6% of the total capital stock outstanding and entitled to vote. (i) There were 15,832,214 shares voted on the matter of the election of directors. The result of the votes cast regarding each nominee for office was:

	Votes For		Votes Withheld
Robert H. Brown, Jr.		14,869,824		962,390
Peter G. Bunger		13,183,547		2,648,667
Jerome H. Farnum		14,868,599		963,615
Herbert A. Morey		14,930,013		902,201
Geoffrey P. Jurick		15,061,364		770,850

     (ii) There were 15,832,214 shares voted on the matter of the approval of Emerson’s 2004 Employee Stock Incentive Plan, which results were as follows:

Votes For	Votes Against		Abstain
14,114,479		1,688,639		29,096

(iii) There were 15,832,214 shares voted on the matter of the approval of Emerson’s 2004 Non-Employee Outside Director Stock Option Plan, which results were as follows:

Votes For	Votes Against		Abstain
14,475,963		1,323,813		32,438

ITEM 5. Other Information.

          None

ITEM 6. Exhibits and Reports on Form 8-K.

     (a) Exhibits:

10.13.3	Lease Agreement dated as of October 8, 2004 between Sealy TA Texas, L.P., a Georgia limited partnership, and Emerson Radio Corp.*
10.18.1	Emerson Radio Corp. 2004 Employee Stock Incentive Plan (incorporated by reference to Exhibit 1 of Emerson’s 2004 Proxy Statement).
10.18.2	Emerson Radio Corp. 2004 Non-Employee Outside Director Stock Option Plan (incorporated by reference to Exhibit 2 of Emerson’s 2004 Proxy Statement).

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10.28.2	Common Stock Purchase Warrant Agreement entered into on August 1, 2004 by and between Emerson Radio Corp. and EPOCH Financial Services, Inc. *
31.1	Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32	Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
(b)	Reports on Form 8-K:
	Current report on Form 8-K, dated August 2, 2004, furnishing the press release announcing the Company’s financial results for the quarter ended June 30, 2004.
	Current report on Form 8-K, dated October 25, 2004,announcing the appointment of Guy A. Paglinco as Vice President and Chief Financial Officer.

* filed herewith

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SIGNATURES

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

	EMERSON RADIO CORP.
	(Registrant)
Date: November 15, 2004	/s/ Geoffrey P. Jurick
	Geoffrey P. Jurick
	Chairman of the Board,
	Chief Executive Officer and
	President
	(Principal Executive Officer)
Date: November 15, 2004	/s/ Guy A. Paglinco
	Vice President and
	Chief Financial Officer
	(Principal Finance and
	Accounting Officer)

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EX-10.13.3

Exhibit 10.13.3

FINAL

Sealy Properties
May 2004
TA Texas
(5101 Statesman Dr.)

LEASE AGREEMENT

PARTIES

     This Lease Agreement (“Lease”), is entered into on the date of the last execution by the parties hereto, between Sealy TA Texas, L.P., a Georgia limited partnership (“LESSOR”); and Emerson Radio Corp., a Delaware corporation (“LESSEE”), and includes all pages and exhibits attached hereto and incorporated by reference herein, and all amendments, modifications, renewals, extensions, restatements, additions and deletions subsequently effected pursuant to Article 36 herein.

1. LEASED PREMISES

     LESSOR hereby leases to LESSEE, and LESSEE hereby leases from LESSOR, on the terms, conditions and covenants in this Lease, the space described, outlined and/or set forth on Exhibit “A”, consisting of 91,364 rentable square feet, and all fixtures, systems and equipment located thereon (collectively, the “Leased Premises”). The municipal address of the Leased Premises is 5101 Statesman Drive, Irving, Texas 75063 and is located on the land more particularly described on Exhibit “B” (the “Land”). The term “Building” in this Lease shall mean the physical structure(s) and all other improvements located on the Land in which the Leased Premises is located.

2. TERM

     TO HAVE AND TO HOLD said Leased Premises for a period of five (5) years and six (6) months or sixty-six (66) months, commencing on the date (the “Commencement Date”) that is the earlier of (i) the date on which LESSEE first occupies the Leased Premises for the purpose of conducting its business, or (ii) thirty (30) days after the date on which the Work Items (hereinafter defined) have been substantially completed in accordance with Exhibit “C” or would have been substantially completed but for LESSEE Delays (as hereafter defined) (but in no event prior to January 1, 2005), and ending on the last day of the month that is sixty-six (66) full calendar months following the Commencement Date (the “Expiration Date”), unless sooner terminated, renewed or extended as provided for herein (such period as renewed, extended or terminated hereinafter referred to as the “Term”).

3. ACCEPTANCE OF LEASED PREMISES; CONDITION AND SUITABILITY

     A. Except for work required to be performed by LESSOR as provided for pursuant to Exhibit “C”, LESSEE acknowledges that: (i) it has fully inspected the Leased Premises; (ii) it is fully aware of the physical condition of the Leased Premises; (iii) it hereby accepts the Leased Premises in its present AS IS condition with no express warranties nor promises to repair, replace or maintain (except as expressly set forth in this Lease) and no implied warranties; (iv) the Leased Premises is fully suitable for LESSEE’S uses, purposes and occupancy; and (v) the Leased Premises is in good and satisfactory condition.

     B. As used herein, the term “substantially completed” or a like term shall mean that the Work Items have been completed in accordance with Exhibit “C”, except for minor punch list items which do not affect LESSEE’S use or occupancy of the Leased Premises. As soon as the Work Items have been substantially completed, LESSOR will notify LESSEE in writing and LESSOR and LESSEE shall inspect the Work Items together and prepare one (1) written punch list of items needing completion or correction. LESSOR will complete such items within thirty (30) days after the receipt of such notice.

     C. Upon the following terms and conditions, on November 15, 2004, LESSOR shall permit LESSEE to occupy the Leased Premises prior to the date of substantial completion of the Work Items: (i) LESSEE shall be permitted such early occupancy of the Leased Premises only for the purposes of installing LESSEE’S racks and other furniture, fixtures, and equipment, and to make general preparations for operations, but not for any other purpose; (ii) LESSEE’S early occupancy of the Leased Premises shall not materially, adversely interfere with the construction of the Work Items; and (iii) such early occupancy shall be subject to all of the terms and conditions of this Lease (other than the payment of Base Monthly Rent or Operating Expenses, the payment of which shall commence as provided in Article 4.E. of this Lease). Such early occupancy by LESSEE in accordance with the terms of this Article 3.C. shall not trigger the Commencement Date or be construed as LESSEE’S approval of the Work Items. LESSEE shall be responsible for reimbursing LESSOR for the reasonable cost of any damage to the Work Items caused by LESSEE’S early occupancy of the Leased Premises.

     D. If the Commencement Date has not occurred by January 1, 2005 (which date shall be extended to a later date by one day for each day constituting a LESSEE Delay, and which date, as so extended, shall be referred to herein as the “Deadline Date”), then LESSEE shall be entitled to receive from LESSOR, as LESSEE’S sole and exclusive remedy, the lesser of (i) a credit against the first Base Monthly Rent due hereunder in an amount equal to one day’s rent per day for each day that shall elapse from the Deadline Date until the Commencement Date and (ii) LESSEE’S actual out of pocket costs incurred due to delivery of the Leased Premises to LESSEE after the Deadline Date (as evidenced by invoices and other reasonable supporting documentation).

     E. If the Commencement Date has not occurred by April 1, 2005 (which date shall be extended to a later date by one day for each day constituting a LESSEE Delay, and which date, as so extended, shall be referred to herein as the “Termination Date”), LESSEE shall have the right, as its sole and exclusive remedy, to terminate this Lease by written notice delivered to LESSOR within ten (10) days following the occurrence of the Termination Date (but, in all events, prior to the date on which the Commencement Date occurs in accordance with the terms hereof).

If LESSEE so timely terminates this Lease within such ten (10) day period (but, in all events, prior to the date on which the Commencement Date occurs in accordance with the terms hereof), then neither LESSOR nor LESSEE shall have any further rights or obligations hereunder (except as expressly provided otherwise herein) and LESSOR shall promptly refund to LESSEE any prepaid sums (including the Security Deposit).

     F. As used herein, the term “LESSEE Delay” shall mean any delay in the substantial completion of the Work Items solely as a result of LESSEE’S request for any change to the Work Items, whether or not LESSOR consents to make such change, or any other delay in the substantial completion of the Work Items caused solely by LESSEE or any agent, employee or contractor of LESSEE.

4. BASE MONTHLY RENT, SECURITY DEPOSIT AND ESCROW

     A. As rental for the Leased Premises, LESSEE agrees to pay as rent to LESSOR, without notice, reduction, deduction or offset, except as expressly set forth in Articles 17 and 18 of this Lease and Paragraph 5 of Exhibit “C” to this Lease, at LESSOR’S office at P.O. Box 11407, Birmingham, Alabama 35246-1081, or at such other place as LESSOR may from time to time designate in writing in advance, the “Base Monthly Rent” as set forth in Article 4.E. herein on or before the first day of each calendar month through the Term.

     B. LESSEE has deposited with LESSOR upon delivery of this Lease, $32,829.84 to be applied as follows: $7,545.00 as the first monthly payment of Operating Expenses (as defined herein) and $25,284.84 as a Security Deposit. Any amount designated herein as “Security Deposit” shall not bear interest, may be commingled with LESSOR’S general funds, and shall not be considered an advance payment of rent or a measure of LESSOR’S damages. In the event of a Default (as defined in Article 20), including but in no way limited to the non-payment of rent, LESSOR may, from time to time without forfeiting, compromising, releasing, novating or waiving any right or remedy, use the Security Deposit to the extent necessary to pay past due rent and other amounts due LESSOR. Following any such application of the Security Deposit, LESSEE shall pay to LESSOR the amount so applied in order to restore the Security Deposit to its original amount within five (5) days after written request.

     C. Notwithstanding anything to the contrary contained herein, if no event of Default exists on the first day of the twenty-fifth (25^th) month of the Term of this Lease or any earlier day of termination, LESSOR (or, in the event of an assignment of LESSOR’S interest in the Leased Premises and the Security Deposit during the Term, LESSOR’S assignee) shall refund the Security Deposit to LESSEE on such date, subject to deduction for LESSOR’S prior application of the Security Deposit in accordance with the terms hereof. The Security Deposit shall be deemed the property of LESSOR, except to the extent of LESSEE’S right to a refund of the Security Deposit in accordance with the terms hereof. LESSEE hereby expressly waives the requirements and applicability of Tex. Prop. Code §§ 93.005 – 93.011, and agrees that LESSOR shall timely return to LESSEE the balance of the Security Deposit not applied to satisfy LESSEE’S obligations as set forth above, provided LESSEE has performed all of its obligations accrued and due and payable hereunder as of such time. If such waiver is not effective under applicable law, LESSOR shall, within the time required by applicable law, return to LESSEE the portion of the Security Deposit remaining after deducting all damages, charges and other amounts permitted by law. LESSOR and LESSEE agree that such deductions shall include, without limitation, all damages and losses that LESSOR has suffered or that LESSOR reasonably estimates that it will suffer as a result of any breach of this Lease by LESSEE. LESSOR shall be released from any obligation with respect to the Security Deposit upon transfer of this Lease and the Leased Premises and the Security Deposit to a person or entity assuming LESSOR’S obligations under this Article 4.C.

     D. In addition to the Base Monthly Rent, LESSEE agrees to pay to LESSOR as additional rent its Proportionate Share (as defined in Article 31) of expenses with respect to the Building and/or Land, consisting of: (i) Taxes pursuant to Article 13; (ii) insurance costs pursuant to Article 8; (iii) utility costs pursuant to Article 12; and (iv) Common Area costs pursuant to Article 11.E. (all of the foregoing expenses being collectively referred to herein as the “Operating Expense” or “Operating Expenses”). During each month of the Term, on the same day that rent is due hereunder and without notice or demand, LESSEE shall pay to LESSOR an amount equal to 1/12 of the estimated annual cost of LESSEE’S Proportionate Share of the Operating Expenses as reasonably determined by LESSOR. The initial monthly payments are based upon the estimated amounts for the first calendar year of the Lease, and may be increased or decreased in good faith by LESSOR to reflect the projected actual cost of all such items during each calendar year. If LESSEE’S total Operating Expense payments applicable to a calendar year are less than LESSEE’S Proportionate Share of all such items, LESSEE shall pay the difference to LESSOR within thirty (30) days after written request. If after such adjustment, the payments for Operating Expenses by LESSEE applicable to a calendar year are more than LESSEE’S actual Proportionate Share of all such items, LESSOR shall retain such excess and credit such excess payment against LESSEE’S future Operating Expense payments due unless the overpayment occurs in the final year of the Term of the Lease, in which case it shall be refunded to LESSEE within thirty (30) days following expiration of the Term, or if any uncured Default then exists, LESSOR shall retain such overpayment until such Default is cured. This obligation survives the termination of this Lease.

     E. The amount of the Base Monthly Rent and the monthly Operating Expense payments beginning on the Commencement Date and continuing through the fourth month of the Term are as follows (Base Monthly Rent for the remainder of the Term is outlined in “Exhibit “C” – Special Stipulations”):

(1) Base Monthly Rent	$	0.00
(2) Taxes	$	4,886.00
(3) Insurance	$	631.00
(4) Common Area Maintenance (CAM)	$	2,028.00
Total Monthly Payment	$	7,545.00

2

     As used herein, the term “Total Monthly Payment” shall include all subsequent adjustments pursuant to this Article 4. If this Lease shall commence on any date other than on the first day of a calendar month, or end on any date other than the last day of a calendar month, rent for such month shall be prorated on a daily basis. In the event of a partial calendar year, LESSEE’S Proportionate Share of the Operating Expenses shall be proportionately adjusted based on the number of days comprising such partial calendar year.

     LESSOR agrees to keep and maintain books and records reflecting the Operating Expenses in accordance with sound accounting principles consistently applied. LESSEE shall have the right, upon at least ten (10) days advance written notice to LESSOR (“Audit Notice”) and at LESSEE’S sole expense (except as expressly set forth in this Lease), to audit LESSOR’S books and records for the immediately preceding calendar year (but in no event for any calendar year prior to 2005) in order to verify actual Operating Expenses. Any such audit shall be performed during LESSOR’S normal business hours. No subtenant shall have any right to conduct an audit and no assignee shall conduct an audit for any period during which such assignee was not in possession of the Leased Premises. Such audit must be conducted by a certified public accountant who is not being compensated by LESSEE on a contingency fee basis. All information obtained through the LESSEE’S audit with respect to financial matters (including, without limitation, costs, expenses, income) and any other matters pertaining to LESSOR and/or the Building shall be held in strict confidence by LESSEE and its officers, agents, and employees; and LESSEE shall cause its auditor and any of its officers, agents, and employees to be similarly bound; provided, however, the disclosure of audit results to third parties shall be permitted on a reasonable need-to-know basis (subject to such third parties’ agreement if such third party is not a court or public or quasi-public body to preserve the confidentiality of the disclosed information in accordance with the terms hereof) and as may be required by court order, applicable security regulations, legal process or applicable law. Public disclosure is permitted if LESSEE in its reasonable discretion determines that such disclosure is necessary to comply with applicable security regulations. LESSOR shall have the right to dispute the result of any such audit by LESSEE. If LESSOR so disputes such audit, and if LESSOR and LESSEE are unable to resolve such dispute within thirty (30) days, then the dispute shall be submitted to a reputable independent accounting firm (“Firm”) reasonably acceptable to LESSOR and LESSEE for resolution. The reasonable determination of the Firm shall be binding on LESSOR and LESSEE. If the parties’ mutual agreement as to the Operating Expenses in question, or the determination of the Firm (as applicable), establishes that LESSEE underpaid or overpaid its Proportionate Share of Operating Expenses (as required pursuant to this Lease), then LESSOR shall refund to LESSEE any such overpayment, or LESSEE shall pay to LESSOR any such underpayment (as applicable), promptly upon the agreement of the parties or conclusion of such determination (as the case may be). In addition, if the Firm is engaged as provided hereinabove and the determination of such Firm establishes: (i) that LESSEE overpaid or underpaid its Proportionate Share of Operating Expenses by five percent (5%) or more, then (A) LESSOR shall pay all costs of engaging the Firm and LESSEE’S reasonable expenses in connection with such audit in case of any such overpayment, and (B) LESSEE shall pay all costs of engaging the Firm and LESSOR’S reasonable expenses in connection with such audit in case of any such underpayment; or (ii) that the variance was less than five percent (5%), LESSEE shall pay the entire cost of engaging the Firm and LESSOR’S reasonable expenses in connection with such audit. In all other circumstances (other than those provided in the immediately preceding sentence) each party shall pay its own expenses in connection with any such audit. Payment by LESSEE of Operating Expenses shall not be deemed to constitute a waiver by LESSEE of its rights to audit Operating Expenses.

5. LATE CHARGES

     Time is of the essence regarding all amounts payable to LESSOR. All amounts due under this Lease shall be paid on or before the date due. LESSEE acknowledges that the late payment of Base Monthly Rent or any other amounts payable by LESSEE to LESSOR hereunder (all of which shall constitute additional rent to the same extent as the Base Monthly Rent) will cause LESSOR to incur administrative costs and other damages, the exact amount of which would be impracticable or extremely difficult to ascertain. LESSEE AND LESSOR agree that if LESSOR does not receive any such payment on or before five (5) business days after the date the payment is due, LESSEE shall pay to LESSOR, as additional rental, a late charge equal to five percent (5%) of the overdue amount to cover such additional administrative costs. This provision for a late charge shall be in addition to all of LESSOR’S other rights and remedies hereunder or at law or equity, and shall not be construed as liquidated damages.

6. PURPOSE, USE AND OCCUPANCY; COMPLIANCE WITH LAWS

     A. The Leased Premises are leased for the purpose of, and shall be used and occupied for general office purposes and the purpose of receiving, storing, warehousing, shipping and selling products, materials and merchandise and for such other lawful purposes as may be incidental thereto, and for no other purpose. The Leased Premises shall not be used for any unlawful purpose nor in any manner creating a public or private nuisance or trespass. Neither sidewalks nor loading docks nor any other area outside the Leased Premises shall be used for sale, storage (other than outdoor trailer storage) or display (other than signage permitted under this Lease) in any manner whatsoever.

     B. LESSEE shall, at its sole cost and expense, obtain all licenses, certificates, permits and all other approvals necessary for such purpose, use and occupancy of the Leased Premises (other than the certificate of occupancy, which shall be LESSOR’S responsibility, at its sole cost and expense, as herein provided), and shall provide LESSOR with copies of same within thirty (30) days of LESSEE’S occupancy and additional copies as may be reasonably requested within five (5) days after written request. LESSEE shall comply with all governmental statutes, laws, ordinances and orders applicable to LESSEE’S specific use of the Leased Premises, all at LESSEE’S sole expense. LESSEE will not permit the Leased Premises to be used for any purpose or in any manner, or take any action or inaction, which would not be covered by the insurance described in Article 8 or Article 9 or which would render the insurance thereon void or voidable or the insurance risk significantly more hazardous. If there is any increase in the cost of any such insurance described in Article 8 or Article 9 directly resulting from LESSEE’S proposed or actual actions or inactions, LESSEE shall pay 1/12 of the amount of such annual increase on a monthly basis as a part of Operating Expenses.

3

     C. LESSEE and LESSEE’S agents, employees, contractors and invitees will comply fully with all requirements of the rules and regulations of the Building and/or project and related facilities which are attached hereto as Exhibit “D”, and made a part hereof as though fully set out herein. LESSOR shall at all times have the right to change such rules and regulations or to promulgate other rules and regulations in such reasonable manner as may be deemed advisable for safety, care, or cleanliness of the Building and/or project and related facilities or premises, and for preservation of good order therein, all of which rules and regulations, changes and amendments will be forwarded to LESSEE in writing and shall be carried out and observed by LESSEE; provided all changes and amendments are reasonable. LESSEE shall further be responsible for the compliance with such rules and regulations by the employees, servants, agents, visitors and invitees of LESSEE.

7. RELEASE AND INDEMNITY, WAIVER OF SUBROGATION, RELEASE FROM NEGLIGENCE

     A. Subject to Section 7.B below, except for the gross negligence or the intentional act or omission of LESSOR or the wrongful failure of LESSOR to perform its obligations hereunder, LESSOR shall not be liable to LESSEE or those claiming by, through, or under LESSEE for any injury to or death of any person or persons or the damage to or theft, destruction, loss, or loss of use of any property or inconvenience (a “Loss”) caused by casualty, theft, fire, third parties, or any other matter (including Losses arising through repair or alteration of any part of the Building, or failure to make repairs, or from any other cause), regardless of whether the negligence of any party caused such Loss in whole or in part and occurring within the Leased Premises. Subject to Section 7.B below, LESSEE agrees to defend, indemnify and hold LESSOR, its employees, representatives, agents, contractors, patrons, invitees, and licensees harmless from any and all liability for and against any injury or damage relating to, arising from or connected with (i) the actions or inactions of LESSEE, its employees, agents, invitees, licensees or others under its control, in or about the Leased Premises; (ii) all costs, reasonable attorney’s fees, expenses and liability incurred by LESSOR in connection with any suit, claim or action or proceeding brought on account of the events and transactions described in the immediately preceding item (i); provided, however, LESSEE shall not be required to indemnify and hold LESSOR harmless from or against any such injury or damage caused by the gross negligence or intentional act or omission of LESSOR or the wrongful failure of LESSOR to perform its obligations hereunder. LESSOR shall not be liable or responsible for any loss of or damage to the property of LESSEE or others by theft, all of which property of LESSEE shall be insured or self-insured by LESSEE, at LESSEE’S sole cost and expense. LESSEE shall not be liable or responsible for any loss of or damage to the property of LESSOR or others by theft, all of which property of LESSOR shall be insured or self-insured by LESSOR. Subject to Section 7.B below, LESSOR agrees to defend, indemnify and hold LESSEE, its employees, representatives, agents, contractors, patrons, invitees, and licensees harmless from any and all liability for and against any injury or damage relating to, arising from or connected with (i) the actions or inactions of LESSOR, its employees, agents, invitees, licensees or others under its control, in or about the Common Areas; (ii) all costs, reasonable attorney’s fees, expenses and liability incurred by LESSEE in connection with any suit, claim or action or proceeding brought on account of the events and transactions described in the immediately preceding item (i); provided, however, LESSOR shall not be required to indemnify and hold LESSEE harmless from or against any such injury or damage caused by the gross negligence or intentional act or omission of LESSEE or the wrongful failure of LESSEE to perform its obligations hereunder.

     B. NOTWITHSTANDING ANYTHING IN THIS LEASE TO THE CONTRARY, LESSOR and LESSEE each hereby release each other and their employees from all loss or damage caused by perils required by this Lease to be insured through, by or under them, by way of subrogation or otherwise, even if such loss or damage shall have been caused by the actions or inactions of the other party or anyone for whom such party may be responsible, INCLUDING A LOSS OR DAMAGE CAUSED BY A PARTY’S NEGLIGENCE. LESSOR and LESSEE agree that they have obtained such a clause or endorsement in their respective insurance policies and shall use all commercially reasonable efforts to maintain such clause or endorsement in effect in their respective insurance policies at all times during the Term of this Lease. THIS SECTION RELEASES A PARTY FROM ITS OWN NEGLIGENCE IN CERTAIN CIRCUMSTANCES.

     C. The provisions of Articles 7.A. and 7.B. shall survive the lease Term with respect to all events, occurrences, series of events or occurrences, transactions, suits, claims or actions occurring during the Term of this Lease.

8. LESSOR’S INSURANCE

     LESSOR shall procure insurance policies and charge a Proportionate Share of the premium cost to the LESSEE pursuant to Articles 4.D. and 4.E. of, casualty, liability and other insurance coverage for the Leased Premises, Land, Building and/or project of which the Leased Premises are a part, as is commercially practicable and customary. Such insurance shall include, but in no way be limited to (i) casualty insurance covering the Building in an amount of not less than full replacement cost, and (ii) insurance covering the releases and indemnities of LESSOR set forth in this Lease relating to negligence.

9. LESSEE’S INSURANCE

     LESSEE, at its sole expense, shall obtain and maintain in full force and effect at all times during the Term the following insurance coverage: (a) worker’s compensation insurance; (b) “All Risk” fire and extended coverage insurance covering all contents, fixtures and improvements installed by LESSEE in the Leased Premises in an amount not less than 100% of their full replacement cost; (c) public general liability insurance against liability for property damage and personal injury suffered by anyone by reason of the use or occupancy of the Leased Premises with minimum limits of $1,000,000 on account of bodily injury to or death of one person, $1,000,000 on account of any one occurrence affecting more than one person and $500,000 on account of damage to property; and (d) insurance covering the releases and indemnities of LESSEE set forth in this Lease relating to negligence. All of such insurance shall be provided by an insurance company or companies with A.M. Best ratings of A-VII or better and licensed to do business in the state in which the property is located, shall name LESSOR as an additional insured (as to the liability policy), and shall be non-

4

cancelable except upon thirty (30) days written notice to LESSOR and any designees of LESSOR. Within ten (10) days after the date of this Lease, and thereafter within ten (10) days after written request, LESSEE shall provide certificates of insurance evidencing the aforementioned coverage, or other such evidence acceptable to LESSOR in its reasonable discretion.

10. MAINTENANCE AND REPAIR BY LESSOR

     A. LESSOR at its own cost and expense, shall maintain, repair and replace only the roof, foundation and the structural components of the exterior walls of the Building in good repair, reasonable wear and tear excepted. The term “exterior walls” as used herein shall not include windows, glass or plate glass, doors, special storefronts, or office entries. LESSOR shall maintain proper functioning of the fire sprinkler system and shall conduct quarterly pressure tests and an annual hydrant test.

     B. [Intentionally Blank]

     C. LESSEE shall promptly give LESSOR written notice of any defect or need for repairs after which LESSOR shall have reasonable opportunity to repair same or cure such defect. LESSOR’S liability with respect to any defects, repairs or maintenance for which LESSOR is responsible under any of the provisions of this Lease shall be limited to the cost of such repairs or maintenance or the curing of such defect. Following notice (written or oral) to LESSEE (except in the event of an emergency, in which case no notice shall be required), LESSOR shall be allowed full access to the Leased Premises at reasonable times (or in the event of an emergency at any time) for the purpose of fulfilling or attempting to fulfill LESSOR’S obligations under this Article 10.

     D. LESSOR shall cause the Building’s mechanical, electrical, plumbing, sprinkler, HVAC and life-safety systems to be in good working order as of the Commencement Date.

     E. LESSOR agrees that if a defect (“HVAC System Defect”) in the Building’s HVAC system rendering same inoperable for its intended purpose is discovered by LESSEE prior to the twenty-fourth (24^th) month following the Commencement Date (the “Second Anniversary”), LESSEE shall give LESSOR written notice thereof (“HVAC System Defect Notice”) on or prior to the Second Anniversary (time being of the essence with respect thereto). If LESSOR receives a HVAC System Defect Notice prior to the Second Anniversary, LESSOR shall, at its sole expense, expeditiously cause such HVAC System Defect to be repaired or remedied.

     F. Notwithstanding the foregoing, nothing contained in Article 10.E. shall: (i) require LESSOR to repair or remedy any HVAC System Defect to the extent such repair or remediation is necessitated due to the negligence, or intentional acts or omissions of, or misuse of the item requiring such repair or remediation by, LESSEE or its employees, agents, contractors or invitees; or (ii) require LESSOR to repair or remedy any HVAC System Defect if the coverage afforded by any warranty or maintenance/service contract relating to the item in question has been impaired or invalidated by LESSEE or its employees, agents or invitees; or (iii) require LESSOR to repair or remedy any HVAC System Defect with respect to which a HVAC System Defect Notice is not received by LESSOR on or prior to the Second Anniversary.

11. MAINTENANCE AND REPAIR BY LESSEE; COMMON AREA MAINTENANCE

     A. LESSEE shall, at its sole expense, repair and maintain all parts of the Leased Premises, except those for which LESSOR is expressly responsible under this Lease, in good condition (reasonable wear and tear excepted), making all necessary repairs, maintenance and replacements, including but not limited to, ceiling tiles, windows, glass, doors, signs, office entries, railings, interior walls and finish work, floors and floor covering, heating and ventilation systems (subject to Article 10.E.), air conditioning systems (subject to Article 10.E.), dock boards and ramps, truck doors, dock bumpers, plumbing fixtures, termite and pest extermination, removal of trash and debris, interior handicap access areas, and shall keep the whole of the Leased Premises in a safe, clean and sanitary condition. LESSEE shall not cause or permit trash to accumulate in or around the Building due to the activities of LESSEE or its employees, agents or visitors.

     B. Intentionally Deleted.

     C. LESSEE shall not be obligated to repair any damage caused by fire, tornado or other Act of God or Force Majeure (as defined in Article 40 of this Lease) to the extent of insurance proceeds actually paid to LESSOR or which would have been paid to LESSOR if LESSOR carried the insurance required of LESSOR in Article 8, except that LESSEE shall be obligated to repair all wind damage to all glass and signage except with respect to tornado or hurricane damage.

     D. LESSEE shall not damage any demising wall or supports or disturb the integrity or support provided by any demising walls or supports and shall, at its sole expense, promptly repair any damage or injury to any demising wall or support caused by LESSEE or its employees, agents, contractors, invitees, licensees, patrons or others under its control.

     E. LESSOR shall operate and perform maintenance, repair, and replacement as necessary to the Common Areas. The Common Areas are the parts of the Land and Building outside of the Leased Premises, including, but not limited to, plumbing, drains, electrical systems, fire sprinkler systems, gutters, downspouts, exterior painting, trees, shrubs, landscaping, parking areas, driveways, sidewalks, curbs, bollards, loading areas, rail spur areas, private streets and alleys, lighting, hallways, and other areas and improvements provided by LESSOR outside the Leased Premises, exclusive of the roof, foundation and other structural components of the Building (which are addressed in Article 10), all of which shall be operated and maintained by LESSOR in a safe, clean and sanitary condition. LESSOR shall charge to LESSEE pursuant to Articles 4.D. and 4.E. LESSEE’S Proportionate

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Share of the cost of operation and maintenance of the Common Areas (including, but not limited to, costs incurred for management fees not to exceed five percent (5%) of the annual total of Base Monthly Rent), including the costs of maintenance, personnel, lighting, utility consumption, water, sewage, painting, termite control, pest extermination, trash and debris removal, cleaning, inspecting and landscaping the Common Areas and lawn sprinkler systems costs, in each case incurred in the operation and maintenance of the Common Areas and which may be reasonably incurred by LESSOR. Common Areas expenses shall exclude the costs of any capital expenses, except those which, in Landlord’s good faith estimate, will reduce Common Area expenses or improve safety (and as to the amortized portion only as described below), and those made to keep the Building and the Land in compliance with governmental requirements enacted subsequent to the date hereof and applicable from time to time (and as to the amortized portion only as described below); provided, however it is agreed that each capital expenditure shall be amortized and charged as a Common Area expense over its useful life in accordance with generally accepted accounting principles, and provided further that if subsequent to any such expenditure LESSEE exercises any renewal option, the portion of the cost included within Common Area expenses shall be recalculated to include the length of the renewal term if such affects the generally accepted calculation of amortization.

     F. LESSOR reserves the right but is not obligated to perform necessary repairs to common sewage line plumbing and all other repairs, maintenance and replacements which are otherwise LESSEE’S obligation under this Article 11, and LESSEE shall, with respect to such items, be liable for and pay to LESSOR the cost of same within ten (10) days after written request and receipt of reasonable supporting documentation therefor.

     G. Intentionally Deleted.

     H. LESSEE shall, at its sole expense, enter into a regularly scheduled preventive maintenance/service contract with a maintenance contractor for servicing all hot water, heating, ventilation and air conditioning systems and other equipment within the Leased Premises. LESSOR reserves the right to approve or disapprove of any maintenance contract and the contractor(s) performing work on equipment serving the Leased Premises, but LESSOR’S approval shall not be unreasonably withheld, conditioned or delayed. The service contract must include all services recommended by the equipment manufacturer and must become effective and a copy thereof delivered to LESSOR without demand within thirty (30) days of the date of this Lease.

     I. Notwithstanding anything herein to the contrary, in no event shall LESSEE’S Proportionate Share of Controllable Operating Expenses (as defined below) in calendar year 2005 or any subsequent calendar year during the Term exceed 108% of LESSEE’S Proportionate Share of Controllable Operating Expenses applicable to the then prior calendar year, calculated on a cumulative basis. There shall be no limitation on LESSEE’S Proportionate Share of Non-Controllable Operating Expenses (as defined below). Assume, for example, LESSEE’S Proportionate Share of Controllable Operating Expenses for calendar year 2005 was $100.00. In calendar year 2006, LESSEE’s Proportionate Share of Controllable Operating Expenses would be the lesser of (i) LESSEE’s Proportionate Share of Controllable Operating Expenses for calendar year 2006, or (ii) $108.00 ($100.00 plus 8%). In calendar year 2007, LESSEE’s Proportionate Share of Controllable Operating Expenses would be the lesser of (i) LESSEE’s Proportionate Share of Controllable Operating Expenses for calendar year 2007, or (ii) $116.64 ($108 plus 8%). As used herein, the terms (a) “Controllable Operating Expenses” shall mean all Operating Expenses other than Taxes, insurance premiums, utility charges, snow and ice removal charges and other Operating Expenses outside the reasonable control of LESSOR; and (b) “Non-Controllable Operating Expenses” shall mean all Operating Expenses, other than Controllable Operating Expenses.

12. UTILITIES

     LESSOR agrees to provide, at its sole expense, the connections to the Leased Premises for sewer, water, electricity, natural gas and telephone service; but LESSEE shall pay for all charges (excluding the cost of the Work Items and associated charges) for water, gas, heat, light power, telephone, sewer, fire sprinklers and all other utilities and services used on or from the Leased Premises, together with any taxes, assessments, deposits, surcharges or other additional charges, penalties or the like pertaining thereto and any repair and maintenance charges for utilities, and LESSEE shall furnish all electric light bulbs and tubes and elements. If any such services are not separately metered to LESSEE, LESSEE shall pay its Proportionate Share of the cost of such services pursuant to Articles 4.D. and 4.E. of all charges jointly metered with other tenants of the Building; provided, however, LESSOR shall have the right to charge LESSEE with a greater share of the cost of such services on an equitable basis to the extent LESSEE is using a disproportionately large amount of the services in relation to the other tenants of the Building and/or project. LESSOR reserves the right to cause any of said services to be separately metered to LESSEE at LESSEE’S sole expense. LESSOR shall not be liable or pay for any interruption, re-establishment or failure of utility services to the Leased Premises, except that LESSOR shall promptly cure any interruption caused by LESSOR’S negligence or willful misconduct.

13. TAXES

     A. LESSEE shall pay LESSEE’S Proportionate Share pursuant to Articles 4.D. and 4.E., of all taxes, assessments and governmental charges of any kind and nature imposed upon the Leased Premises, Land and/or Building (referred to herein as “Taxes”). If at any time during the Term, there shall be levied, assessed or imposed on LESSOR a capital levy or other tax directly on the rents received from the Leased Premises, Land or Building and/or an assessment, levy or charge measured by or based, in whole or in part upon such rents from the Leased Premises, Land or Building, in which the Leased Premises is located, and such taxes, assessments, levies or charges do not exist as of the date hereof, then all such taxes, assessments, levies or charges, or the part thereof so measured or based, shall be deemed to be included within the term “Taxes.” Notwithstanding the foregoing, in no event shall Taxes include LESSOR’S income or franchise taxes.

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     B. LESSEE shall be liable for and pay all taxes, assessments, levies and governmental charges imposed against any personal property or fixtures of LESSEE placed in the Leased Premises. If any such taxes, assessments, levies or governmental charges are against LESSEE’S property and (i) LESSOR pays same or (ii) the assessed value of LESSOR’S property is increased by inclusion of LESSEE’S personal property and fixtures and LESSOR pays all or part of same, then, within thirty (30) days after written request, LESSEE shall pay same to LESSOR.

     C. LESSOR shall have the option, but not the obligation, to pay any and all taxes, assessments, levies and charges (whether or not included in the aforementioned definition of Taxes) payable by LESSEE under this Lease or by law. If LESSOR does so, LESSEE shall pay to LESSOR the amount so paid within thirty (30) days after written request.

     D. LESSOR shall have the right to employ a tax consulting firm to attempt to assure a fair tax burden on the Leased Premises, Land and Building within the applicable taxing jurisdiction, and LESSEE’S Proportionate Share of the cost of such consultant shall be included as Taxes to be charged to LESSEE pursuant to this Article.

     E. LESSEE has no right to protest the real estate tax rate assessed against the Project and/or the appraised value of the Project determined by any appraisal review board or other taxing entity with authority to determine tax rates and/or appraised values (each a “Taxing Authority”). LESSEE hereby knowingly, voluntarily and intentionally waives and releases any right, whether created by law or otherwise, to (a) file or otherwise protest before any Taxing Authority any such rate or value determination even though LESSOR may elect not to file any such protest; (b) receive, or otherwise require LESSOR to deliver, a copy of any reappraisal notice received by LESSOR from any Taxing Authority; and (c) appeal any order of a Taxing Authority which determines any such protest. The foregoing waiver and release covers and includes any and all rights, remedies and recourse of LESSEE, now or at any time hereafter, under Section 41.413 and Section 42.015 of the Texas Tax Code (as currently enacted or hereafter modified) together with any other or further laws, rules or regulations covering the subject matter thereof. LESSEE acknowledges and agrees that the foregoing waiver and release was bargained for by LESSOR and LESSOR would not have agreed to enter into this Lease in the absence of this waiver and release. If, notwithstanding any such waiver and release, LESSEE files or otherwise appeals any such protest, then LESSEE will be in default under this Lease and, in addition to LESSOR’S other rights and remedies, LESSEE must pay or otherwise reimburse LESSOR for all costs, charges and expenses incurred by, or otherwise asserted against, LESSOR as a result of any tax protest or appeal by LESSEE, including, appraisal costs, tax consultant charges and attorneys’ fees (collectively, the “Tax Protest Costs”). If, as a result of LESSEE’S tax protest or appeal, the appraised value for the Project is increased above that previously determined by the Taxing Authority (such increase, the “Value Increase”) for the year covered by such tax protest or appeal (such year, the “Protest Year”), then LESSEE must pay LESSOR, in addition to all Tax Protest Costs, an amount (the “Additional Taxes”) equal to the sum of the following: (i) the product of the Value Increase multiplied by the tax rate in effect for the Protest Year; plus (ii) the amount of additional taxes payable during the five (5) year period following the Protest Year, such amount to be calculated based upon the Value Increase multiplied by the tax rate estimated to be in effect for each year during such five (5) year period. During the Term, LESSEE must pay all Additional Taxes — even those in excess of LESSEE’S proportionate share. The Additional Taxes will be conclusively determined by a tax consultant selected by LESSOR, without regard to whether and to what extent LESSOR may be able in years following the Protest Year to reduce or otherwise eliminate any Value Increase. All Tax Protest Costs and Additional Taxes must be paid by LESSEE within five (5) days following written demand by LESSOR. LESSOR shall exercise customary and reasonable practices in an effort to minimize real estate taxes assessed against the Building and Land, including without limitation, protesting the real estate tax rate assessed against the Building and Land and/or the appraised value of the Building and Land when appropriate.

14. ALTERATIONS AND FIXTURES

     LESSEE shall not make any alterations, additions or improvements (“Alterations”) to the Leased Premises, Land or Building (including but in no way limited to roof and wall penetrations) without the express prior written consent of LESSOR (such consent not to be unreasonably withheld, conditioned or delayed). LESSEE may, without the consent of LESSOR, but at its sole expense and in a good workmanlike manner, erect such shelves, bins, machinery and trade fixtures (“Fixtures”), without altering the structural soundness, aesthetics or basic character of the Leased Premises, Land or Building or its walls, and in any case complying with all applicable governmental laws, ordinances, decisions, orders, decrees, regulations and other requirements. All Alterations and Fixtures erected by LESSEE that are affixed to the Leased Premises or the Building shall be and remain the property of LESSOR during the Term of this Lease; however, LESSEE shall, unless LESSOR otherwise elects in writing, remove all Alterations and Fixtures erected by LESSEE and restore the Leased Premises to its original condition (reasonable wear and tear excepted) by the end of the Term or upon earlier vacating of the Leased Premises, whichever comes first. Notwithstanding the foregoing, if LESSOR so elects in writing prior to the end of the Term of this Lease or upon LESSEE’S earlier vacating of the Leased Premises, such Alterations and Fixtures (other than trade fixtures) as LESSOR elects to have remain in the Leased Premises shall remain the property of LESSOR upon and after such end of the Term or LESSEE’S earlier vacating of the Leased Premises. All removals and restorations by LESSEE shall be accomplished in a good and workmanlike manner so as not to damage the Leased Premises, Land or Building or their structural, aesthetic or functional qualities, and LESSEE shall repair any such damage at its sole cost and expense.

15. SIGNS AND SIGN REMOVAL

     After first obtaining express written approval from LESSOR (not to be unreasonably withheld, conditioned or delayed), LESSEE shall have the right to erect signs on the exterior walls of the Building in accordance with reasonable signage specifications established by LESSOR. Any such signs shall be securely attached parallel to the walls and shall be in keeping with the general scheme of the signs and aesthetic characteristics in the immediate vicinity of the Leased Premises and shall not be other than customary trade signs identifying the business of LESSEE. LESSEE shall not erect any sign over the public way, over the roofline or on the roof, nor paint or otherwise deface or alter the exterior walls of the Building or Leased Premises. The erection of any signs by LESSEE shall be subject to and in conformity with all

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applicable laws, zoning ordinances, and building restrictions, covenants of record and in accordance with LESSOR’S reasonable signage standards. On or before the end of the Term, LESSEE shall remove all signs thus erected, and shall repair any damage or disfigurement, and close any holes, caused by such removal.

16. ASSIGNMENT OR SUBLETTING

     LESSEE may not assign this Lease or sublease the Leased Premises in whole or in part without LESSOR’S prior express written consent (except as expressly provided in Article 16.E. below) (such consent not to be unreasonably withheld, conditioned or delayed), and then only in accordance with and subject to the following conditions:

     A. If LESSEE desires to assign this Lease or sublet the Leased Premises in whole, then, at least ten (10) days prior to the proposed effective date of any assignment or sublease, the LESSEE shall deliver to LESSOR a written notice of intention to assign or to sublease, setting forth a proposed commencement date for the assignment or sublease and shall attach to such notice a copy of the proposed assignment or sublease agreement and all agreements collateral thereto. The LESSOR shall then have the right, to be exercised by giving written notice to LESSEE within ten (10) business days after receipt of LESSEE’S notice of intention to assign or sublease, to cancel and terminate this Lease, as of the day before the proposed effective date of the assignment or sublease; provided, however, if LESSOR so elects to cancel and terminate the Lease, LESSEE shall have the right to prevent such cancellation and termination by withdrawing its request for consent to the proposed assignment or subletting by delivery of a withdrawal notice to LESSOR within ten (10) business days following receipt of LESSOR’S notice of disapproval of the proposed assignment or subletting.

     B. In the event of the assignment of this Lease or sublease of all or any portion of the Leased Premises where the rental reserved in the assignment or sublease exceeds the rental or the pro-rata portion of the rental, as the case may be, for such space reserved in this Lease, LESSEE shall pay the LESSOR monthly, as additional rent, at the same time and at the same place as the monthly installments of rent hereunder, the excess of the rental reserved in the assignment or sublease over the rental reserved in this Lease applicable to the assigned or subleased space.

     C. None of LESSEE’S obligations to LESSOR under this Lease shall be waived, forfeited, compromised, released or novated regardless of any assignment or sublease, and any assignment or sublease shall be expressly subject to and in compliance with the provisions of this Lease. Further, as between LESSOR and LESSEE (and, if applicable, an assignee), the terms and conditions of this Lease shall take precedence over and control the provisions of any sublease or assignment to the extent of conflict or differing interpretation.

     D. LESSEE acknowledges and agrees that, among other matters, LESSOR has no obligation to consent to any assignment or subletting if: (a) [Intentionally Deleted]; (b) [Intentionally Deleted]; (c) a proposed assignee’s or subtenant’s business will impose a burden on the Building’s parking facilities, Common Areas or utilities that is greater (other than a de minimus increase) than the burden imposed by LESSEE, in LESSOR’S reasonable judgment; (d) the terms of a proposed assignment or subletting will allow the proposed assignee or subtenant to exercise a right of renewal, right of expansion, right of first offer, right of first refusal or similar right held by LESSEE, except to the extent expressly permitted in this Lease; (e) a proposed assignee or subtenant refuses to enter into a written assignment agreement or sublease, reasonably satisfactory to LESSOR, which provides that it will abide by (and, with respect to an assignee, assume) all of the applicable terms and conditions of this Lease accruing during the term of any assignment or sublease (except that in the case of a sublease, such subtenant’s rental obligations shall be as set forth in the sublease) and containing such other terms and conditions as LESSOR reasonably deems necessary; (f) the use of the Leased Premises by the proposed assignee or subtenant will not be for a use permitted by this Lease; (g) LESSEE is in Default at the time of the request; (h) LESSOR has sued or been sued by the proposed assignee or subtenant or has otherwise been involved in a legal dispute with the proposed assignee or subtenant; (i) the assignee or subtenant is involved in a business which is not in keeping with the then current standards of the Building; (j) the proposed assignee or subtenant is an existing tenant of the Building or is a person or entity then negotiating with LESSOR for the lease of space in the Building or another facility owned by LESSOR or an affiliate of LESSOR within the project of which the Leased Premises are a part; or (k) the assignee or subtenant is a governmental or quasi-governmental entity or an agency, department or instrumentality of a governmental or quasi-governmental agency. LESSEE acknowledges and agrees that the list set forth above has been included for illustration purposes only and does not represent the sole or exclusive basis upon which LESSOR may reasonably withhold LESSOR’S consent to any assignment or subletting.

     E. Notwithstanding the foregoing, LESSEE may assign this Lease or sublease all or part of the Leased Premises (a “Transfer”) to the following types of entities (each, a “Permitted Transferee”) without the written consent of LESSOR (each, a “Permitted Transfer”), provided that the conditions set forth below are satisfied:

   (1) any person or entity who or which controls, is controlled by, or is under common control with LESSEE;

   (2) any entity in which or with which LESSEE, or its corporate successors or assigns, is merged or consolidated, in accordance with applicable statutory provisions governing merger and consolidation of entities, so long as (A) LESSEE’S obligations hereunder are assumed by the entity surviving such merger or created by such consolidation; and (B) the net worth of the surviving or created entity is not less than the net worth of LESSEE as of the date of the Permitted Transfer; or

   (3) any corporation acquiring all or substantially all of LESSEE’S assets if such corporation’s net worth after such acquisition is not less than the net worth of LESSEE as of the date of the Permitted Transfer.

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LESSEE shall promptly notify LESSOR of any such Permitted Transfer. As a condition precedent to any Permitted Transfer, the proposed Permitted Transferee must deliver to LESSOR a written agreement whereby it expressly assumes the LESSEE’S obligations hereunder; however, any transferee of less than all of the space in the Leased Premises shall be liable only for obligations under this Lease that are properly allocable to the space subject to the Permitted Transfer, and only to the extent of the rent it has agreed to pay LESSEE therefor. The occurrence of a Permitted Transfer shall not waive LESSOR’S right as to any subsequent Transfer. As used herein, “net worth” shall mean the excess of total assets over total liabilities (in each case, determined in accordance with generally accepted accounting principles) excluding from the determination of total assets all assets which would be classified as intangible assets under generally accepted accounting principles, including, without limitation, goodwill, licenses, patents, trademarks, trade names, copyrights, and franchises. Any subsequent Transfer by a Permitted Transferee shall be subject to LESSOR’S prior written consent (which consent shall not be unreasonably withheld or delayed).

17. DAMAGE OR DESTRUCTION

     A. Subject to Article 17.E. below, if, at any time prior to the Commencement Date or during the Term, the Leased Premises or the Building should be destroyed or damaged to any extent which may require repairs in an amount in excess of thirty percent (30%) of the replacement cost of the Leased Premises or the Building, LESSOR shall have the right and option of either:

   (1) Immediately terminating this Lease (by written notice to LESSEE), in which case neither party shall have any rights against the other party from and after the occurrence or destruction except those arising from this Lease; or

   (2) Expeditiously repairing or rebuilding such damaged or destroyed portions of the Leased Premises or Building in substantially the same or better condition as immediately prior to the destruction or damage, in which event rental shall be reduced proportionately to the loss of actual physical occupancy suffered by LESSEE, provided that, if such damage was the direct result solely of the gross negligence or willful misconduct of LESSEE, its employees, agents, invitees, licensees, or others under its control, rental shall not be reduced during such period.

     B. Subject to Article 17.E. below, if during the Term there should be any such damage or destruction, but to an extent less than the said thirty percent (30%) of the replacement cost as discussed above, this Lease shall continue and LESSOR shall expeditiously repair or rebuild the damaged or destroyed portions of the Leased Premises as set forth in Article 17.A. above, and the rent shall be reduced in proportion to the actual loss of physical occupancy suffered by LESSEE for the period of the repair or rebuilding, provided LESSOR shall have no obligation to spend or incur costs for such repair or rebuilding in excess of the insurance proceeds actually paid to LESSOR.

     C. Intentionally Deleted.

     D. Subject to Article 17.E. below, within forty five (45) days after the occurrence of any damage or destruction which gives rise to the option of LESSOR to terminate or repair or rebuild, LESSOR has not given LESSEE notice of its decision, then this Lease shall continue in full effect, the option by LESSOR to terminate this Lease shall be deemed to have been waived, and LESSOR shall expeditiously repair or rebuild the Leased Premises, provided LESSOR shall have no obligation to spend or incur costs for such repair or rebuilding in excess of the insurance proceeds actually paid to LESSOR.

     E. Notwithstanding anything herein to the contrary, in the event that the Leased Premises are damaged or destroyed by fire or other casualty so as to materially impair the use and occupancy by LESSEE of the Leased Premises for the purposes contemplated hereunder, then LESSOR shall be obligated to provide written notice (the “Restoration Notice”) to LESSEE within forty-five (45) days of such event of casualty stating a good faith estimate, certified by an independent architect, of the period of time (the “Stated Restoration Period”) which shall be required for the repair and restoration of the Leased Premises. LESSEE shall have the right, at its election, to terminate the Lease if either (i) the Stated Restoration Period shall be in excess of one hundred forty (140) days following the event of casualty and LESSEE terminates this Lease with written notice thereof to LESSOR within ten (10) business days following delivery of the Restoration Notice, or (ii) LESSOR shall fail to substantially complete the repair and restoration of the Leased Premises within the Stated Restoration Period and LESSEE delivers written notice of such termination to LESSOR within ten (10) business days following the expiration of the Stated Restoration Period.

18. CONDEMNATION

     A. If, at any time during the Term, (a) title to the entire Land should become vested in a public or quasi-public authority by virtue of the exercise of expropriation, condemnation or other power in the nature of eminent domain, or by voluntary transfer from the owner of the Land under threat of such a taking, or (b) if less than the entire Land be thus taken, or transferred in lieu of such a taking, but it would be legally and commercially unreasonable for LESSEE to occupy and enjoy the Leased Premises remaining, and unreasonable for LESSEE to conduct his trade or business therein, or then in either event, the Term shall end as of the time of such vesting of title, after which neither party shall be further obligated to the other except for occurrences antedating such taking.

     B. Should there be such a partial taking or transfer in lieu thereof, but not to such an extent as to make such continued occupancy and operation by LESSEE unreasonable, then this Lease shall continue on all of its same terms and conditions subject only to a reduction in rent as may be fair and equitable. It is provided, however, that LESSOR and LESSEE shall each have the right and option to terminate this Lease in the event there is a partial taking or transfer in lieu thereof which affects a portion of Land to the extent that, in LESSOR’S or LESSEE’S reasonable

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opinion, it is commercially impractical to continue the operation of the Building or the project in a manner that will justify the continuation of this Lease.

     C. In the event of any such taking or private purchase in lieu thereof, all compensation awarded for any taking (or sale proceeds in lieu thereof) of the fee or leasehold interest shall be the property of LESSOR, and LESSEE shall have no claim thereto, the same being hereby expressly waived by LESSEE. Any amounts specifically awarded or agreed upon by LESSEE and the expropriating authority for the taking of LESSEE’S removable trade fixtures shall be the property of LESSEE. LESSEE further grants LESSOR exclusive authority to negotiate with any such authority for payment both with respect to the interest of LESSOR and the leasehold interest of LESSEE in the Leased Premises.

19. ENTRY DURING TERM

     A. LESSOR shall have the right to enter the Leased Premises throughout the Term during LESSEE’S regular hours of operation (except in the case of an emergency when LESSOR may enter at any time) for the following purposes: (1) inspecting the general condition and state of repair of the Leased Premises; (2) performing such maintenance and other obligations as may be required or permitted by this Lease of LESSOR; (3) showing the Leased Premises to any prospective purchasers, lenders; (4) showing the leased premised to prospective tenants during the last six (6) months of the Term or in the event of Default by LESSEE, at any time; (5) taking any emergency action which LESSOR in its reasonable discretion deems necessary to protect the Leased Premises, Land or Building; (6) determining whether there has been a Default under this Lease; and (7) any other reasonable purposes.

     B. If this Lease is not renewed or extended within one hundred twenty (120) days prior to the end of the Term, LESSOR, its officers, agents or assigns, shall have the right to erect on or about the Leased Premises a customary sign advertising the Leased Premises, Building and/or Land for lease or for sale; and shall likewise have the right to enter the Leased Premises for the purpose of showing the Leased Premises to prospective tenants.

20. DEFAULT

     The following, whether one or more and whether occurring together or separately, shall each be considered a breach and default by LESSEE under and of this Lease following the expiration of any applicable cure period (“Default”): (i) failure to pay all or part of any amount payable under this Lease within ten (10) days following written notice to LESSEE of such failure; provided, however, that LESSOR shall not be required to send such written notice to LESSEE more than twice in any one calendar year and after such two (2) written notices, LESSOR shall have no obligation to give LESSEE written notice of any subsequent default during the remainder of such calendar year and LESSEE’S failure or refusal to timely pay all or any part of any amount payable under this Lease within five (5) days after the same shall be due during the remainder of such calendar year shall constitute a Default; (ii) failure, for any reason whatsoever, of LESSEE to perform or effect performance of any of the other terms, conditions, obligations, agreements or covenants to be observed or performed by LESSEE under this Lease, within thirty (30) days after written notice to LESSEE of its failure to do so; provided, however, that in the event LESSEE’S failure to perform or effect performance of any of the other terms, conditions, obligations, agreements or covenants to be observed or performed by LESSEE under this Lease cannot reasonably be cured within thirty (30) days following written notice to LESSEE, LESSEE shall not be in default if LESSEE commences to cure same within the thirty (30) day period and thereafter diligently prosecutes the curing thereof to completion; (iii) failure, without any grace period, to comply with the provisions of Article 28 entitled “Environmental Hazards”; (iv) LESSEE or any officer, agent, successor, employee, director, legal representative or assign of LESSEE shall falsify any report or information furnished to LESSOR; (v) LESSEE or any guarantor of this Lease shall become bankrupt or insolvent or file or have filed against it any debtor or bankruptcy proceeding pursuant to any statute, either of the United States or of any state, or for the reorganization or for the appointment of a receiver or trustee of all or a material portion of its property and such case, proceeding or other action (a) results in the entry of an order for relief against it which is not fully stayed within seven (7) business days after the entry thereof or (b) remains undismissed for a period of one hundred twenty (120) days; (vi) LESSEE or any guarantor of this Lease makes an assignment for the benefit of creditors, or petitions for or enters into a plan of arrangements; and (vii) LESSEE shall abandon the Leased Premises or suffer this Lease to be seized or otherwise taken under any levy, turnover order, writ of execution or any other order, decree, writ or judgment.

21. REMEDIES

     A. Upon each occurrence of Default, LESSOR shall have the option to pursue, at any time and from time to time, any one or more of the following remedies, and/or any other remedy provided by law or in equity, without any notice or demand (except as expressly provided herein), LESSEE specifically waiving any municipal, county, state or federal law to the contrary:

   (1) Terminate this Lease; and/or

   (2) Enter upon and take possession of the Leased Premises with or without terminating this Lease; and/or

   (3) Alter and/or change all locks and other security devices at the Leased Premises with or without terminating this Lease;

and in any such event LESSEE immediately shall surrender possession of the Leased Premises to LESSOR, and if LESSEE fails so to do, LESSOR may enter upon and take possession of the Leased Premises and expel or remove LESSEE and LESSEE’S property and any other person and property occupying such Leased Premises or any part thereof, without service or notice or resort to legal process and being liable for prosecution or any claim of damages therefor, including but in no way limited to trespass or loss or damage to persons or property.

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     B. If LESSOR terminates this Lease due to a Default following expiration of any applicable cure period, LESSEE shall be liable for and shall pay to LESSOR within five (5) days after written request the sum of all Base Monthly Rent and other payments owed to LESSOR hereunder accrued through the date of such termination, plus an amount equal to (1) the present value (using a discount rate equal to the 90 day U.S. Treasury Bill rate at the date of such determination) of the remaining Total Monthly Payment payments for the remaining portion of the Lease, calculated as if the Term expired on the date set forth in Article 2, less (2) the then present fair market rental value of the Leased Premises remaining for such period.

     C. If LESSOR repossesses the Leased Premises without terminating this Lease, LESSEE, at LESSOR’S option, shall be liable for and shall pay LESSOR within five (5) days after written request all of the Total Monthly Payment and other payments owed to LESSOR accrued through the date of such repossession, plus all amounts required to be paid by LESSEE to LESSOR under this Lease through the date of expiration of the Term diminished by all amounts received by LESSOR through reletting the Leased Premises for the remainder of the Term. Actions to collect amounts due by LESSEE to LESSOR under this Article 21.C. may be brought from time to time, on one or more occasions, without the necessity of LESSOR’S waiting until expiration of the Term.

     D. Upon Default, in addition to any amount provided to be paid herein, LESSEE also shall be liable for and shall pay to LESSOR (i) brokers’ fees incurred by LESSOR in connection with reletting the whole or any part of the Leased Premises; (ii) the costs of removing and storing LESSEE’S or other occupant’s property; (iii) the costs of repairing, altering, remodeling or otherwise putting the Leased Premises and the fixtures, equipment and systems located therein into condition acceptable to a new tenant; and (iv) all reasonable expenses and fees, including but in no way limited to attorney’s fees, incurred by LESSOR in enforcing or defending LESSOR’S rights and/or remedies, (v) interest at the rate of twelve percent (12.00%) per annum on all sums due and owed to LESSOR by virtue of any provision of this Lease including without limitation, Base Monthly Rent and late charges, from the time they are due and payable until they are paid.

     E. LESSEE acknowledges that LESSOR has entered into this Lease in reliance upon, among other matters, LESSEE’S agreement and continuing obligation to pay all rent due throughout the Term. Upon termination of LESSEE’S right to possession of the Leased Premises due to a Default, LESSOR shall use reasonable efforts to relet the Leased Premises; provided, however, that, LESSEE agrees that LESSOR has no obligation to: (i) relet the Leased Premises prior to leasing any other space within the Building; (ii) relet the Leased Premises (A) at a rental rate or otherwise on terms below market, as then determined by LESSOR in its reasonable discretion; (B) to any entity not satisfying LESSOR’S then standard financial credit risk criteria; (C) for a use (1) not consistent with LESSEE’S use prior to the Default; (2) which would violate then applicable law or any restrictive covenant or other lease affecting the Building; (3) which would impose a greater burden upon the Building’s parking, HVAC or other facilities; and/or (4) which would involve any use of Hazardous Materials; (iii) divide the Leased Premises, install new demising walls or otherwise reconfigure the Leased Premises to make same more marketable; (iv) pay any reasonable leasing or other commissions arising from such reletting, unless LESSEE unconditionally delivers LESSOR, in good and sufficient funds, the full amount thereof in advance; (v) pay, and/or grant any allowance for, tenant finish or other costs associated with any new lease, even though same may be amortized over the applicable lease term, unless LESSEE unconditionally delivers LESSOR, in good and sufficient funds, the full amount thereof in advance; and/or (vi) relet the Leased Premises, if to do so, LESSOR would be required to alter other portions of the Building, make ADA-type modifications or otherwise install or replace any sprinkler, security, safety, HVAC or other Building operating systems.

     F. If LESSOR repossesses the Leased Premises, LESSOR shall have the right to (i) keep in place and use or (ii) remove and store all of the furniture, fixtures, equipment and other contents located at the Leased Premises, including that which is owned by or leased to LESSEE at all times prior to any foreclosure or repossession by LESSOR or third party having a lien thereon. LESSOR also shall have the right to relinquish possession of all or any portion of such furniture, fixtures, equipment and other property to any person (“Claimant”) who presents to LESSOR a copy of any instrument represented by Claimant to have been executed by LESSEE (or any predecessor of LESSEE) granting Claimant the right under various circumstances to take possession of such furniture, fixtures, equipment or other property, without the necessity on the part of LESSOR to inquire into the authenticity or legality of said instrument. The rights of LESSOR herein stated shall be in addition to any and all other rights that LESSOR has or may hereafter have at law or in equity; and LESSEE stipulates and agrees that the rights granted LESSOR are commercially reasonable.

     G. LESSEE AND LESSOR WAIVE ANY RIGHT TO TRIAL BY JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE BETWEEN LESSOR AND LESSEE ARISING OUT OF THIS LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.

22. CONDITION AT TERMINATION AND KEYS

     The Leased Premises and keys to same shall be surrendered to LESSOR, broom clean (free of all debris and property of LESSEE), no later than 5:00 o’clock p.m. on the last day of the Term, with the entire Leased Premises in good repair, reasonable wear and tear and damage by casualty excepted (except as provided to the contrary in this Lease), and with all equipment and systems in good operating condition. Should LESSEE surrender the Leased Premises or the equipment or systems in other than the above specified condition, LESSEE hereby grants LESSOR the right to have the Leased Premises placed in such condition and LESSEE agrees to pay the actual, reasonable cost of such reconditioning, as well as the Total Monthly Payment for the period necessary to accomplish same, within ten (10) days after written request to LESSEE. At the end of the Term, LESSEE shall surrender all keys to LESSOR at the place then fixed for the payment of rent or such other location as reasonably specified by LESSOR in writing. All obligations of the LESSEE contained in this Article 22 shall survive the end of the Term. Notwithstanding any provision in this Lease to the contrary, all personal property of LESSEE that shall remain in the Leased Premises after the vacation of the

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Leased Premises by LESSEE shall be deemed abandoned, shall thereupon, at the election of LESSOR, become the property of LESSOR, and the LESSOR may dispose of such property in any way at any time, without notice, as LESSOR sees fit without liability or payment for same or damage thereto to LESSEE, at LESSEE’S sole expense.

23. HOLDING OVER

     If, for any reason, LESSEE retains possession of the Leased Premises after the termination of the Term, such possession shall be subject to immediate termination by LESSOR at any time, and all of the other terms and provisions of this Lease (excluding any expansion or renewal option or other similar right or option) shall be applicable during such holdover period, except that LESSEE shall pay LESSOR from time to time, upon demand, as Base Monthly Rent for the holdover period, an amount equal to one hundred fifty percent (150%) of the Base Monthly Rent in effect on the termination date, computed on a monthly basis for each month or part thereof during such holding over. All other payments shall continue under the terms of this Lease. In addition to the foregoing, LESSEE shall be liable for all damages incurred by LESSOR as a result of such holding over, such damages to include, without limitation, LESSOR’S loss of rental income from one or more prospective tenants for the Leased Premises due to LESSEE’S failure to timely vacate the Leased Premises. No holding over by LESSEE, whether with or without consent of LESSOR, shall operate to extend this Lease and this Article 23 shall not be construed as consent for LESSEE to retain possession of the Leased Premises.

24. FINANCIAL STATEMENTS

     If LESSEE’S financial statements cease to be publicly available, then within ten (10) days after written request, LESSEE shall furnish to LESSOR copies of LESSEE’S income statements and balance sheets covering LESSEE’S last four (4) quarterly accounting periods, and shall include all corresponding notes, comments, opinions and statements and such financial information shall be certified once per annum by LESSEE or a Certified Public Accountant to be materially accurate.

25. SUBORDINATION AND ATTORNMENT

     A. LESSEE agrees that this Lease is and shall remain subject to and subordinate to all present and future mortgages, deeds to secure debt, deeds of trust, security agreements, financing statements and all other security instruments and other similar encumbrances (the “Encumbrances”) affecting the Land or the Building, or any part thereof, and within ten (10) days after written request, LESSEE shall execute, acknowledge, verify and deliver to LESSOR such certificate(s), letters, representations and agreements in writing as LESSOR or its lender may reasonably request, acknowledging the subordination of this Lease to such Encumbrances. Notwithstanding the foregoing, any such lender may at any time subordinate its Encumbrance to this Lease, without notice or LESSEE’S consent, and thereupon this Lease shall be deemed prior to such Encumbrance without regard to their respective dates of execution, delivery or recording and in that event such lender shall have the same rights with respect to this Lease as though this Lease had been executed prior to the execution, delivery and recording of such Encumbrance and had been assigned to such lender. LESSEE hereby irrevocably appoints LESSOR as LESSEE’S attorney-in-fact, coupled with an interest, and grants LESSOR power of attorney to subordinate LESSEE’S interest under this Lease to all Encumbrances on the Land and the Building, and any part thereof; provided that such subordination contains reasonable non-disturbance protection.

     B. Nothing in this Lease shall in any manner restrict LESSOR’S right to assign or encumber this Lease in its sole discretion. Should the LESSOR assign this Lease or should LESSOR enter into Encumbrances affecting all or any portion of the Leased Premises and should the holder(s) of such Encumbrances succeed to the interest of LESSOR, LESSEE shall be bound to any such holder under all the terms, covenants and conditions of this Lease, and LESSEE shall promptly attorn to such holder as LESSOR under this Lease.

     C. Notwithstanding any contrary provision contained herein, LESSOR shall attempt to obtain from LESSOR’S current mortgagee a non-disturbance and attornment agreement substantially in the form attached hereto as Exhibit “F” and made a part hereof for all purposes (the “SNDA”). If LESSOR does not deliver the fully executed SNDA to LESSEE by not later than the date five (5) business days from the date hereof, LESSOR or LESSEE may terminate this Lease by not later than the date eight (8) business days from the date hereof by written notice to the other, in which event this Lease shall terminate, all prepaid sums (including the Security Deposit) shall be refunded to LESSEE and the parties shall have no further obligations hereunder. LESSEE shall execute the SNDA promptly after receiving the counterpart executed by LESSOR and the named Lender. In addition, notwithstanding any contrary provision contained herein, the subordination of this Lease to any mortgage, deed of trust or other lien hereafter placed upon the Leased Premises and LESSEE’S agreement to attorn to the holder of such mortgage, deed of trust or other lien as provided in this Article 25 shall be conditioned upon such holder’s entering into a non-disturbance and attornment agreement providing LESSEE with substantially the same protection as to LESSEE’S use and enjoyment of LESSEE’S leasehold estate, use, possession, tenancy and other rights hereunder as is afforded LESSEE under the form instrument attached hereto as Exhibit “F”.

26. EXCULPATION

     LESSEE agrees that LESSEE shall look solely to LESSOR’S interest in the Leased Premises, Land and Building for the satisfaction of any claim, judgment, decree, decision, or ruling lawfully requiring the payment of money by LESSOR, and no other property or assets of LESSOR, its officers, directors, agents, employees, partners, owners, shareholders, successors, assigns or legal representatives, shall be subject to lien, levy, execution or other enforcement procedure for the satisfaction of any such claim, judgment, injunction, decree, decision or ruling, nor shall any of the foregoing individuals have any personal liability, whether jointly, individually or derivatively, for any obligation of or any claim against LESSOR.

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27. ESTOPPEL REPRESENTATIONS

     Within ten (10) business days after written request from a party hereto, the other party shall execute, acknowledge, verify and deliver to the requesting party or its designee written statements certifying that this Lease is in full force and effect (and, if there has been a modification thereof, that the same is in full force and effect as modified), that there are no uncured defaults (or if any such default exists, the specific nature and extent thereof), the date to which any rent or other charges have been paid in advance, if any, that all tenant finish allowances and related costs owed by LESSOR have been paid in full (or, if not, the specific amount owed) and such other matters as the requesting party may, in its reasonable discretion request. It is understood and agreed that each party’s obligation to furnish each estoppel certificate in a timely fashion is a material inducement for the execution of this Lease. No cure or grace period provided in this Lease shall apply to the obligations to timely deliver an estoppel certificate.

28. ENVIRONMENTAL HAZARDS

     A. The term “Hazardous Substances”, as used in this Lease shall mean all pollutants, contaminants, explosives, flammable materials, compressed materials, corrosives and toxic, radioactive and hazardous materials, and all other substances, the use, containment, existence, monitoring, transporting, maintenance prevention and/or removal of which is monitored, restricted, prohibited or penalized by an “Environmental Law”, which term shall mean all federal, state or local laws, ordinances, statutes, orders, directives and decrees, and all orders, directives, rulings, rules, regulations and decisions of a governmental or quasi-governmental authority, and all decisions, orders, decrees and judgments of a judicial or quasi-judicial body, and all rules, regulations, rulings, orders, directives and decisions of any regulatory or quasi-regulatory body relating to the foregoing or the pollution, contamination, regulation, monitoring, cleansing or protection of the environment. LESSEE hereby agrees that: (i) no activity or inactivity will be conducted on the Leased Premises that will produce any Hazardous Substances, except for such activities that are part of the ordinary course for LESSEE’S business activities and which are conducted in accordance with all Environmental Laws and have been expressly and specifically approved in advance in writing by LESSOR in its sole discretion (“Permitted Activities”); LESSEE shall be responsible for obtaining any required permits, certificates (excluding the Certificate of Occupancy), variances and all approvals and for paying any fees and providing any testing required by any governmental agency related to LESSEE’S specific use of the Leased Premises; (ii) the Leased Premises will not be used in any manner for the storage of any Hazardous Substances except for the temporary storage of “Permitted Materials” (as defined in Article 28.B.), which are properly stored in a manner and location meeting all Environmental Laws and are expressly and specifically approved in advance in writing by LESSOR in its sole discretion; (iii) no portion of the Leased Premises will be used as a landfill, waste disposal facility, waste storage facility or a dump; (iv) there will be no installation of any above ground or underground tanks or other storage facilities of any type; (v) LESSEE will not cause or permit any surface or subsurface conditions to exist or come into existence that constitute, or with the passage of time may constitute a public or private nuisance; (vi) there will be no Hazardous Substances brought onto the Leased Premises, except for the Permitted Materials, and if so brought or found located thereon, the same shall be immediately removed by LESSEE, with proper disposal pursuant to all Environmental Laws, and all required cleanup procedures shall be diligently undertaken pursuant to all Environmental Laws. LESSOR shall have the right but not the obligation to enter the Leased Premises during LESSEE’S regular business hours (except in case of an emergency when LESSOR may enter at any time) for the purpose of inspecting the storage, use and disposal of Permitted Materials to ensure compliance with this Lease and all Environmental Laws. Should it be determined, in LESSOR’S sole discretion, that said Permitted Materials are being improperly stored, used, or disposed of, then LESSEE shall take such corrective action in accordance with Environmental Law within 24 hours after written demand from LESSOR. If such corrective action is not so taken, LESSOR shall have the right, but not the obligation, to perform such work and LESSEE shall reimburse LESSOR for all costs associated with said work within ten (10) business days after written request. If at any time during or after the Term, the Leased Premises are found to be so contaminated or subject to said conditions, LESSEE shall immediately institute proper and thorough cleanup procedures in accordance with Environmental Law at LESSEE’S sole cost, and LESSEE agrees to indemnify and hold LESSOR harmless from all claims, demands, actions, liabilities, costs, expenses, damages and obligations of any nature arising from, in connection with or as a result of said conditions caused by LESSEE or LESSEE’S employees, agents, contractors or invitees. If such corrective action is not so taken, LESSOR shall have the right, but not the obligation, to perform such work and LESSEE shall reimburse LESSOR for all costs associated with said work within ten (10) business days after written request. At the expiration or earlier termination of the Lease, if LESSOR has good reason to believe that LESSEE violated the provisions of this Section 28, LESSOR shall have the right, at its option and at LESSEE’S sole cost and expense, to undertake an environmental assessment of the Leased Premises to determine LESSEE’S compliance with all Environmental Laws. LESSOR and LESSEE agree that LESSOR’S receipt of or satisfaction with any environmental assessment in no way waives any rights that LESSOR holds against LESSEE. The foregoing indemnification and the responsibilities of LESSEE in this Article 28 shall survive the end of the Term.

     B. PERMITTED MATERIALS:

        Cleaning agents and materials incidental to Lessee’s business
        De minimis items incidental to LESSEE’S business

     C. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, LESSEE shall have no responsibility or liability relating to or arising from the existence of Hazardous Substances located in or on the Building, the Leased Premises or any part of the Land unless LESSEE or LESSEE’S employees, agents, contractors or invitees create, place or dispose of Hazardous Substances in or on the Building, the Leased Premises or any part of the Land.

29. PROHIBITION OF LIENS

     LESSEE has no authority, express or implied, to create, place or allow any lien or encumbrance of any kind or nature whatsoever upon the Leased Premises, Land or Building, or in any manner to bind the interest of LESSOR or

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LESSEE in the Leased Premises, Land or Building or to charge any amount payable under this Lease for any claim in favor of any person dealing with LESSEE, including those who may furnish materials or perform labor for any construction or repairs. LESSEE agrees that it will pay or cause to be paid all sums for labor performed or materials furnished in connection with any work performed on the Leased Premises by or on behalf of LESSEE (except as otherwise provided herein in Exhibit “C”), and that it will save and hold LESSOR harmless from any and all loss, cost or expense based on or arising out of asserted claims or liens against the Leased Premises, Land or Building or against the right, title and interest of the LESSOR in the Leased Premises, Land or Building or under this Lease. LESSEE agrees to give LESSOR written notice within five (5) days of the placing of any lien or encumbrance against the Leased Premises, Land or Building caused by LESSEE.

30. LESSOR’S LIEN

     LESSOR hereby waives any statutory or contractual lien (excluding judgment liens) on the goods, wares and equipment of LESSEE in the Leased Premises and shall sign such confirmations of the foregoing as LESSEE shall reasonably request. The foregoing waiver shall not waive, release or otherwise affect any unsecured claim that LESSOR may have against LESSEE.

31. PROPORTIONATE SHARE

     “Proportionate Share”, as used in this Lease, shall mean the percentage which is the ratio of the rentable square feet of the Leased Premises to the total rentable square feet contained in the Building. The Proportionate Share as of the date of the Lease is one hundred percent (100%).

32. SEVERABILITY

     If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent and for any reason, be declared invalid or unenforceable by a court of law or regulatory agency, the remainder of this Lease and the application of such term, covenant or condition to persons or circumstances other than those which or to which such may be held invalid or unenforceable, shall not be affected thereby, and each term, covenant or condition of this Lease shall be valid and enforceable to the fullest extent permitted by law.

33. FURNISHING NOTICE

     Any notice, demand, request or writing which shall be required or permitted under this Lease must be in writing and (i) delivered in person or by courier or (ii) deposited, postage prepaid, return receipt requested in the US Mail, certified or registered, or (iii) via a nationally recognized overnight delivery service, and addressed to:

LESSOR:	Sealy TA Texas, L.P.
	Attn: Mark P. Sealy
	Sealy & Company, Inc.
	333 Texas Street, Suite 1050
	Shreveport, Louisiana 71101
	Telephone No.: 318-222-8700
	Telecopier No.: 318-222-4124
LESSEE:	Legal Notice Address:
	Legal Department
	Emerson Radio Corp.
	9 Entin Road
	Parsippany, New Jersey 07054-0430
	Telephone No.: 973 428-2026 / 973 428-2074
	Telecopier No.: 973 428-2010
LESSEE Billing Address:
	Emerson Radio Corp.
	Attn: Frank Guerriero
	9 Entin Road
	Parsippany, New Jersey 07054-0430
	Telephone No.: 973-428-2020
	Telecopier No.: 973-428-2019
On-Site Contact Address:
	Emerson Radio Corp.
	Attn: Rodney Powers
	5101 Statesmen Drive
	Irving, Texas 75063
	Telephone No.: To Be Provided in Suite Acceptance Memorandum
	Telecopier No.: To Be Provided in Suite Acceptance Memorandum

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or such other address or name as LESSOR or LESSEE shall have most recently designated by written notice. Any notice, demand or request hereunder shall be deemed to have been received on the date of delivery, if delivered in person or by courier, or on the date of receipt on the return receipt, if delivered by US Mail or overnight delivery service.

34. TITLES

     Notations or titles appearing in this Lease are provided merely for ease of reference, and the parties hereto expressly acknowledge and agree that such notations and titles do not constitute a part of this Lease, have no legal effect whatsoever in determining the rights or obligations of parties and shall have no bearing upon the meaning or interpretation of this Lease or any portion of it.

35. NON-WAIVER

     The failure by either party to act upon a specific default, failure or breach of any term, covenant or condition in this Lease (whether once or more) is not and will not be intended to be, and shall not be deemed to be a surrender of the Leased Premises or a waiver, forfeiture, compromise, release or novation of such term, covenant, or condition nor of any subsequent default, failure or breach of the same or any other term, covenant or condition of this Lease. Any acceptance by a party of any amount of money is not intended to be, nor shall be deemed to be a surrender of the Leased Premises or a waiver, forfeiture, compromise, release or novation of any default, failure or breach by the other party of any term, covenant or condition of this Lease, regardless of the other party’s knowledge of such default, failure or breach at the time of acceptance of such amount. No covenant, term or condition of this Lease shall be deemed to have been compromised, forfeited, released, novated or waived by a party unless specifically expressed in writing by such party.

36. ENTIRE AGREEMENT

     This Lease constitutes the entire agreement between the parties, and there are no other agreements or covenants by either LESSOR or LESSEE other than set forth in this Lease. No subsequent amendment, modification, renewal, extension, restatement, addition or deletion to this Lease shall be binding upon or inure to the benefit of LESSOR or LESSEE unless reduced to writing, signed by their authorized representatives.

37. RECORDATION OF LEASE OR SHORT FORM

     LESSEE shall not record this Lease or a short form of this Lease, unless expressly approved by LESSOR in writing. Within five (5) days after written request by LESSOR, LESSEE shall join LESSOR in the execution of a memorandum or “short form” of this Lease for the purposes of recordation at LESSOR’S sole discretion and expense. The memorandum shall describe the parties, the Leased Premises, and the Term of this Lease, and shall incorporate this Lease by reference.

38. TIME OF ESSENCE

     Time is the essence with respect to the performance of each of the payments, covenants and agreements in this Lease.

39. GOVERNING LAW; JURISDICTION; VENUE

     The laws of the State of Texas shall govern the validity, performance, interpretation and enforcement of this Lease and all claims, suits, demands and actions relating to, in connection with and arising from this Lease and its subject matter, and all such claims, suits, demands and actions shall be made and brought in the County of the State of Texas in which the Building is located.

40. ACTS OF GOD; FORCE MAJEURE

     A party shall not be required to perform any term, condition or covenant of this Lease, or be liable for any damages to the other party, so long as the performance or nonperformance of the term, condition or covenant is delayed, caused by or prevented by an Act of God or Force Majeure; provided, however, the foregoing shall be inapplicable to, and shall not in any way excuse LESSEE’S or LESSOR’S failure to timely pay Base Monthly Rent or other monetary amount due hereunder, as applicable, from one party to the other at the time such payments are due. For purposes of this Lease, Act of God and Force Majeure are defined as strikes, lock-outs, sit-downs, material or labor restrictions by any governmental authority, unusual transportation delay, riots, floods, washouts, explosions, earthquakes, fire, storms, weather (including wet grounds or inclement weather which prevents construction), acts of terrorism and public enemy, wars, insurrections or any other cause not reasonably within the control of the party required to take such action and which by the exercise of due diligence is unable, fully or in part, to prevent or overcome; provided, however, the inability to secure a certificate of occupancy from the appropriate governmental authority shall not permit an Act of God or Force Majeure delay.

41. LESSEE’S AUTHORITY

     Both LESSEE and the individual(s) signing on behalf of LESSEE below hereby represent and warrant that they are duly authorized to execute and deliver this Lease and bind LESSEE to the terms thereof without the consent of any other individual, entity or group of individuals and/or entities.

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42. COMPLIANCE WITH LAW

     All agreements between LESSOR and LESSEE, whether now existing or hereafter arising, are hereby limited so that in no contingency, whether by reason of demand or acceleration or otherwise, shall any amount contracted for, charged, received, paid or agreed to be paid to LESSOR exceed the maximum amount permissible under applicable law. If, from any circumstances whatsoever, any amount would otherwise be payable to LESSOR in excess of the maximum lawful amount, such amount payable to LESSOR shall be reduced to the maximum amount permitted under applicable law; and if from any circumstances LESSOR shall ever receive anything of value deemed interest by applicable law in excess of the maximum lawful amount, an amount equal to any excessive interest shall be applied to the reduction of the amounts due and to become due under this Lease and not the payment of interest, or if such excessive amount exceeds amounts due and to become due under this Lease, such excess shall be refunded to LESSEE. This Article 42 shall control all agreements between the LESSOR and LESSEE.

43. WAIVER OF CONSUMER RIGHTS

     LESSOR and LESSEE waive their rights under the Deceptive Trade Practices-Consumer Protection Act, Section 17.41 et. seq., Business & Commerce Code, a law that gives consumers special rights and protections. Each, after consultation with an attorney of its selection, voluntarily consents to this waiver.

44. CERTAIN CALCULATIONS

     LESSOR and LESSEE are knowledgeable and experienced in commercial transactions and agree that the provisions set forth in this Lease for determining charges, amounts and additional rent payable by LESSEE are commercially reasonable and valid even though such methods may not state a precise mathematical formula for determining such charges. ACCORDINGLY, LESSEE HEREBY VOLUNTARILY AND KNOWINGLY WAIVES ALL RIGHTS AND BENEFITS OF LESSEE UNDER SECTION 93.012 OF THE TEXAS PROPERTY CODE, AS SUCH SECTION NOW EXISTS OR AS MAY BE HEREAFTER AMENDED OR SUCCEEDED.

45. INTENTIONALLY DELETED

46. NO IMPLIED WARRANTY

     LESSOR AND LESSEE EXPRESSLY WAIVE AND DISCLAIM ANY IMPLIED WARRANTY THAT THE LEASED PREMISES ARE SUITABLE FOR LESSEE’S INTENDED COMMERCIAL PURPOSE. FURTHER, LESSEE AGREES THAT LESSEE’S OBLIGATION TO PAY BASE MONTHLY RENT AND OTHER SUMS HEREUNDER IS NOT DEPENDENT UPON THE CONDITION OF THE LEASED PREMISES OR THE PERFORMANCE BY LESSOR OF ITS OBLIGATIONS HEREUNDER AND, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, LESSEE SHALL CONTINUE TO PAY BASE MONTHLY RENT AND, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN, SUCH OTHER SUMS, WITHOUT ABATEMENT, SETOFF OR DEDUCTION, NOTWITHSTANDING ANY BREACH BY LESSOR OF SUCH OBLIGATIONS, WHETHER EXPRESS OR IMPLIED, EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN.

16

This Lease Agreement is executed as of the dates indicated below.

WITNESS:	LESSEE:
	EMERSON RADIO CORP.,
	a Delaware corporation
/S/
	By:/S/ Frank Guerriero
	Printed Name: Frank Guerriero
/S/
	Its: Vice President of Operations
	Emerson Radio Consumer Products Corporation
	Date: October 1, 2004
WITNESS:	LESSOR:
	SEALY TA TEXAS, L.P.,
	a Georgia limited partnership
	By:	Sealy TA Texas General Partner, L.L.C.,
		a Delaware limited liability company,
		its general partner
/S/
		By: /S/ Mark P. Sealy
		Printed Name:	Mark P. Sealy
		Its:	President
	Date: 10/8/04

17

EX-10.28.2

Exhibit 10.28.2

THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY OTHER SECURITIES LAWS. SUCH SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF (1) AN EFFECTIVE REGISTRATION STATEMENT COVERING SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933 AND ANY OTHER APPLICABLE SECURITIES LAWS, OR (2) AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.

COMMON STOCK PURCHASE WARRANT AGREEMENT

       EMERSON RADIO CORP., a Delaware corporation (the “Company”), hereby certifies that, for value received, EPOCH FINANCIAL SERVICES, INC. (the “Holder”), is the registered holder of warrants (the “Warrants”) to subscribe for and purchase 50,000 shares of Common Stock (as adjusted pursuant to Section 3 hereof, the “Shares”) of the Company, at a purchase price per share equal to the Warrant Exercise Price (as defined below), subject to the provisions and upon the terms and conditions hereinafter set forth. As used herein, (a) the term “Common Stock” shall mean the Company’s presently authorized Common Stock, par value $.01 per share, and any stock into or for which such Common Stock may hereafter be converted or exchanged, (b) the term “Grant Date” shall mean as of August 1, 2004, and (c) the term “Warrant” shall be deemed to include any warrant issued upon transfer or partial exercise of this Warrant, unless the context clearly requires otherwise.

     1. Exercise of Warrants. (a) The Warrants may be exercised by the Holder, in whole at any time or in part from time to time, at any time up to August 1, 2009 (the “Expiration Date”) at 5:00 p.m. New York City time, when such Warrants shall expire, at an exercise price of $3.00 per share (the “Warrant Exercise Price”). The Holder shall deliver to the Company written notice of the Holder’s intent to exercise the Warrants at Nine Entin Road, Parsippany, New Jersey 07054-0430, or at such other address as the Company shall designate in writing to the Holder, together with this Warrant Agreement and a certified or official bank check payable to the order of the Company for the aggregate purchase price of the Shares so purchased. Upon exercise of the Warrants as aforesaid, the Company shall as promptly as practicable, and in any event within 10 days thereafter, execute and deliver to the Holder a certificate or certificates in the name of the Holder for the total number of whole Shares for which the Warrants are being exercised. If the Warrants shall be exercised with respect to less than all of the Shares, the Holder shall be entitled to receive a similar warrant of like tenor and date covering the number of Shares in respect of which the Warrants were not exercised. The Warrants covered by this Warrant Agreement shall lapse and be null and void if not

1

exercised by the Holder on or before 5:00 p.m., New York City time, on the Expiration Date.

          (b) In lieu of exercising this Warrant in the manner set forth in paragraph 1(a) above, this Warrant may be exercised prior to the Expiration Date by surrender of the Warrant without payment of any other consideration, commission or remuneration, together with the cashless exercise subscription form at the end hereof, duly executed. The number of Shares to be issued in exchange for the Warrant shall be the product of (x) the excess of the market price of the Common Stock on the date of surrender of the Warrant and the exercise subscription form over the Warrant Exercise Price and (y) the number of shares subject to issuance upon exercise of the Warrant, divided by the market price of the Common Stock on such date. Upon such exercise and surrender of this Warrant, the Company will (i) issue a certificate or certificates in the name of the Holder for the number of whole shares of the Common Stock to which the Holder shall be entitled, rounded down to the nearest whole number of Shares so that no fractional Shares shall be issued, and (ii) deliver the other securities and properties receivable upon the exercise of this Warrant, pursuant to the provisions of this Warrant. If the Warrants shall be exercised with respect to less than all of the Shares, the Holder shall be entitled to receive a similar warrant of like tenor and date covering the number of Shares in respect of which the Warrants were not exercised.

          (c) The market price of Common Stock shall mean the price of a share of Common Stock on the relevant date, determined on the basis of the last reported sale price of the Common Stock as reported on the American Stock Exchange (“AMEX”), or, if there is no such reported sale on the day in question, on the basis of the average of the closing bid and asked quotations as so reported, or, if the Common Stock is not listed on AMEX, the last reported sale price of the Common Stock on such other national securities exchange or market upon which the Common Stock is listed, or, if the Common Stock is not listed on any national securities exchange, on the basis of the average of the closing bid and asked quotations on the day in question in the over-the-counter market as reported by the National Association of Securities Dealers’ Automated Quotations System, or, if not so quoted, as reported by National Quotation Bureau, Incorporated or a similar organization.

     2. Covenants of the Company. The Company covenants and agrees that all the Shares which may be issued upon the exercise of the Warrants represented by this Warrant Agreement will, upon issuance, be fully paid and nonassessable and free from all taxes, liens, and charges with respect to the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). The Company further covenants and agrees that during the period within which the Warrants represented by this Warrant Agreement may be exercised, the Company will at all times have authorized and reserved a sufficient number of Shares to provide for the exercise of the Warrants represented by this Warrant Agreement.

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     3. Adjustments of Warrant Exercise Price and Number of Shares.

          (a) If the Company shall at any time declare a stock dividend on its outstanding shares of Common Stock or effectuate a stock split or reverse stock split, by subdivision or consolidation in any manner, regarding the number of shares of the Common Stock then outstanding into a different number of shares of the Common Stock, with or without par value, then thereafter the number of Shares which the holder shall have the right to purchase (calculated immediately prior to such change), shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of shares of the Common Stock of the Company issued and outstanding by reason of such dividend or change, and the Warrant Exercise Price of the Shares after such change shall in the event of an increase in the number of shares of the Common Stock be proportionately reduced, and in the event of a decrease in the number of shares of the Common Stock be proportionately increased.

          (b) No adjustment in the Warrant Exercise Price shall be required unless such adjustment would require an increase or decrease of at least $0.05 per share of Common Stock; provided, however, that any adjustments which by reason of this sub-section (b) are not required to be made shall be carried forward and taken into account in any subsequent adjustment; and provided further, however, that adjustments shall be required and made in accordance with the provisions of this Section 3 (other than this sub-section (b)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the Holder of this Warrant or Common Stock. All calculations under this Section 3 shall be made to the nearest cent or to the nearest 1/100th of a share, as the case may be. Anything in this Section 3 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Warrant Exercise Price, in addition to those required by this Section 3, as it in its discretion shall deem to be advisable in order that any stock dividend, subdivision of shares or distribution of rights to purchase stock or securities convertible or exchangeable for stock hereafter made by the Company to its shareholders shall not be taxable.

          (c) Notwithstanding anything herein to the contrary, for purposes of this Section 3, the Holder agrees that no adjustment shall be made to the Warrant Exercise Price or the number of Shares issuable upon the exercise of this Warrant Agreement upon issuance of Common Stock (or any other securities) of the Company for any purposes other than as set forth in Sections 3(a) and 4 herein.

          (d) Notwithstanding anything herein to the contrary, the Holder agrees that no adjustment shall be made to the Warrant Exercise Price or the number of Shares issuable upon the exercise of this Warrant Agreement upon issuance of Common Stock (or any other securities) of the Company in connection with a transaction concerning or involving Sport Supply Group, Inc.

     4. Survival in the Event of Mergers and Reorganizations. In the event of the reclassification or change in the outstanding Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a

3

result of a subdivision, combination or stock dividend), or in the event of a sale of all or substantially all of the assets of the Company, or in the event of any consolidation of the Company with, or merger of the Company into, another corporation, the Company, or such successor corporation, as the case may be, shall provide that, the Holder shall thereafter be entitled to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, change, consolidation, sale, or merger by a holder of the number of Shares which this Warrant Agreement entitled the holder thereof to purchase immediately prior to such reclassification, change, consolidation, sale, or merger. Such corporation, which thereafter shall be deemed to be the Company for purposes of this Warrant Agreement, shall provide for adjustments, if any, which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant Agreement.

     5. Sale of Assets, Dissolution. Notwithstanding paragraph 4 hereof, in the event of a sale of all or substantially all the assets of the Company, or in the event of any distribution of all or substantially all of its assets in dissolution or liquidation, or in the event of any other distribution or dividend (other than cash dividends) or other event described in Section 4, the Company shall mail notice thereof by registered mail to the Holder and shall make no distribution to the stockholders of the Company until the expiration of 10 days from the date of mailing of the aforesaid notice; provided, however, that in any such event, if the Holder shall not exercise the Warrants within 10 days from the date of mailing such notice, all rights herein granted and not so exercised within such 10 day period shall thereafter become null and void. The Company shall not, however, be prevented from consummating any such merger, consolidation, sale or distribution without awaiting the expiration of such 10 day period, it being the intent and purpose hereof to enable the Holder, upon exercise of the Warrants, to participate in the distribution of the consideration to be received by the Company upon any such merger, consolidation, or sale or in the distribution of assets upon any dissolution or liquidation or in the event of any other distribution or dividend (as provided above).

     6. No Fractional Shares. The number of Shares subject to issuance upon the complete exercise of the Warrants shall be rounded down to the nearest whole number of Shares so that no fractional Shares shall be issued upon the complete exercise of the Warrants. The Holder shall not be entitled to receive any compensation or property for such fractional Share to which it may have been entitled to in the absence of this provision.

     7. Notices. If there shall be any adjustment in accordance with this Warrant Agreement, or if securities or property other than Shares of the Company shall become purchasable in lieu of Shares upon exercise of the Warrants, the Company shall forthwith cause written notice thereof to be sent by registered mail, postage prepaid, to the Holder at its address shown on the books of the Company, which notice shall be accompanied by a certificate of either independent public accountants of recognized standing or the Chairman, President, or any Vice President of the Company setting forth in reasonable detail the basis for the Holder becoming entitled to purchase such Shares and the number of Shares which may be purchased and the exercise price thereof, or the

4

facts requiring any such adjustment, or the kind and amount of any such securities or property so purchasable upon the exercise of the Warrants, as the case may be.

     8. Taxes. The issue of any stock or other certificate upon the exercise of the Warrant shall be made without charge to the Holder for any stamp, duty, excise, or similar tax (but not including the Holder’s income or similar taxes) in respect of the issue of such certificate. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder, as the registered holder of this Warrant Agreement, and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

     9. Non-Transferability. This Warrant is not transferable or assignable by the Holder, other than to Holder’s officers, directors, employees or any of their respective family members.

     10. Warrant Holder Not Stockholder. This Warrant Agreement does not confer upon the Holder any right to vote or to consent or to receive notice as a stockholder of the Company, as such in respect of any matters whatsoever, or any other rights or liabilities as a stockholder, prior to the exercise hereof as provided herein.

     11. Investment Representations. The Holder, by acceptance hereof, and with reference to the Warrants and the Shares issuable upon exercise of the Warrants, represents and warrants that:

          (a) The Holder is acquiring such securities for investment purposes only, for its own account, and not with a view toward resale or other distribution thereof, and has no present intention of selling or otherwise disposing of such securities.

          (b) The Holder is aware that the offer and sale of the securities have not been registered under the Securities Act of 1933, as amended (“Securities Act”), or any state securities law, that upon exercise of the Warrants, the Shares must be held indefinitely unless they are subsequently registered or an exemption from such registration is available and that the Company is under no obligation to register the offer and sale of the Shares under the Securities Act or any applicable state securities laws, except as otherwise set forth in Section 13 hereof.

          (c) The Holder acknowledges that the Warrants may not be made subject to a security interest, pledged, hypothecated, sold, or otherwise transferred in the absence of an effective registration statement for such Warrants under the Securities Act and such applicable state securities laws or there is an applicable exemption therefrom. The Holder further acknowledges that, unless the offer and sale of the Shares issuable upon exercise of the Warrants have been registered under the Securities Act, the Shares issued upon the exercise of the Warrants shall be restricted in the same manner and to the

5

same extent as the Warrants and the certificates representing such Shares shall bear the following legend:

“THESE SHARES OF COMMON STOCK HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY OTHER SECURITIES LAWS. SUCH SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF (1) AN EFFECTIVE REGISTRATION STATEMENT COVERING SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933 AND ANY OTHER APPLICABLE SECURITIES LAWS, OR (2) AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.”

     In making the above representations and warranties, the Holder intends that the Company rely thereon and understands that, as the result of such reliance, such securities are not being registered under the Securities Act or any applicable state securities laws in reliance upon the applicability of certain exemptions relating to transactions not involving a public offering.

     12. Lost Warrants. In case this Warrant Agreement shall be mutilated, lost, stolen, or destroyed, the Company will issue a new Warrant Agreement of like date, tenor, denomination and terms and conditions, and deliver the same in exchange and substitution for and upon surrender and cancellation of the mutilated Warrant Agreement, or in lieu of any Warrant Agreement lost, stolen, or destroyed, upon receipt of evidence satisfactory to the Company of the loss, theft, or destruction of such Warrant Agreement, and upon receipt of indemnity satisfactory to the Company.

     13. Registration Rights.

     (a) The Company agrees that if at any time hereafter the Company proposes to file with the Securities and Exchange Commission (the “Commission”) a registration statement (“Registration Statement”) under the Securities Act on a form suitable for registering the Shares issuable upon exercise of the Warrants (other than on Form S-4, S-8, or comparable registration statement; other than any registration statement which has been declared effective by the Commission prior to the date hereof or has been filed with the Commission prior to the date hereof but has not yet been declared effective), it will give written notice to such effect to the Holder, at least 30 days prior to such filing, and, at the written request of the Holder, made within 10 days after the receipt of such notice, will include therein at the Company’s cost and expense (except for the fees and expenses of counsel to the Holder and underwriting discounts and commissions attributable to the Shares of Warrant Common Stock (as defined below) included therein) such number of Shares of Warrant Common Stock held by the Holder as it shall request. If the registration is an underwritten primary registration on behalf of the Company, and the managing underwriter(s) advise the Company in writing that in their good faith opinion, based upon market conditions, the number of securities

6

requested to be included in such registration exceeds the number which can be sold in such offering, the Company will include in such registration (i) first, the securities the Company proposes to sell, (ii) second, the Warrant Common Stock (as hereinafter defined) requested to be included in such registration and any other securities requested to be included in such registration pursuant to contractual arrangements between Company and such other security holders (“Registration Rights Holders”), pro rata among the holders of the Warrant Common Stock and the Registration Rights Holders on the basis of the number of securities requested to be included in such registration by such holders and the Registration Rights Holders, and (iii) third, other securities requested to be included in such registration. The Company, at its own expense, will use its commercial reasonable efforts to file and seek the effectiveness of such Registration Statement with the Commission and will cause the prospectus included in such Registration Statement to meet the requirements of the Securities Act necessary to effect the sale of the Shares included at the request of the Holder and keep such Registration Statement effective for a period of 180 days thereafter. The term “Warrant Common Stock” shall mean the Shares issuable and issued pursuant to this Warrant Agreement.

     (b) The Company promptly shall notify the Holder, as a participating holder of Warrant Common Stock, of the occurrence of any event as a result of which any prospectus included in a registration statement filed pursuant to this Section 13 includes any misstatement of a material fact or omission of any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they were made, not misleading.

     (c) The Company’s obligations under this Section 13 with respect to the Holder, as the holder of Warrant Common Stock, are expressly conditioned upon the Holder promptly, completely, and accurately furnishing to the Company in writing such information concerning the Holder and the terms of the Holder’s proposed offering as the Company shall request for inclusion in the Registration Statement.

     14. Indemnification.

     (a) The Company agrees to indemnify and hold harmless each selling holder of shares of Warrant Common Stock and each person who controls any such selling holder within the meaning of Section 15 of the Securities Act, and each and all of them, from and against any and all losses, claims, damages, liabilities or actions, joint or several, to which any selling holder of shares of Warrant Common Stock or they or any of them may become subject under the Securities Act or otherwise and to reimburse the persons indemnified above for any legal or other expenses (including the reasonable cost of any investigation and preparation) incurred by them in connection with any litigation or threatened litigation, whether or not resulting in any liability, but only insofar as such losses, claims, damages, liabilities or actions arise out of, or are based upon, any untrue statement or alleged untrue statement of a material fact contained in any registration statement pursuant to which shares of Warrant Common Stock were registered under the Securities Act (hereinafter called a “Registration Statement”), any preliminary prospectus, the final prospectus or any amendment or supplement thereto (or in any

7

application or document filed in connection therewith) or document executed by the Company based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to register or qualify the shares of Warrant Common Stock under the securities laws thereof or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the indemnity agreement contained in this sub-section (a) shall not extend to any selling holder of shares of Warrant Common Stock in respect of any such losses, claims, damages, liabilities or actions arising out of, or based upon, any such untrue statement or alleged untrue statement, or any such omission or alleged omission, if such statement or omission was based upon and made in conformity with information furnished in writing to the Company by a selling holder of shares of Warrant Common Stock specifically for use in connection with the preparation of such Registration Statement, any final prospectus, any preliminary prospectus or any such amendment or supplement thereto. The Company agrees to pay any reasonable legal and other expenses for which it is liable under this sub-section (a) from time to time (but not more frequently than monthly) within 30 days after its receipt of a bill therefor.

     (b) Each selling holder of shares of Warrant Common Stock, severally and not jointly, will indemnify and hold harmless the Company, its directors, its officers who shall have signed the Registration Statement and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act to the same extent as the foregoing indemnity from the Company, but in each case to the extent, and only to the extent, that any statement in or omission from or alleged omission from such Registration Statement, any final prospectus, any preliminary prospectus or any amendment or supplement thereto was made in reliance upon information furnished in writing to the Company by such selling holder specifically for use in connection with the preparation of the Registration Statement, any final prospectus or the preliminary prospectus or any such amendment or supplement thereto; provided, however, that the obligation of any holder of shares of Warrant Common Stock to indemnify the Company under the provisions of this sub-section (b) shall be limited to the product of the number of shares of Warrant Common Stock being sold by the selling holder and the market price of the Common Stock on the date of the sale to the public of these shares of Warrant Common Stock. Each selling holder of shares of Warrant Common Stock agrees to pay any legal and other expenses for which it is liable under this sub-section (b) from time to time (but not more frequently than monthly) within 30 days after receipt of a bill therefor.

     (c) If any action is brought against a person entitled to indemnification pursuant to the foregoing Sections 14(a) or (b) (an “indemnified party”) in respect of which indemnity may be sought against a person granting indemnification (an “indemnifying party”) pursuant to such Sections, such indemnified party shall promptly notify such indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party of any such action shall not release the indemnifying party from any liability it may have to such indemnified party otherwise than on account of the indemnity agreement contained in sub-sections (a) or (b) of this Section 14, except to the extent that such failure or delay in providing notice of an indemnifiable claim shall have

8

materially prejudiced the defense of such indemnifiable claim. In case any such action is brought against an indemnified party and it notifies an indemnifying party of the commencement thereof, the indemnifying party against which a claim is to be made will be entitled to participate therein at its own expense and, to the extent that it may wish, to assume at its own expense the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that (i) if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded based upon advice of counsel that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party shall have the right to select separate counsel to assume such legal defenses and otherwise to participate in the defense of such action on behalf of such indemnified party or parties, and (ii) in any event, the indemnified party shall be entitled to have counsel chosen by such indemnified party participate in, but not conduct, the defense at the expense of the indemnifying party. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 14 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed such counsel in connection with the assumption of legal defenses in accordance with proviso (i) to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel), (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. An indemnifying party shall not be liable for any settlement of any action or proceeding effected without its written consent.

     (d) In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for this Section 14 is unavailable in accordance with its terms, the Company and the selling holder of shares of Warrant Common Stock shall contribute to the aggregate losses, claims, damages and liabilities, of the nature contemplated by said indemnity agreement, incurred by the Company and the selling holder of shares of Warrant Common Stock, in such proportions as is appropriate to reflect the relative benefits received by the Company and the selling holder of shares of Warrant Common Stock from any offering of the shares of Warrant Common Stock; provided, however, that if such allocation is not permitted by applicable law or if the indemnified party failed to give the notice required under sub-section (c) of this Section 14, then the relative fault of the Company and the selling holder of shares of Warrant Common Stock in connection with the statements or omissions which resulted in such losses, claims, damages and liabilities and other relevant equitable considerations will be considered together with such relative benefits.

     (e) The respective indemnity and contribution agreements by the Company and the selling holder of shares of Warrant Common Stock in sub-sections (a), (b), (c) and (d)

9

of this Section 14 shall remain operative and in full force and effect regardless of (i) any investigation made by any selling holder of shares of Warrant Common Stock or by or on behalf of any person who controls such selling holder or by the Company or any controlling person of the Company or any director or any officer of the company, (ii) payment for any of the shares of Warrant Common Stock, or (iii) any termination of this Agreement, and shall survive the delivery of the shares of Warrant Common Stock, and any successor of the Company, or of any selling holder of shares of Warrant Common Stock, or of any person who controls the Company or of any selling holder of shares of Warrant Common Stock, as the case may be, shall be entitled to the benefit of such respective indemnity and contribution agreements. The respective indemnity and contribution agreements by the Company and the selling holder of shares of Warrant Common Stock contained in sub-sections (a), (b), (c) and (d) of this Section 14 shall be in addition to any liability which the Company and the selling holder of shares of Warrant Common Stock may otherwise have.

     15. Applicable Law. This Warrant Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to the conflict of laws provisions thereof.

     IN WITNESS WHEREOF, the parties hereto have executed this Warrant Agreement effective as of the day and year first above written.

EMERSON RADIO CORP.
By:	/s/ Elizabeth J.Calianese, SVP-HR, Secretary
	Elizabeth J. Calianese, SVP-HR, Secretary

EPOCH FINANCIAL SERVICES, INC.
By:	/s/ J. Todd Atenhan, President
	J. Todd Atenhan, President

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NOTICE OF EXERCISE

To: Emerson Radio Corp.

1. The undersigned hereby elects to purchase            shares of Common Stock of                  pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in full.

2. Please issue a certificate or certificates representing said shares in the name of the undersigned or in such other name or names as are specified below:

__________________________________

__________________________________

                     (Name)

__________________________________

                    (Address)

3. The undersigned represents that the aforesaid shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares.

__________________________________(Signature)

__________________________________

        (Date)

4. Please issue a new Warrant of equivalent form and tenor for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below:

____________________________________________________________________

Date: _________________________

(Warrantholder) _________________________

Name: (Print) ______________________________

Its: __________________________________

11

SUBSCRIPTION FOR CASHLESS WARRANT SUBSCRIPTION

     The undersigned,          , pursuant to the provisions of the foregoing Warrant, hereby agrees to subscribe to that number of shares of the Common Stock as are issuable in accordance with the formula set forth in paragraph 1(b) of the Warrant, and makes payment therefor in full by surrender and delivery of this Warrant.

Dated:		Signature:
	Address:

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EX-31.1

Exhibit 31.1

Certification

Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002

I, Geoffrey P. Jurick, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Emerson Radio Corp.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over

financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 15, 2004

/s/ Geoffrey P. Jurick_

Chairman of the Board,
Chief Executive Officer and
President

A signed original of this written statement required by Section 302 has been provided to Emerson Radio Corp. and will be retained by Emerson Radio Corp. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-31.2

Exhibit 31.2

Certification

Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002

I, Guy A. Paglinco, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Emerson Radio Corp.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 15, 2004

/s/ Guy A. Paglinco

Vice President and
Chief Financial Officer

A signed original of this written statement required by Section 302 has been provided to Emerson Radio Corp. and will be retained by Emerson Radio Corp. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Emerson Radio Corp. (the “Company”) on Form 10-Q for the period ended September 30, 2004, filed with the Securities and Exchange Commission, Geoffrey P. Jurick, Chief Executive Officer, and Guy A. Paglinco, Chief Financial Officer, of the Company each hereby certifies pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition of the Company as of the dates presented and the consolidated result of operations of the Company for the periods presented.

Dated: November 15, 2004

By: /s/ Geoffrey P. Jurick

Geoffrey P. Jurick
Chief Executive Officer

By: /s/ Guy A. Paglinco

Vice President and
Chief Financial Officer

The foregoing certification is being furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Emerson Radio Corp. and will be retained by Emerson Radio Corp. and furnished to the Securities and Exchange Commission or its staff upon request.