SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ---------------

                                    FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                                     OF 1934
                     For the Fiscal Year Ended December 31, 1998
                                       or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934

                        Commission File Number: 000-27376
                                 ---------------

                            ELCOM INTERNATIONAL, INC.
             (Exact name of registrant as specified in its charter)

            DELAWARE                                            04-3175156
  (State or other jurisdiction of                               (I.R.S. Employer
   incorporation or organization)                            Identification No.)
                                  10 OCEANA WAY
                          NORWOOD, MASSACHUSETTS 02062
                                 (781) 440-3333
          (Address, including zip code, and telephone number, including
             area code, of registrant's principal executive offices)

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

                                                     Name of exchange
           Title of each class                       on which registered
           -------------------                       --------------------
      Common Stock, $.01 par value                          NASDAQ

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

           Yes   X                            No     
               -----                             -----   
     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [X]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant  based on the  closing  price of such stock on The Nasdaq  Stock
Market on March 23, 1999, was  approximately  $65,528,000.  For purposes of this
disclosure  only,  the  registrant  has assumed  that its  directors,  executive
officers,  and beneficial owners of 10% or more of the registrant's common stock
are affiliates of the registrant.

     The  registrant  had  27,416,000  shares of common  stock,  $.01 par value,
outstanding as of March 23, 1999.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  registrant's  definitive  proxy  statement  for the 1999 annual
meeting  of  stockholders  of Elcom  International,  Inc.  are  incorporated  by
reference into Part III of this report.



<PAGE>


                                     PART I

Item 1. Business

Overview

     Elcom  International,   Inc.  (the  "Company")  develops  and  licenses
automated  procurement software applications enabling the conduct of interactive
electronic commerce and, through its PC remarketing subsidiaries,  uses versions
of its technology as well as  Internet-based  technology to support the sale and
marketing of PC products,  the source of substantially  all of the Company's net
sales since inception.  Through elcom.com,  inc., its technology subsidiary, the
Company developed its PECOS(R) (Personal Electronic Catalog and Ordering System)
technologies which enable companies to communicate, market, sell and buy various
goods and services  electronically.  The Company  licenses its PECOS  technology
product line to companies in a broad range of industries.

elcom.com, inc.

     The software division of elcom.com,  inc. ("elcom.com",  formerly Elcom
Systems,  Inc.) the Company's  technology and  Internet-based  sales subsidiary,
develops and licenses standalone, intranet and Internet-based applications which
automate  internal and external  purchasing  systems for businesses  through the
computerization  of  front-end  electronic  catalogs  and  ordering  as  well as
multiple back-office  purchasing  processes.  Beginning in March 1999, elcom.com
began operating an Internet  on-line  storefront where it markets and sells over
62,000 PC products to businesses  and  consumers.  During 1999,  elcom.com  also
intends to launch an integrated  Internet auction site at www.elcom.com and also
to add  office  supplies  and other  business  supply-oriented  products  to its
product offerings.  elcom.com intends to capitalize on the Company's  experience
in  electronic  commerce  to become a leading  Internet-based  supplier of these
multiple  commodity-type  products  to  businesses  in the U.S.  elcom.com  is a
wholly-owned subsidiary of Elcom Services Group, Inc. (formerly Catalink Direct,
Inc.), itself a wholly-owned subsidiary of Elcom International, Inc.
(Nasdaq:ELCO).

     elcom.com has introduced and continues to develop  electronic  commerce
applications  to meet  the  business  objectives  of  organizations  seeking  to
leverage  electronic  commerce to extend market reach, reduce operating expenses
and  enable  new  service  offerings.   These  applications  direct  and  manage
electronic  communications  between trading partners' systems for the buying and
selling of goods and services and are built upon the Company's PECOS distributed
processing framework which provides secure and reliable  transaction  processing
over networks  including  intranets,  extranets and the Internet.  The Company's
PECOS product line has been  designed to be year 2000  compliant and can support
large numbers of end-user customers,  products, suppliers and transactions.  The
Company's  transaction server middleware  provides a fully scaleable  foundation
for robust system performance and high transaction capacity.

     elcom.com's   original  PECOS   technology,   PECOS  Commerce   Manager
("PECOS.cm")  provides selling  organizations with the ability to support direct
electronic  linkages with their customers,  providing  automation of sales order
processing utilizing personal computers and networking infrastructure.  PECOS.cm
supports a number of deployment  alternatives that include Windows, Java or HTML
operating in conjunction with standard browser  applications.  The Windows-based
client combines a convenient, easy-to-use, interactive, graphical user interface
and robust front-end client, with an integrated  back-end  information and order
transaction processing server system operating on UNIX or NT-based platforms. In
the third  quarter of 1998,  the Company  discontinued  general  maintenance  of
PECOS.cm and introduced  PECOS.web,  an Internet-based  ordering and information
system with a majority of the  functionality  of  PECOS.cm,  to its  customers.
elcom.com's  buy-side  solution,  PECOS Procurement  Manager  ("PECOS.pm"),  was
announced in 1997 and enhanced during 1998 to provide companies with the ability
to  automate  internal  procurement  processes  related to  commodity  products.
PECOS.pm  assists  organizations  in their  implementation  of procurement  best
practices,  which can result in reduced order processing costs, consolidation of
vendors,  and the  implementation of new service  capabilities,  such as desktop
ordering and just-in-time purchasing.  PECOS.pm is deployed as an intranet-based
technology,  which interfaces with a company's existing  management  information
system   infrastructure  and  enables  electronic  ordering  with  participating
vendors.  Based  upon  customer-defined  controls,  PECOS.pm  supports  workflow
processes as 

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<PAGE>

requisition  routing and  approval,  electronic  order  placement  and automated
payment  processing.  PECOS.pm  version 3.0 is under license at several customer
sites, and the Company intends to accelerate further development of PECOS.pm.

Elcom Services Group

     The Company uses its PECOS  technologies  through Elcom Services Group,
Inc.(R) ("Elcom Services Group",  formerly Catalink Direct, Inc.), to market and
sell PC-related  products to business customers and has generated  substantially
all  of the  Company's  net  sales.  Elcom  Services  Group's  use  of  PECOS.cm
represented the first  utilization of this  technology and the Company  believes
that its PECOS.cm and PECOS.web systems  differentiate Elcom Services Group from
other PC  remarketers.  Elcom  Services Group  commenced  operations in December
1993, and experienced rapid growth through the end of 1997. The Company achieved
its growth by offering  its  PECOS.cm  technology  to its Elcom  Services  Group
customers  and by various  marketing  efforts,  including  the  expansion of its
direct sales force nationwide and by the acquisition of six PC remarketers.  The
Company's PC  remarketer  acquisition  strategy  included  utilizing an acquired
company's  sales force to offer PECOS.cm to  prospective  customers in those new
markets and, over time, to transition  the acquired  company's  customers to the
PECOS.cm system,  thereby generating  increasing revenues transacted through the
PECOS.cm system. A portion of the Company's revenues continue to be generated by
several  companies  acquired  by the  Company  which  have not  converted  their
customers'  orders to transact  through PECOS.cm or PECOS.web and these entities
continue to use, in whole or in part,  traditional  methods of selling and order
taking.

     In addition to PECOS.cm  and  PECOS.web,  during 1999,  Elcom  Services
Group  intends  to  offer  its  customers  PECOS.pm,   the  Company's  automated
procurement  system,  thereby providing its corporate customers with the ability
to consolidate suppliers and reengineer their internal procurement practices for
commodity items including PCs and related products and services.  Although there
can be no assurances as to the ultimate timing, capabilities,  or success of the
PECOS.pm technology,  management believes that by providing PECOS.pm to existing
and prospective  customers,  Elcom Services Group's sales force can be empowered
with a significant competitive differentiation in the PC remarketing marketplace
with the intent to improve Elcom Services Group's  customer  penetration as well
as providing service-oriented solutions to its business partners' needs.

     Elcom  Services  Group  offers over  23,000  products  manufactured  by
leading  companies  such as  Compaq,  IBM,  Toshiba,  Hewlett-Packard  and Apple
through PECOS.cm and 62,000 products through PECOS.web. The Company is currently
finalizing  development  of a version of PECOS.web for use by its United Kingdom
subsidiary.  Several  product  manufacturers  have paid  marketing fees to Elcom
Services Group to advertise  their  products in PECOS.cm and  PECOS.web.  Orders
placed through  PECOS.cm and PECOS.web for products which are in stock generally
are  fulfilled  from  the  inventory  of  Elcom  Services  Group or one of Elcom
Services  Group's  Distribution  Fulfillment  Partners  ("DFPs"),  which include
Ingram Micro,  Inc.,  and Tech Data  Corporation,  two of the largest PC product
distributors in the world (See "-  Fulfillment/Logistics/Information  Systems").
Elcom  Services Group also offers a wide range of  professional  services to its
customers,  and has  recently  increased  its focus on  attempting  to grow this
business  segment.  Elcom  Services Group operates seven Field Sales and Support
Offices ("FSSO") in the U.S. and seven in the U.K., and maintains  configuration
and distribution  facilities in Canton, MA; Irvine, CA; and Langley,  Berkshire,
U.K.  The Company also  utilizes an  outsourced  facility in  Hartford,  CT, and
maintains a distribution warehouse in Hounslow, Middlesex, U.K.

Shoplink Incorporated

     In 1996, the Company  licensed its technology to ShopLink  Incorporated
("ShopLink")  and  invested a nominal  amount in it.  ShopLink  is a provider of
PC-based shopping services whereby consumers are able to use PECOS technology to
conveniently purchase groceries,  health and beauty care products and other home
consumable  products and services and receive direct  deliveries from ShopLink's
product  consolidation  center or product fulfillment partners to their homes or
other  specified  locations.  As further  discussed in the Notes to Consolidated
Financial  Statements contained elsewhere herein, in

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<PAGE>

September  1997,  the Company  sold  options to acquire its 5% equity  ownership
interest in ShopLink, which can be exercised through March 31, 1999.

Electronic Commerce Overview

     Electronic  commerce  involves the automation of business  transactions
through the use of  telecommunications  and  computers  to exchange  and process
commercial  information and to conduct and record  transactions  electronically.
Historically,  the vast majority of electronic commerce has been conducted using
electronic data interchange ("EDI")  technologies,  which typically has involved
the  interchange of information  between large trading  partners and can be both
complex  and  expensive  to  establish.  More  recently,  PC-based  and  network
technologies have enabled electronic  commerce to be conducted through PCs using
common  carrier  networks such as those  operated by AT&T,  MCI WORLDCOM,  Inc.,
Sprint Communications  Company,  L.P., and others, or over a public network such
as the Internet.  The Company believes  interest in conducting  business through
Internet-based commerce is rapidly growing as the marketplace becomes more aware
of emerging  Internet  technology and of the  advantages  that can be offered to
businesses  and  consumers  in the  form  of low  cost  communications,  reduced
transaction time, and widespread user access.

         The Company's  PECOS product line currently  operates on common carrier
networks,  intranets and over the Internet. The commercial market for electronic
commerce-oriented  products  and services  designed  for use with  internetworks
(i.e. intranet, Internet, extranet) has recently started to expand.

elcom.com, inc.

     The Elcom Systems  division of elcom.com,  inc.,  develops and licenses
intranet  and  Internet-based  applications  which  automate  the  external  and
internal  purchasing  systems  for  businesses  through the  computerization  of
front-end  ordering and  back-office  purchasing  processes.  Beginning in March
1999,  elcom.com  launched an Internet on-line  storefront site at www.elcom.com
where it markets and sells over 62,000 PC products to businesses  and consumers,
and intends to offer office supplies and other  products,  24 hours a day, seven
days a week and be a leading supplier of these multiple commodity-type products,
primarily to businesses.  elcom.com also plans to launch an auction site as part
of its Internet-based business-to-business storefront.

     In 1999, Elcom  International  transferred various assets and personnel
to elcom.com to ensure that all technology resides in one company and to provide
a  substantial  hardware  platform on which to host its  Internet-based  on-line
storefront and provide an information systems foundation for its planned hosting
of  web-based  automated  procurement  systems  for  businesses,  targeted to be
introduced during 1999.

     As acceptance of the Internet  continues to accelerate as an electronic
medium to purchase  products on-line and as intranets are used more by companies
to disseminate information internally, companies are seeking to streamline their
procurement  and  purchasing  processes to achieve  internal  cost savings while
concurrently increasing productivity. Companies are looking to "employee facing"
browser-based  applications  to  provide  empowerment  on the  desktop  to allow
employees to automate the purchasing processes for commodity-type  products with
virtually  no  paperwork  involved.  Companies  can now deploy  applications  on
intranets  available  to all  corporate  personnel,  that  connect  them  to the
company's suppliers'  information,  vendors and other providers through a single
"one-stop-shop" intranet-based system such as the Company's PECOS.pm system.

     Through  its Elcom  Systems  software  division,  elcom.com's  business
strategy  includes  being a provider of "buy-side"  Internet and  intranet-based
automated  procurement  systems  ("APS").  The Company  also  intends to license
PECOS.pm to customers of Elcom Services Group and other  companies and currently
has PECOS.pm technology licenses with three companies.

     Internet-based  on-line sales of products are rapidly expanding.  While
forecasts  vary, one  international  research firm estimates that $43 billion of
products  were sold over the  Internet in 1998 with  several  firms  forecasting
substantial  growth  over the next  several  years.  When the  Internet  becomes
readily

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<PAGE>

available  to  virtually  all  PC  users  over  the  next  several  years,  many
forecasters  expect on-line  purchasing to become a widespread sales channel for
many products sold worldwide.

     elcom.com's  Internet sales site became  operational during March 1999,
and  the  Company   intends  to  transition   as  much  of  the   organization's
commodity-type  PC  remarketer  customers  as possible to  elcom.com  which will
operate  using an  Internet-based  model  supported  by the  Company's  existing
customer support  infrastructure;  however,  the Company also intends to service
its traditional  customers,  which require a full range of services  through its
remarketer   subsidiaries.   elcom.com   intends  to   outsource   much  of  its
support-oriented  infrastructure  requirements  to  the  Company's  full-service
remarketer  subsidiaries  and believes that its future  personnel  needs will be
drawn first from these entities.

     elcom.com will leverage the Company's  proprietary  automated  sourcing
technology which, in the U.S.,  connects with Ingram Micro and Tech Data, two of
the world's largest PC distributors.  This automated sourcing  technology allows
the Company to have a multi-billion  dollar on-line  inventory  available to its
customers  and to offer one of the  broadest  selections  of  personal  computer
products  in the  industry,  with  same-day  shipping  for  most  non-configured
systems.  The Company expects to investigate  outsourcing many of its activities
to third parties such as Ingram Micro or Tech Data.

     elcom.com expects to generate revenues from multiple sources, including
sales from its Internet  reselling site with products  generally drop shipped to
customers by the Company's DFPs; product and manufacturer advertising on its web
site; licensing of PECOS.pm to companies and associated  professional  services;
and through consulting and hosting services.

elcom.com Technologies

     PECOS.pm enables intranet-based  automated purchasing at the desktop by
individual users and creates a "full-circle"  procurement system which automates
electronic catalog and product presentation from multiple suppliers,  electronic
ordering, and also automates the internal, typically manual processes,  required
to identify  and select  products,  check  pricing and  availability,  and place
orders with approved suppliers.  In addition,  PECOS.pm can provide an automated
internal  routing and approval  process,  with audit trail, for tracking orders.
For companies  which  support  Electronic  Data  Interchange  ("EDI"),  PECOS.pm
provides  for  three-way  purchase  order,  invoice  and  receipt  matching  and
EDI-based financial settlement. By automating paper-based, manual systems in the
purchasing  process,  PECOS.pm can  significantly  reduce a customer's  internal
costs  and product  delivery cycle times,  while  increasing  efficiencies  and
productivity.  PECOS.pm  also allows  clients to negotiate  vendor  discounts by
aggregating  purchases with preferred strategic suppliers.  The Company believes
that companies spend as much as $125 or more to process a purchase order through
delivery  of  product,  but can reduce  that  expense to as little as $10 to $20
through automation via PECOS.pm.

     PECOS.cm,  the Company's original  client/server  technology,  preceded
PECOS.pm  (which  utilizes some of the same  technology)  and was licensed to 11
customers  between  1994 and 1998 in  countries  ranging  from  Australia to the
Netherlands.  The PECOS.cm technology  represented the technological  foundation
for the  Company  and the  Company  holds one patent on certain  aspects of this
technology.

Elcom Services Group

     Elcom Services  Group,  Inc.  (formerly  Catalink  Direct,  Inc.),  the
Company's  full service PC  remarketer  and  professional  services  subsidiary,
utilizes  the  PECOS.cm  and  PECOS.web  technologies  to  support  the sale and
marketing  of  PC-related  products  and  services  electronically.  The Company
commenced   commercial   operations  in  December  1993,  and   consummated  the
acquisitions of Catalink Direct (Connecticut),  Inc. (formerly known as Computer
Specialties,  Inc.) ("CDCI") in 1994, and Catalink Direct  (Pennsylvania),  Inc.
(formerly known as Computerware, Inc.) ("Computerware") and a group of companies
which  owned a U.K.  remarketer  of PC  products  known  as  Lantec  Information
Services  ("Elcom Group U.K.") in 1995,  each of which  initially  operated as a
wholly-owned  subsidiary of Elcom Services Group.  CDCI (as of December 31,1995)
and  Computerware  (as of December  31,  1997) were  merged into Elcom  Services
Group,  and are no longer  separate  entities.  In  February  1996,  the Company
completed the

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acquisition  of AMA  (U.K.)  Limited  ("AMA"),  a  U.K.-based  remarketer  of PC
products,  which was accounted for as a pooling of interests.  In December 1996,
Elcom Services Group acquired Prophet Group Limited, a U.K.-based PC remarketer,
which was  accounted  for as a purchase.  On February 21, 1997,  Elcom  Services
Group  acquired Data Supplies  Limited,  a U.K.-based PC  remarketer,  which was
accounted for as a purchase.  Elcom Services Group's acquisition  strategy is to
utilize an  acquired  company's  sales  force to offer its PECOS  technology  to
prospective  customers  in those  new  markets  and to  transition  an  acquired
company's customers, over time, to its PECOS technology.

     Elcom Services Group's PECOS.cm and PECOS.web  Systems.  Elcom Services
Group's  PECOS.cm  system  is  a  proprietary,   Windows-based  interactive  and
integrated  electronic  catalog  and  interactive  ordering  system  that  takes
advantage of Windows'  graphical user interface.  PECOS.cm is loaded on the hard
disk drive of the  customer's  PC and "senses"  the  hardware and color  display
capabilities  of the customer's PC system and displays one or more messages,  if
necessary,  to allow the customer to maximize the sound (if available) and color
display  capabilities of their PC system to enhance displayed  images.  PECOS.cm
operates  in a  client/server  architecture  as  an  "electronic"  catalog  with
interactive and integrated  communications and ordering  capabilities.  Click-on
icon commands allow  customers to "browse"  through visual display pages to view
product  images and  information  in  varying  levels of detail or to search the
product  pricing and  description  databases and,  using various  parameters and
criteria,  compare  and  select  products.  When  combined  with  the  Company's
transaction-based, back-end server systems, which communicate with the Company's
and its primary DFPs' inventory systems,  PECOS.cm is a "full-circle" electronic
commerce  system.  In order to take  better  advantage  of the  Internet,  Elcom
Services  Group has  discontinued  general  maintenance  of, and  de-emphasized,
PECOS.cm, although it continues to be fully operational,  and is now focusing on
its PECOS.web  Internet  ordering and information  system.  Introduced in August
1998,  PECOS.web  offers  many of the same  benefits as  PECOS.cm,  but does not
impose any technology requirements other than Internet access which allows Elcom
Services Group's customers to more easily conduct  electronic  commerce with the
Company.  The  Company  is  currently  finalizing  development  of a version  of
PECOS.web for use by its United Kingdom subsidiary.

     Products  selected for purchase are copied  automatically to a purchase
list or  requisition  form with all pertinent  information  and when  finalized,
PECOS.cm and PECOS.web can display the order in purchase  order format,  listing
all product information, part numbers, and related information.  After customers
have  reviewed  and  compiled  their  requisitions  or orders  (and  optionally,
circulated  them  internally for approval using their  electronic  mail system),
customers can then electronically  place those orders directly to Elcom Services
Group's computer system using PECOS.cm or PECOS.web.  For orders to be fulfilled
through the Company or its primary  DFPs,  PECOS.cm and  PECOS.web  concurrently
communicate   with  the  applicable   computer   system(s),   checking   product
availability and other  information,  and displays this information and confirms
the order to the customer in real-time.

     To  initiate  an order,  the  customer  enters his or her  confidential
password  authorization,  and PECOS.cm automatically  initiates a communications
link  ("Commlink")  via modem over a toll-free  number or the  Internet to Elcom
Services Group's back-end  transaction server system allowing  information to be
exchanged in real-time between the client (the front-end client interface on the
customer's  PC) and the server (the back-end  transaction  server systems at the
Company).  Commlinks  using  PECOS.cm  typically  last  one  to  three  minutes,
depending  on the extent of  product  data  updates  which are  necessary,  with
order-oriented  information  being exchanged  concurrently  between the computer
systems of the Company  and/or its primary DFPs.  Elcom  Services Group utilizes
comprehensive  electronic  links with its primary DFPs and electronic  links are
being pursued with other DFPs. During periodic Commlinks using PECOS.cm, product
information  on the  customer's  hard  drive also is  updated  automatically  to
reflect  changes,  such as new  products  and pricing  revisions,  new  PECOS.cm
electronic mail messages,  and other information updates,  unless it has been so
long since that  customer's last Commlink that it is determined that it would be
more  expedient to send that customer a new set of PECOS.cm  disks,  or urge the
customer to use PECOS.web.

     In the case of PECOS.web, a customer logs into the appropriate Internet
site and uses their  confidential  password to  establish  a Commlink  (computer
connection)  with the Company's  server  systems.  Thereafter,  they are working
on-line with real time information and ordering.  PECOS.web, using the

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<PAGE>

Internet,  accomplishes  most  interactive  functions  in  seconds.  PECOS.cm is
currently  supporting  over $2.5  million in sales at Elcom  Services  Group per
month in the U.S. and U.K.  PECOS.web,  Elcom Services Group's Internet ordering
and  information  system which was  introduced  in the third quarter of 1998, is
currently supporting over $1.5 million in sales per month in the U.S.

     In addition to  introducing  PECOS.web  to its  customers  during 1999,
Elcom  Services  Group  intends to further  differentiate  itself by offering an
Elcom Services Group version of elcom.com's PECOS.pm APS to its customers. Elcom
Services Group believes  that, as was the case with  PECOS.cm,  its  "sell-side"
electronic  commerce  solution,  PECOS.pm may provide a significant  competitive
advantage in the area of  electronic  commerce  that will enable Elcom  Services
Group to continue to differentiate itself from its competitors with a "buy-side"
electronic  commerce  solution.  Management  believes  that use of PECOS.pm will
empower  its  customers  to  achieve  process  reengineering  and best  practice
objectives,  as well as leveraging the system to order other desired  supplier's
products via a fully integrated  electronic  procurement system. There can be no
assurances as to when PECOS.pm will be made available to Elcom  Services  Group,
and after delivery, whether PECOS.pm will be accepted and used by customers.

     The Company  believes that its various  technologies  also will provide
certain advantages to Elcom Services Group associated with changes that have, or
are  beginning  to occur in the PC  remarketer  channel.  Recent  reductions  by
manufacturers  in the  availability  of  price  protection  as well  as  further
limitations as to the products that may be returned to vendors, have focused the
Company  on  reducing  the  amount of  inventory  that it holds.  The  Company's
electronic  sourcing  capabilities  allow it to be responsive to customer orders
while  simultaneously  reducing its  inventory  positions.  In addition,  to the
extent  certain   manufacturers  elect  to  deal  directly  with  customers  and
compensate the Company as an agent,  the Company's  technologies can be utilized
to parse and  appropriately  route orders to the appropriate  suppliers based on
the specifics of an order.  The Company is currently in discussions with a major
manufacturer to support this type of arrangement.

Products and Pricing

     Products.  Elcom Services Group offers over 23,000 products from a wide
variety of  manufacturers  through  PECOS.cm  and over 62,000  products  through
PECOS.web.  In the U.S.,  Elcom  Services  Group  currently  purchases  selected
products  directly  from  certain   manufacturers,   including  Compaq  Computer
Corporation,  with the balance of its products being purchased from DFPs,  while
in the U.K., the  substantial  majority of products are purchased  directly from
manufacturers on net terms. Elcom Services Group provides customers with a large
product  selection,  including  personal computer systems,  monitors,  printers,
peripherals,  software,  accessories  and supplies,  as well as a broad range of
professional  services.  The level of products purchased by Elcom Services Group
directly from manufacturers in the U.S. declined  substantially between 1997 and
1998,  due to a variety  of  policy  changes  by  manufacturers,  principally  a
reduction in price  protection  programs and a reduced ability to return product
as well as reductions in incremental  discounts made available by manufacturers.
Elcom Services Group markets products sold by the following manufacturers, among
others:

                              PERSONAL COMPUTERS
        Compaq                       IBM                            Apple
         NEC                       Gateway                         Toshiba
    Hewlett-Packard                  Dell                         Panasonic

                                  PRINTERS
    Hewlett-Packard                 Canon                          Lexmark
        Epson                       Xerox                        Tektronics

                                PERIPHERALS
         NEC                        Sony                            Cisco
        Intel                      Xircom                         Kingston
      Viewsonic                     3Com                           Iomega

                                       6
<PAGE>



                                 SOFTWARE
      Microsoft                    Lotus                           Corel
       Seagate                     Novell                   Computer Associates
        Adobe                      Claris                        Symantec

     In the U.S., Elcom Services Group has established electronic purchasing
and supply relationships with Ingram Micro and Tech Data, as well as traditional
relationships  with several other large,  national PC product  suppliers.  Elcom
Services  Group's  purchasing  relationships  with DFP suppliers are pursuant to
industry-standard  arrangements  with  negotiated  pricing  based  on  either  a
percentage  of  all  orders  being  offered  electronically  to  a  supplier  or
anticipated  volume levels,  with payment  generally being made through existing
floor plan financing arrangements.

     In the  U.K.,  Elcom  Services  Group  also  is an  authorized  product
fulfillment  aggregator for IBM and Compaq products,  and is in discussions with
Ingram Micro (U.K.) on methods to access their inventory  electronically.  There
can be no  assurances  that any DFP  arrangement  or  electronic  links  will be
negotiated  or developed  with Ingram Micro  (U.K.),  or if so, on what terms or
timing.

      Pricing.  Elcom  Services  Group  believes that its product  pricing is
competitive with other remarketers. Elcom Services Group offers larger corporate
customers a higher discount than other customers,  reflecting the economies of a
higher  level of  purchases  by such  customers.  The  Company  uses a specially
designed,  customized  and automated  pricing  system for its customers  through
PECOS.cm's and  PECOS.web's  back-end  server system which supports and tracks a
variety of pricing  methodologies,  including the ability to provide  customized
pricing for each  customer,  by product.  PECOS.cm and PECOS.web are designed so
that each time a customer Commlinks,  Elcom Services Group can optionally change
pricing on selected products in real-time, as appropriate.

Professional Services

      Elcom  Services Group offers a wide range of  professional  services in
both the U.S. and the U.K.  Professional  services offerings to customers in the
U.S. and U.K.  include  advising on project and roll-out  management,  providing
on-site engineers for network integration and systems support, responsive "Help"
desk and break/fix  services.  The Company also offers national dispatch service
for warranty and repair  contracts.  In the U.K.,  Elcom Services Group provides
additional service offerings, including offering customers complete PC lifecycle
management from purchase to disposal,  high-end technical consulting, as well as
designing and overseeing implementations of complex applications.  The Company's
service-oriented  revenues increased in 1998 to approximately $34 million,  from
$32  million in 1997,  and the  Company  believes  that  there is a  significant
opportunity  to expand its service  operations in the future.  Accordingly,  the
Company  expects to continue its focus on  attempting to grow this higher margin
segment of its business in both the U.S. and U.K.

Fulfillment/Logistics/Information Systems

     Fulfillment.  In the U.K.,  Elcom  Services  Group sources the  substantial
majority of its products directly from  manufacturers,  while in the U.S., Elcom
Services  Group  sources  the  majority of its  products  from a number of DFPs,
including  Ingram  Micro  and  Tech  Data,  its  primary  DFPs,  from  which  it
electronically  sources a majority of  domestically  purchased PC products which
are not sourced directly through purchasing arrangements with Compaq and certain
other  manufacturers.  Ingram Micro and Tech Data are the two largest PC product
distributors in the world,  with combined annual sales in excess of $34 billion.
Augmented by its DFPs,  Elcom Services Group U.S. draws from  inventories  which
the Company believes are well in excess of $3 billion.  In the U.K., in addition
to its direct  purchasing  arrangements,  Elcom  Services  Group also  maintains
relationships  with several DFPs. Elcom Services Group's customers can typically
expect  products that are in stock and that do not require  configuration  to be
immediately available for shipment directly to the customer.

                                       7
<PAGE>

      For computer systems that require  configuration,  the Company operates
two  configuration  facilities in the U.S. and one in the U.K. and also utilizes
an additional  outsourced facility in the U.S. Products requiring  configuration
are typically  shipped to these  facilities.  Although the Company believes that
both its DFPs and Elcom  Services  Group are given due  consideration  regarding
supply of products by  manufacturers  and that Elcom Services Group is given due
consideration regarding supply of products by its DFPs, manufacturer constraints
on the availability of certain products have been a historical problem in the PC
channel and there can be no assurance  that such  periodic  constraints  may not
have an adverse  effect on the Company's  business in the future.  At the end of
1998,  the  Company did not have a  significant  amount of product on back order
and,  accordingly,  the  Company  did not have a material  backlog  of  customer
orders.

      In the U.S., the electronic links between PECOS.cm's client and between
PECOS.web's  browser,   both  interact  with  Elcom  Services  Group's  back-end
transaction  server system (and its primary DFPs' computer  systems),  providing
the customer with seamless  order  processing  and shipment,  as if a customer's
order was  shipped  directly  from  Elcom  Services  Group.  Using  PECOS.cm  or
PECOS.web,  when a customer clicks and accepts an order, as applicable,  a "pick
ticket" is automatically  printed out in a distribution facility for the product
to be picked for direct  shipment to the  customer  or to one of Elcom  Services
Group's  configuration  centers.  PECOS' back-end automatic sourcing  technology
also  can   automatically   select  one  of  the  Company's   configuration  and
distribution  facilities  in the U.S.  as the source  and print a "pick  ticket"
there for fulfillment.  In order to provide similar  electronic links with other
suppliers,  Elcom Services Group is in the process of pursuing  electronic price
and availability links with secondary DFPs, which are primarily aggregators, for
electronic  inquiry of product price and availability  (although there can be no
assurances that any such electronic  links will be finalized and implemented or,
if so,  what the  timing or terms  thereof  will  be).  The  Company  also is in
discussions  regarding  an  electronic  link with a major  manufacturer  that it
believes can be used to support direct  relationships  between the  manufacturer
and customers of the Company,  where the Company would function as a sales agent
of the  manufacturer,  for a fee.  Until  these  electronic  link(s)  are  fully
established,  Elcom  Services  Group  obtains  some of its  product  to  fulfill
customer  orders from these  suppliers,  including  manufacturers,  using direct
order entry systems  provided by these  companies and by telephone and facsimile
transmissions.  These traditional  product  fulfillment methods involve expenses
associated  with  ordering,  invoicing  and  product  tracking  being  performed
manually.

      PC Configuration  Capabilities.  Elcom Services Group offers customized
configuration  services to its  customers,  whereby a customer can  request,  by
clicking  on an option in  PECOS.cm  or  PECOS.web,  that Elcom  Services  Group
configure   their  PC  system,   load  software  and  test  the  PC  system  for
functionality  prior  to  shipment.   The  configuration  services  are  offered
generally on a fee basis and currently are performed primarily by Elcom Services
Group at its Canton, MA and Irvine, CA facilities and in an outsourced  facility
in  Hartford,  CT.  In  addition,  Elcom  Services  Group  maintains  a  product
distribution and configuration facility in Langley,  Berkshire in the U.K. and a
warehouse  location at Hounslow,  Middlesex,  in the U.K. Elcom Services Group's
technical support staff reviews the viability of configuration orders before the
order is released for  fulfillment,  or on demand via PECOS.cm's and PECOS.web's
Analyze Custom Configuration function.

      Information  System.  During  1997 and 1998,  in the U.S.,  the Company
licensed and installed Year 2000 compliant  software from Oracle Corporation and
other  software  firms as its  Information  Technology  ("IT") system to improve
management's  ability to monitor and manage the Company. The Company's IT system
installation  went  "live"  in  the  U.S.  in  November  of  1997.  This  system
incorporates  modules supporting general ledger,  accounts payable,  purchasing,
accounts  receivable,  inventory  and  order  entry.  The IT  design is a unique
implementation  of Oracle software  applications that are being and/or have been
enhanced and extended to provide functionality not found in the standard system,
including the ability to:

     -    Accept  electronically  delivered  sales  orders such as PECOS and EDI
          orders, as well as converted quotations;
     -    automatically   source   product  from  the  Company's  or  its  DFPs'
          inventories based on variable parameters; and

                                       8
<PAGE>

     -    automatically  create purchase orders,  electronically  transmit them,
          and  electronically  confirm  shipments by DFPs to enable invoicing or
          anticipate receipt as the case may be.

      During 1998, the Company continued to enhance its U.S. IT system and is
Year 2000 compliant,  subject to additional "patches" which Oracle may introduce
to make its  modules(s)  Year 2000  compliant.  During  1998,  in the U.K.,  the
Company  implemented a Year 2000  compliant  upgrade to its Computer  Associates
International,  Inc.  software  system which operates on an IBM AS-400  hardware
platform.  The Company has been assured by its electronic  trading partners that
their  information  systems  applications  either  are,  or will be,  Year  2000
compliant  before  issues may arise,  however,  there can be no assurance by the
Company that its  electronic  trading  partners  will not  experience  Year 2000
oriented problems which could effect the supply of products to the Company.  The
Company  is  dependent  on its IT  system  and any  problems  with  its  ongoing
development and enhancement,  or any interruption in its functional availability
may have an adverse effect on sales to customers  and/or customer  satisfaction.
Although the Company believes that its technology and operating  systems will be
adequate for its current needs,  such systems will  undoubtedly  require ongoing
modification  and  enhancement  as  the  Company  expands  and  evolves.  See "-
Managements'  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations - Year 2000 Compliance".

Marketing and Sales

      Elcom Services Group Targeted Customer  Segments.  Elcom Services Group
uses its  telemarketing  and direct sales forces in the U.S. and U.K. to sell to
targeted  business  and  corporate  accounts,  its  educational  and  government
customer base and, in the U.K., to its  value-added  reseller  customers.  As of
December  31,  1998,  Elcom  Services  Group  employed  approximately  248 sales
representatives, account executives, telemarketers and related support personnel
to service those customer segments.

      As of December  31,  1998,  Elcom  Services  Groups'  sales and support
personnel  operated  from Field  Support  and Sales  offices  (FSSO's)  in seven
metropolitan  areas in the U.S.  as well as seven  locations  in the U.K.  Elcom
Services Group's primary locations and FSSO's are listed below:

                               UNITED STATES
                              ---------------
          - Bristol, PA(Philadelphia)                 - Phoenix, AZ
          - Irvine, CA                                - San Diego, CA
          - New York City, NY                         - Stamford, CT
          - Norwood, MA (Boston)(Headquarters)

                               UNITED KINGDOM
                              ----------------
          - Basingstoke, Hampshire                    - London (City of)
          - Birmingham                                - Manchester
          - Glasgow (Scotland)                        - Slough, Berkshire
          - Langley, Berkshire

      At the end of 1998, the Company closed six FSSO's,  reduced the size of
its sales force,  and provided  certain sales  personnel  with the technology to
operate from a home office  environment.  The Company is  continuing to focus on
better  aligning the costs of Elcom  Services  Group's  sales  organization  and
operational  infrastructure  in a manner  intended to compensate for the reduced
level of gross profit  available in the current PC remarketer  environment,  and
additional steps may need to be taken in this regard.

      Corporate and Business Accounts.  Elcom Services Group's primary target
customers are large corporations that wish to make their PC product  procurement
functions more efficient.  Corporate accounts typically employ purchasing agents
or buyers  with  above-average  product  knowledge  who view most PC products as
commodities.  Business  accounts  targeted  by Elcom  Services  Group range from
divisions of

                                       9
<PAGE>

large corporations to businesses with as few as fifty employees. These companies
will  also  be  targeted  customers  for  PECOS.pm,   the  Company's   automated
procurement  system.  Elcom Services Group  penetrates the corporate market with
both direct  sales  efforts and  telemarketing.  The  Company  targets  business
customers using a defined business telemarketing staff operating from certain of
its U.S. and U.K.  locations  whose mission is to introduce Elcom Services Group
to businesses which would not otherwise be cost-effectively  penetrated by Elcom
Services  Group's direct  corporate sales force.  Elcom Services  Group's direct
sales  efforts  include  on-site  presentations,  as well as  demonstrations  to
potential  corporate  customers  of PECOS.cm,  PECOS.web  and later during 1999,
PECOS.pm.  Telemarketers  also assist the sales  professionals by contacting and
pre-qualifying  accounts for  follow-up  and on-site  visits by the direct sales
force if appropriate. Customer support representatives and entry-level corporate
sales representatives provide day-to-day  administrative and operational support
in order to maximize the selling time of the direct sales force.

      Educational and Governmental  Accounts.  The Company restructured Elcom
Services Group's government and education sales operations in September 1998 and
intends to  concentrate  on  building  an  educational  sales  force  focused on
providing Windows and Intel-based  ("Wintel")  solutions to the education market
in the U.S.  The  Company  decided to  leverage  its  experience  in cabling and
network  integration of classrooms  and schools  derived from its previous Apple
Educational Sales Agent relationship, to promote this new division as it focuses
on a larger potential market.

     Fulfillment  Accounts. In the U.K., Elcom Services Group also operates as a
product  aggregator  for IBM and Compaq  products,  typically  serving small- to
medium-sized   value-added  resellers  and  remarketers  that  do  not  maintain
significant inventory themselves. These customers demand competitive pricing and
typically  require next-day  delivery  anywhere in the U.K. The Company believes
that although its product fulfillment business is to a different market than its
core remarketer business, this fulfillment business,  which Elcom Services Group
U.K. has been operating for many years, can provide the Company with the ability
to generate incremental revenues over a fixed cost structure.

Customer and Technical Services

     Elcom  Services  Group  provides  a wide  range  of  customer  service  and
technical  support,   including  nationwide  toll-free  pre-sale  and  post-sale
telephone-based support. Elcom Services Group believes that maintaining a direct
customer  and  technical  support  link  with  its  customers  is  an  important
competitive  factor and promotes  customer  satisfaction.  In addition,  certain
manufacturers  require their  remarketers to provide certain levels of technical
support as an ongoing  condition to  authorizing  the  remarketers to sell their
products.

Product Warranty and Service Policies

      In addition to providing its customers with manufacturers'  warranties,
Elcom Services Group offers its customers certain return privileges for products
which have not been used or damaged.  Typically,  such  products can be returned
within a certain  time to Elcom  Services  Group for a refund or  credit.  Elcom
Services Group believes that its product return  policies are  competitive  with
those  offered by other  remarketers.  Historically,  product  returns  have not
generally   represented   a  material   exposure  to  the  Company.   Typically,
manufacturer  warranties  are  included as part of, and are packaged  with,  the
product.  When  available from  manufacturers,  Elcom Services Group also offers
on-site and extended-term warranty and/or service policies as ancillary products
available  for sale through the PECOS.cm or  PECOS.web  systems.  In addition to
Elcom  Services  Group's  telephone-based  technical  support  and  manufacturer
programs, Elcom Services Group offers a full range of on-site and depot warranty
and  post-warranty  service options in the U.S.,  generally  through  nationwide
outsourcing  agreements with third party service providers.  Product returns are
centralized at the Company's  facilities,  where the various tasks are performed
that are  necessary  to  either  return  products  to  inventory,  to one of the
Company's DFPs or to a manufacturer for credit,  or to liquidate  non-returnable
items.

                                       10
<PAGE>

Competition

     Electronic  Commerce  Systems  Marketplace.   The  market  for  interactive
electronic  commerce  software is  relatively  new and rapidly  evolving and the
Company  expects  competition  in this market to intensify in the future.  Among
other  factors,  before  licensing an electronic  commerce  system,  the Company
believes  potential  customers  consider  the level of  features  and  functions
available in electronic commerce applications and the cost to acquire, implement
and  maintain  the system,  as well as the length of time to  implement a system
and,  as  applicable,   integrate  it  with  a  company's  existing  information
technology system.  The Company competes with vendors of prepackaged  electronic
commerce software,  vendors of software tools for developing electronic commerce
applications,  and systems integrators.  The Company's competitors include Ariba
Technologies,  Inc., Commerce One, Inc., Concur Technologies, Inc., and Trade'ex
Electronic  Commerce Systems.  The Company expects  additional  competition from
other emerging and established companies, including Microsoft Corp., IBM, SAP AG
and Oracle Corporation,  all of which have announced products for Internet-based
electronic  commerce.  The Company's potential  competitors also include systems
integrators  such as Electronic  Data Systems (EDS) and a number of EDI solution
vendors, including Sterling Commerce, Inc.

     Certain of these and other competitors have longer operating  histories and
significantly greater financial,  technical,  marketing and other resources than
the  Company and thus may be able to develop or respond  more  quickly to new or
changing  opportunities,  technologies  and customer  requirements.  Also,  many
current  and  potential  competitors  have  greater  name  recognition  and more
extensive  customer bases that could be leveraged,  thereby gaining market share
to the  Company's  detriment.  Such  competitors  may be able to undertake  more
extensive  promotional  activities,  adopt more aggressive  pricing policies and
offer more  attractive  terms to purchasers than the Company and to bundle their
products in a manner that may discourage users from purchasing  products offered
by the Company. In addition,  current and potential competitors have established
or may  establish  cooperative  relationships  among  themselves  or with  third
parties  to  enhance  their  products.  Accordingly,  it is  possible  that  new
competitors  or  alliances  among  competitors  may emerge and  rapidly  acquire
significant  market  share.  There can be no assurance  that the Company will be
able to compete  effectively with competitors or that the competitive  pressures
faced by the Company will not have an adverse effect on the Company's  business,
results of operations and/or financial  condition.  See  "--Electronic  Commerce
Overview".

      PC Products  Marketplace.  The Company has invested  substantial effort
and capital to develop and  implement  its  proprietary  PECOS.cm and  PECOS.web
front-  and  back-end  systems,  as  well  as for the  associated  hardware  and
electronic  links with its primary DFPs. The overall  market of companies  which
sell PC products is highly  fragmented  and Elcom  Services Group operates in an
extremely competitive  environment which is continuously evolving and subject to
rapid technological  change. Of the more than 10,000 total outlets,  the Company
believes that there are more than 1,000  significant  PC product  remarketers of
various  types in the U.S.  and U.K. In response to  competitive  pressures  and
declining  margins,  traditional  computer  remarketers  are  cutting  costs and
acquiring or merging with other remarketers to increase scale and efficiency.  A
prospective  purchaser of personal  computer products has the option to purchase
directly from a manufacturer  (e.g., IBM, Compaq,  Dell Computer Corp.),  from a
major remarketer (e.g., Entex Information Systems, Inc., MicroAge,  Inc., Inacom
Corp.,  CompuCom  Systems,  Inc.), from a computer mail order company (e.g., CDW
Computer Centers,  Inc.,  Creative Computers Inc., Micro Warehouse Inc.), from a
systems integrator (e.g.,  Andersen Consulting,  EDS), from computer superstores
(e.g.,  CompUSA Inc.),  from  Internet-based  companies (e.g.  Cyberian Outpost,
Inc.,  Insight  Enterprises,  Inc.),  from  electronics  superstores  and  local
computer stores,  among others.  Elcom Services Group competes with all of these
entities  for the  sale of its PC  products.  Each of these  entities  in the PC
distribution channel competes on a wide variety of capabilities including price,
delivery   performance,   breadth  of  products,   services   offered,   overall
convenience, and in some cases specialized and distinct capabilities. The advent
and boom of the Internet-based sales companies has added substantial  additional
pressure to price competition in the marketplace and is impacting gross profits.
Certain  of the  companies  noted  above and other  potential  competitors  have
substantially  greater  financial,  technical and marketing  resources  than the
Company and greater name recognition and more extensive customer bases.

                                       11

<PAGE>

Intellectual Property

      The Company's  success and ability to compete are  dependent,  in part,
upon its proprietary technology. While the Company relies to a certain extent on
trademark, trade secret, patent and copyright law to protect its technology, the
Company believes that factors such as the  technological  and creative skills of
its personnel,  new product developments,  frequent product  enhancements,  name
recognition and reliable  product  availability  and  distribution  are of equal
importance for establishing and maintaining a leadership position.  Although the
Company  has  received  a patent  on  certain,  specific  aspects  of its  PECOS
technology,  there can be no assurance that other entities will not develop,  or
have not developed,  technologies  that are similar or superior to the Company's
technology.  The source  code for the  Company's  proprietary  software  also is
protected  both as a  trade  secret  and as an  unregistered  copyrighted  work.
Despite  these  precautions,  it may be  possible  for a third  party to copy or
otherwise  obtain and use some portions of the Company's  products or technology
without  authorization,  or to  develop  similar  technology  independently.  In
addition,  effective copyright and trade secret protection may be unavailable or
limited in certain  foreign  countries,  and the global  nature of the  Internet
makes it  virtually  impossible  to  control  the  ultimate  destination  of the
front-end client portion of the PECOS technology.

      The Company generally enters into confidentiality or license agreements
with its  employees,  consultants,  licensees  and certain of its  vendors,  and
generally  attempts to control  access to and  distribution  of its  proprietary
software,   documentation  and  other   information.   In  connection  with  the
distribution of Elcom Services Group's PECOS.cm front-end client, Elcom Services
Group employs  licenses that generally are not paid for, or manually  signed by,
the  end-user  and,  therefore,   could  in  certain  circumstances,   be  found
unenforceable  under the laws of certain  jurisdictions.  Despite the  Company's
efforts to protect its proprietary rights,  unauthorized  parties may attempt to
copy  aspects  of  the  Company's  proprietary  system  or  to  obtain  and  use
information that the Company regards as proprietary.  Policing  unauthorized use
of the Company's products is difficult. There can be no assurance that the steps
taken by the Company will prevent  misappropriation  of its  technology  or that
such agreements will be enforceable. In addition, litigation may be necessary in
the future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets,  to determine the validity and scope of the proprietary
rights of others,  or to defend  against claims of  infringement  or invalidity.
Such litigation could result in substantial costs and diversion of resources and
could  have a  material  adverse  effect on the  Company's  business,  operating
results or financial condition.  The Company believes that each of the following
are proprietary  features of its "front-end" client interface:  the architecture
allowing  for easy  custom  modification  by the Company or its  licensees,  the
capabilities for display of certain business forms and catalog page screens, and
the interfaces to the "back-end".  However,  the Company  believes that the most
critical and  proprietary  elements of its PECOS  technology  are the "back-end"
transaction servers, order sourcing and processing, customer authentication, and
catalog  updating  modules,  which  reside  within the  computer  systems in the
Company's or licensee's facilities and are not available to end-users.

Government Regulation

      The  Company  is not  currently  subject  to direct  regulation  by any
government agency,  other than regulations  applicable to businesses  generally,
and there are currently few laws or regulations directly applicable to access to
or commerce  between  personal  computers,  among local area  networks or on the
Internet.  However,  due to  the  increasing  popularity  and  use  of  personal
computers and the Internet, it is possible that a number of laws and regulations
may be adopted  with  respect  thereto,  covering  issues such as user  privacy,
pricing and characteristics  and quality of products and services.  The adoption
of any such laws or regulations  may decrease the growth of electronic  commerce
and/or the  Internet,  which could in turn decrease the demand for the Company's
products and increase the Company's  cost of doing business or otherwise have an
adverse  effect  on the  Company's  business,  operating  results  or  financial
condition.  Moreover,  the  applicability  to  the  Internet  of  existing  laws
governing  issues  such as property  ownership,  libel and  personal  privacy is
uncertain.

                                       12
<PAGE>

Environmental Matters

      Based on the Company's  experience to date, the cost of compliance with
environmental matters has been immaterial and the Company believes that it is in
material compliance with applicable environmental laws and regulations.

Personnel

         As of December  31,  1998,  the  Company had a total of 989  personnel,
including 946 salaried and 43 hourly personnel.  The Company's personnel are not
represented  by any labor  union and the  Company  believes  that its  personnel
relations are good. The Company's future success depends,  in significant  part,
upon the continued service of its key technical and senior management  personnel
and its continuing ability to attract and retain highly qualified  technical and
managerial  personnel,   including  its  sales  force.  Competition  for  highly
qualified  personnel is intense and there can be no  assurance  that the Company
can retain its key managerial and technical personnel or that it will be able to
attract or retain additional highly qualified technical and managerial personnel
in the future.

      The rapid  execution  necessary  for the  Company to fully  exploit the
opportunities  for its products and services,  especially  on the Internet,  has
presented a  significant  challenge to the Company's  personnel  and  management
resources. To manage its expected growth, the Company will continue to implement
and  improve  its  information  systems  and  solicit  key  candidates  for open
positions as well as continuing to train its personnel base.

Company Trade Names and Trademarks

      The Company has referred to a variety of other entities and products in
this Annual Report on Form 10-K,  certain of which are tradenames or trademarks.
Such  tradenames  or  trademarks  are the property of the  respective  companies
owning such tradenames and trademarks.

Item 2.  Properties

      As of December 31, 1998,  the Company  leased the  properties set forth
below, and rented seven other smaller field sales and support offices  ("FSSOs")
as well as a professional  services office in Edison,  N.J. The following leases
vary in length remaining, from two years to 15 years for the Langley,  Berkshire
facility and, in some cases, include options to extend the lease terms (see also
Note 6 to the Company's Consolidated Financial Statements, included elsewhere in
this Annual Report on Form 10-K).

                               APPROXIMATE
                                 SQUARE
  LOCATION                       FOOTAGE                     USE
--------------------------     -----------  ------------------------------------
  Norwood, Massachusetts         36,000     Headquarters; Elcom Services Group
                                                     Boston-area FSSO

  Westwood, Massachusetts        24,000          elcom.com's Headquarters

  Canton, Massachusetts          84,000     Elcom Services Group Configuration
                                                     and Distribution

  Irvine, California             34,000          Elcom Services Group FSSO, 
                                               Configuration and Distribution

  Bristol, Pennsylvania          35,000     Elcom Services Group Administrative
                                                        and FSSO

  Langley, Berkshire (U.K.)      40,000          United Kingdom Headquarters;
                                                  Elcom Services Group FSSO,
                                               Configuration and Distribution

                                       13
<PAGE>

                             APPROXIMATE
                                 SQUARE
       LOCATION                  FOOTAGE                    USE
--------------------------     -----------  ------------------------------------
  Hounslow, Middlesex (U.K.)     25,000     Elcom Services Group Distribution
                                                      and Warehouse

  Slough, Berkshire (U.K.)        7,800         Elcom Services Group FSSO

  Basingstoke, Hampshire (U.K.)   7,500     Elcom Services Group Administrative
                                                        and FSSO

      In addition to the leased  properties  noted  above,  the Company  also
owns,  through  its Prophet  Group  Limited  subsidiary,  land and a building in
Redditch,   Hereford,   United  Kingdom,   comprising  administrative  and  FSSO
facilities of approximately 20,000 square feet.

      Subject to ongoing review,  the Company  considers its facilities to be
generally  sufficient to meet its near-term  space  requirements in light of its
current plans.  The Company's  operations are dependent in part upon its ability
to protect its network infrastructure in its Norwood, MA and Langley,  Berkshire
U.K.  facilities  against  damage from physical  break-ins,  natural  disasters,
operational disruptions and other events.

Item 3.  Legal Proceedings

      The  Company  is  a  party  to  various  claims,   disputes  and  other
proceedings relating to former employees and other matters arising in the normal
course of its  business.  In the  opinion of  management,  the  outcome of these
matters will not have a material  adverse effect on the  consolidated  financial
condition or results of operations of the Company.

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

      None.

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

Price Range of Common Stock

      The Company's  Common Stock trades on The Nasdaq Stock  Market(R) under
the  symbol  ELCO.  As of  December  31,  1998,  there  were  approximately  200
stockholders  of record of the  Company's  Common  Stock.  This  number does not
reflect  persons or entities  who hold their  stock in nominee or "street  name"
through various  brokerage firms. The high and low closing sales prices reported
by The Nasdaq Stock Market for each of the quarters in the two year period ended
December 31, 1998 are set forth in the table below.  For the period from January
1, 1999 to March 23, 1999,  such high and low closing  sales prices were:  high:
$4.06 and low: $1.59.

            Quarter Ended              1998                      1997
      --------------------     ---------------------    -----------------------
                                 High         Low         High          Low
                               ---------    --------    ---------    ----------
                March 31,         $6.69       $5.00        $9.00         $5.63
                 June 30,          6.06        3.44         7.31          4.56
            September 30,          4.13        1.19         7.00          5.81
             December 31,          3.13        1.16         8.00          5.63

      The Company has never  declared  or paid cash  dividends  on its Common
Stock.  The Company  currently does not  anticipate  paying any dividends in the
foreseeable future. Any payment of future dividends will be at the discretion of
the Board of Directors and will depend upon,  among other things,  the Company's
earnings,  financial  condition,  capital  requirements,  level of indebtedness,
contractual  restrictions  with  respect to the payment of  dividends  and other
factors that the Company's Board of Directors  deems relevant.

                                       14

<PAGE>

Item 6. Selected Financial Data

      The following table sets forth selected consolidated financial data for
the Company for the years ended December 31, 1994 through December 31, 1998. The
historical financial data are derived from the consolidated financial statements
of the Company audited by Arthur Andersen LLP,  independent public  accountants.
This information  should be read in conjunction with the Company's  Consolidated
Financial Statements and related Notes thereto and with "Management's Discussion
and  Analysis  of  Financial  Condition  and Results of  Operations",  which are
included elsewhere in this Annual Report. The data for the periods presented are
not necessarily comparable because of acquisitions  consummated at various times
during the periods presented.

<TABLE>
<CAPTION>

                                                                     (in thousands, except per share data)
                                                                           YEARS ENDED DECEMBER 31,
                                                 -----------------------------------------------------------------------
                                                       1994        1995         1996            1997           1998
                                                 ------------   -----------  -----------     -----------     ----------
<S>                                                  <C>          <C>          <C>             <C>            <C>     

INCOME STATEMENT DATA (1):
Net Sales                                            $57,712      $311,423     $620,115        $760,136       $763,600
                                                 ============   ===========  ===========     ===========     ==========
Gross profit                                           8,778        39,382       70,039          90,394         76,942
Selling, general and administrative expenses          10,364        36,016       57,551          70,200         80,285
Research and development expenses                      1,166         1,122        1,200           1,275          1,178
Restructuring, impairment and other related
  charges                                                -             -            -               -           12,892
                                                 ------------   -----------  -----------     -----------     ----------
Operating profit (loss)                              (2,752)         2,244       11,288          18,919        (17,413)
Interest and other income (expense), net               (146)        (1,909)      (2,303)         (4,142)        (7,664)
                                                 ------------   -----------  -----------     -----------     ----------
Income (loss) before income taxes                    (2,898)           335        8,985          14,777        (25,077)
Provision for income taxes                              564          1,239        3,410           4,489            484
                                                 ------------   -----------  -----------     -----------     ----------
Net income (loss)                                   $(3,462)     $   (904)     $  5,575        $ 10,288      $ (25,561)
                                                 ============   ===========  ===========     ===========     ==========
Basic net income (loss) per share                   $ (0.37)     $  (0.05)    $    0.21      $     0.38    $     (0.94)
                                                 ============   ===========  ===========     ===========     ==========
Basic weighted average shares outstanding             9,247         18,195       26,363          26,937         27,322
                                                 ============   ===========  ===========     ===========     ==========

Diluted net income (loss) per share                $  (0.37)     $  (0.05)    $    0.19      $     0.35    $     (0.94)
                                                 ============   ===========  ===========     ===========     ==========
Diluted weighted average shares outstanding            9,247        18,195       29,739          29,461         27,322
                                                 ============   ===========  ===========     ===========     ==========

</TABLE>

<TABLE>
<CAPTION>

                                                                                   DECEMBER 31,
                                                           -------------------------------------------------------------
                                                               1994         1995       1996         1997        1998
                                                               ----         ----       -----        ----        ----
<S>                                                           <C>        <C>         <C>          <C>         <C>

CONSOLIDATED BALANCE SHEET DATA (1):
Total current assets                                          $20,313    $136,781    $210,185     $277,806    $220,415
Total assets                                                   22,356     174,231     260,769      332,068     261,851
Total current liabilities                                      13,997      89,290     161,158      218,300     175,929
Long-term liabilities, net of current portion                     236          91       1,008        3,465         905
Total stockholders' equity                                      8,123      84,850      98,603      110,303      85,017

</TABLE>


(1)  The  information   presented  for  all  periods  includes  the  results  of
     operations and financial  condition of CDCI,  which was acquired in October
     1994 and AMA, which was acquired in February 1996. The acquisitions of CDCI
     and AMA were both  accounted  for on a pooling  of  interests  basis.  As a
     result,  the Company's results of operations have been restated back to the
     Company's  inception in September 1992 to include the results of operations
     of CDCI and AMA.


                                       15

<PAGE>


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

OVERVIEW

      The  Company  was  founded in 1992,  commenced  selling PC  products in
December  1993,  and  experienced  rapid growth for several  years.  The Company
achieved its growth by using its  proprietary  Personal  Electronic  Catalog and
Ordering System ("PECOS") as a value-add  differentiator and by offering the use
of PECOS through Elcom Services Group, Inc. (formerly Catalink Direct,  Inc.) to
its customers and by various marketing  efforts,  including the expansion of its
direct  sales  force  nationwide,  and by  the  acquisition  of six PC  products
remarketers.  To date,  the Company's net sales have been derived  substantially
from the sale of PC products by the  Company's  wholly-owned  subsidiary,  Elcom
Services  Group,  Inc. and its respective  subsidiaries in the United States and
United Kingdom ("Elcom Services  Group"),  to business and corporate  customers.
These sales are  accomplished  through the Company's PECOS  electronic  commerce
technology and through  telephone and other  traditional  ordering  methods.  In
addition,  the Company,  through another subsidiary,  elcom.com,  inc. (formerly
Elcom   Systems,   Inc.),   licenses   its  PECOS   technologies   and  provides
implementation  and consulting  services,  and  commencing in 1999,  operates an
Internet on-line site selling PC's and related products.

      In  mid-1998,  the  Company  changed  the  name  of its  PC  remarketer
subsidiary,  Catalink Direct,  Inc., to Elcom Services Group, Inc. The change in
name more closely  identifies the subsidiary  with the Company's  corporate name
and is more  descriptive  of the Company's  business  focus,  which  includes an
expanded range of  professional  technical and customer  services in addition to
product  supply.  The  U.K.-based PC  remarketer  group will continue to operate
under the Elcom Group Limited name.

     In December 1998, the Company established  elcom.com,  inc. and, in January
1999 merged  Elcom  Systems,  Inc.  with and into  elcom.com,  inc.  whereby the
surviving  entity is named  elcom.com  and is now a  wholly-owned  subsidiary of
Elcom Services Group.

Elcom Services Group

      In  October  1994,   the  Company   completed  the   acquisition  of  a
Connecticut-based PC products remarketer ("CDCI"),  which was accounted for on a
pooling-of-interests  basis. Accordingly,  the results of this entity (which was
merged into Elcom  Services  Group in December 1995) have been included with the
Company's  results  since the date of the  Company's  organization.  In February
1995, the Company acquired Catalink Direct (Pennsylvania),  Inc., formerly known
as Computerware Business Trust ("Computerware"),  a Bristol,  Pennsylvania-based
PC products  remarketer  (which was merged into Elcom Services Group in December
1997).  In June 1995,  the Company  acquired  all of the equity of a PC products
remarketer  in the  United  Kingdom  operating  as Lantec  Information  Services
Limited ("Lantec"). The Computerware and Lantec acquisitions have been accounted
for as purchase transactions.

      In February 1996, the Company  completed the  acquisition of AMA (U.K.)
Limited  ("AMA"),  a remarketer of PC products in the United Kingdom,  which has
been accounted for on a pooling-of-interests  basis. Accordingly,  AMA's results
have been included  with the  Company's  results since the date of the Company's
organization. In December 1996, the Company acquired Prophet Group Limited, a PC
products  remarketer and in February  1997,  the Company  acquired Data Supplies
Limited,  a PC  products  remarketer,  both of which are  located  in the United
Kingdom.  The Prophet Group and Data Supplies  acquisitions  have been accounted
for as purchase transactions.

      Elcom Services  Group's revenues and resultant gross profit have always
been  effected  by  price  reductions  by  PC  manufacturers,  which  have  been
substantial over the last several years. Manufacturers' price reductions require
that  Elcom  Services  Group  increase  its base  unit  volumes  and  associated
peripheral  product  sales to overcome  the effect of such price  decreases  and
increase  its  revenue  volume if it is to  sustain  its  level of gross  profit
dollars.  Although the Company's unit volume of PCs shipped to customers  showed
significant  growth  in 1998  compared  to 1997,  these  price  decreases  had a
significant  effect on the average unit price of PCs sold and the  Company's net
sales, when compared to last year. Further,  the Company experienced a softening
of demand from its customers  beginning in September 1998, which the

                                       16
<PAGE>

Company  has   attributed  to  the  Asian   financial   crisis  and   subsequent
fluctuations, and related uncertainties in the worldwide financial markets, that
impacted many of the Company's customers.

      During the third quarter of 1998, the Company  restructured  certain of
its Elcom Services  Group United States  operations.  The primary  objectives of
this restructuring were to centralize and better leverage Elcom Services Group's
customer relations support functions.  In addition,  the Company also elected to
not pursue renewal of its Apple Educational Sales Agent contract,  as management
intends to focus on a broader educational market.

      At the  end  of the  fourth  quarter  of  1998,  Elcom  Services  Group
"rightsized" its operations,  reducing its work force by 133 positions worldwide
and  closing  six field  support  and sales  offices in the United  States.  The
rightsizing  primarily  focused on reengineering  and streamlining the Company's
sales force and operating  infrastructure  in a manner  intended to better align
its costs  with the  revenues  and  margin  expected  to be  generated  by Elcom
Services  Group.  The  Company   continues  to  evaluate  the  results  of  this
rightsizing, and additional steps may be taken.

elcom.com, inc.

      On a  stand-alone  basis,  for the years  ended  December  31, 1998 and
December 31, 1997,  revenues generated by the Elcom Systems software division of
elcom.com ("Elcom  Systems") from licenses,  including  associated  professional
services and maintenance fees, were approximately $2.6 million and $4.8 million,
respectively.  Consequently,  because Elcom  Systems'  expenses were  relatively
stable  in  both   periods,   its   consolidated   operating   loss   (excluding
restructuring,  impairment and other related charges)  increased $2.0 million to
$3.1 million  during 1998 versus an operating  loss of $1.1 million in 1997. The
decline in Elcom  Systems'  revenues  reflects the shift in the Company's  focus
from its PECOS Commerce  Manager  ("PECOS.cm")  technology to PECOS  Procurement
Manager   ("PECOS.pm"),  its  recently   introduced   intranet-based   automated
procurement  management  system. In the third quarter of 1998, Elcom Systems was
restructured to serve as an electronic commerce-oriented systems integration arm
of Elcom Services Group, the Company's  PC-remarketing and professional services
subsidiary. In addition, beginning in March 1999, elcom.com launched an Internet
on-line storefront site at www.elcom.com  where it markets and sells over 62,000
PC products to businesses  and consumers,  and intends to offer office  supplies
and other products,  24 hours a day, seven days a week and be a leading supplier
of these multiple commodity-type  products,  primarily to businesses.  elcom.com
also   plans  to  launch  an  auction   site  as  part  of  its   Internet-based
business-to-business storefront.

Salomon Smith Barney Engagement

      On July 23, 1997, the Company announced that its Board of Directors had
authorized the  engagement of the  investment  banking firm of Smith Barney Inc.
(which  subsequently  merged with Salomon  Brothers Inc. to become Salomon Smith
Barney),  to assist the Company by coordinating and evaluating  options intended
to help enable the strategic potential of the Company to be realized.  The rapid
growth of the Company prior to that time and the Board of Directors' belief that
the Company's stock was undervalued in the marketplace,  prompted the Company to
take this step. These actions,  intended to maximize stockholder value, included
evaluating  the  possible  sale or merger of the  Company,  strategic  financing
options,  and  potential  strategic  partners.  Due to the size and scale of the
Company's PC  remarketing  and services  business in the United  Kingdom and the
relative  strength  of  the  United  Kingdom  stock  market,   particularly  for
information  technology  stocks,  the  Company  and  Salomon  Smith  Barney also
evaluated  alternatives  intended to take advantage of this strength,  including
potential  separate  transactions  for the Company's  United  Kingdom and United
States remarketer businesses.

      On  September  17,  1998,  the  Company  announced  that  its  Board of
Directors  voted to continue to build its business as a  standalone  company and
therefore  disengaged from its activities  with Salomon Smith Barney  associated
with the  evaluation  of strategic  alternatives  for the Company.  The Board of
Directors  decided  that  none  of the  preliminary  proposals  or  alternatives
potentially available to it at that time were of a structure or amount which, if
consummated,   would  have  been  in  the  best   interests  of  the   Company's
stockholders.  The  Board  of  Directors  decided,  in  light  of the  proposals
discussed during the engagement,

                                       17

<PAGE>

that the  interests  of the  stockholders  would  best be served by the  Company
continuing to develop its business as a standalone company.

      After  disengaging  from  Salomon  Smith  Barney,  the  Company has had
periodic discussions with several companies. However, the Company is not engaged
currently in any  substantive  negotiations,  although it intends to continue to
have  discussions,  if  appropriate,  with relevant and  qualified  companies to
investigate  possibilities  to increase  stockholder  value. The Company remains
contractually  committed  to Salomon  Smith  Barney until late 1999 in the event
that a transaction is consummated with certain parties.

Year 2000 Compliance

      As further described  elsewhere herein,  the Company has implemented an
Oracle-based Year 2000 compliant Information  Technology System ("IT System") in
the United States.  In the United  Kingdom,  the Company has  implemented a Year
2000 compliant upgrade to its Computer Associates  International,  Inc. software
system which operates on an IBM AS-400  hardware  platform.  Due to the extended
time frame of the United States Oracle-based system implementation,  and related
ongoing   enhancements,   the  Company  has  deferred   implementation   of  the
Oracle-based  system  in the  United  Kingdom.  The  Company  also  has  delayed
implementation of a new warehousing system in the United States and is currently
using its Oracle-based Year 2000 compliant,  inventory system.  During 1999, the
Company will reassess  implementation  of its Oracle-based  system in the United
Kingdom.  The Company's  near term IT System efforts will continue to be focused
on  additional  enhancements  to its  systems,  including  ensuring  the Company
remains  current in  applying  any  software  "patches"  issued by its  software
vendors to address Year 2000 compliance issues. The Company has been assured by,
and is confident that, its key electronic trading partners'  information systems
applications  either are, or will be, Year 2000 compliant in sufficient  time to
avoid material problems,  however, there can be no assurance by the Company that
its electronic  trading partners will not experience Year 2000 oriented problems
which could effect the supply of products to the Company.  The  Company's  PECOS
electronic commerce  technology  applications have been developed in a Year 2000
compliant fashion.

      The  following is a discussion  of the Year 2000 date issue as it could
affect the Company.  The Year 2000 issue arises from the fact that many computer
programs and embedded  chips in other forms of technology  use only the last two
digits to identify a year in a date field.

     The Company's state of readiness.  The Company currently  believes that its
potential  exposure to problems arising from the Year 2000 issue could primarily
be in two areas:

      -  The Company's internal operating systems which include both Information
          Technology ("IT") and non-IT components (such as computer chips 
          imbedded in hardware).
      -  Compliance  with the Year 2000  issue by third  parties  with whom the
          Company has a material relationship.

     Internal  operating  systems.  The  Company is heavily  dependent  upon its
complex IT System for all phases of its  operations,  which  include  electronic
(PECOS)  and  other  forms of order  entry,  sales,  distribution,  billing  and
accounting.  The Company began addressing potential Year 2000 issues in 1996 and
has completed an assessment of its principal IT Systems and modules. The Company
has determined  that these systems and modules are Year 2000 compliant  based on
systematic  testing  conducted  by Company  personnel  and outside  consultants,
however,  there may be some non-IT technology or non-critical  applications that
are not Year 2000 compliant.

     The Company is completing a multi-phase program to identify and resolve its
potential exposure as follows:

     -    To the extent practical,  systematically test and verify equipment and
          facility systems that contain non-IT components.

                                       18
<PAGE>

     -    Test  non-critical  applications and assess whether any  non-compliant
          applications should be replaced,  upgraded or discontinued.Continue to
          test and verify that the  Company's  principal  IT Systems and modules
          are Year 2000 compliant.
     -    Use internal programmers and outside consultants to upgrade or replace
          any  non-compliant  applications  and to upgrade any other systems and
          modules determined to be non-compliant.
     -    Replace non-IT components that are not Year 2000 compliant.

     The Company  estimates  that it will complete its  assessment of non-IT
technology and non-critical applications for its IT technology by the end of the
first  quarter of fiscal  1999,  and expects to address  any issues  identified;
although until this assessment is completed,  and the results thereof  assembled
and analyzed,  no assurances can be given as to the Company's ability to address
such issues, if any, that are identified.

     Third party relationships. The Company is continuing to assess the Year
2000 issue with respect to its third party  relationships.  Although the Company
is rarely  dependent  on a single  source of supply for the products it sells or
for its own IT and non-IT  components,  the failure of a particular  supplier to
timely deliver Year 2000 compliant IT and non-IT components could jeopardize the
Company's ability to meet its delivery schedules.

     The  Company is pursuing a program to  identify  and resolve  Year 2000
exposure from third parties as follows:

     -    Develop and execute Year 2000 compliance tests with its key electronic
          trading  partners and verify such partners are Year 2000 compliant.  
     -    Develop  a  supplier  compliance  warranty  for  incorporation  in all
          purchase orders requiring  suppliers  selling IT and non-IT components
          to the Company to certify that items delivered are Year 2000 compliant
          and  require  them to  correct  or  replace  any such item found to be
          non-compliant.  The  Company  estimates  that  it  will  complete  its
          assessment  relating to third party  suppliers and  development of its
          supplier compliance warranty by the end of the first quarter of fiscal
          1999.  
     -    Develop alternative sources for IT and non-IT components that are Year
          2000  compliant in the event that  existing  suppliers are not able to
          meet compliance requirements.
     -    The Company also is dependent on third party service  providers,  such
          as telephone  companies,  banks and insurance carriers;  however,  the
          Company does not believe that it has  significant  Year 2000  exposure
          from those  providers  and has not  implemented  any  requirements  to
          assure Year 2000 compliance by them.

     Costs to address the Company's Year 2000 issues.  Other than time spent
by the  Company's  internal  information  technology  and other  personnel,  the
Company has not incurred any significant  costs in identifying Year 2000 issues.
The Company  does not  anticipate  any  significant  costs to make its  internal
systems Year 2000 compliant because no significant remediation is expected to be
required.  Because no  material  Year 2000 issues  have yet been  identified  in
connection  with  third  party  relationships,  the  Company  cannot  reasonably
estimate costs which may be required for  remediation or for  implementation  of
contingency  plans. As the Company gathers  additional  information  relating to
Year 2000 issues and the  readiness  of its third party  providers,  the Company
will reevaluate its ability to estimate costs  associated with Year 2000 issues.
There can be no assurance  that, as additional  Year 2000 issues are  addressed,
the Company's costs to remediate such issues will not be material.

     Potential risks of the Company's Year 2000 issues. The Company believes
that the most  reasonably  likely worst case Year 2000 scenario  would include a
combination of some or all of the following:

     -   Internal  IT  modules  or  systems  may  fail to  operate  or may give
         erroneous  information.  Such failure could result in shipping  delays,
         inability to generate or delays in generation of financial

                                       19
<PAGE>

          reports and statements,  inability of the Company to communicate  with
          its branch offices,  and computer network  downtime  resulting in
          numerous inefficiencies and higher payroll expenses.
     -    Non-IT  components in lighting,  telephone,  security and similar
          systems might fail and cause the entire IT System to fail.
     -    Communications  with  customers  that  depend  upon IT or  non-IT
          technology,  such as EDI (including automatic ordering by and for
          customers),  and obtaining current pricing from vendors, may fail
          or give  erroneous  information.  These types of  problems  could
          result  in such  difficulties  as the  inability  to  receive  or
          process customer orders,  shipping delays, or sale of products at
          erroneous prices. 
     -    Product  being  unavailable  as a result  of Year  2000  problems
          experienced by one or more vendors of the Company, or as a result
          of a Year 2000 problem with  certain of their  suppliers,  and/or
          the inability of the Company to develop  alternative  sources for
          products.
     -    Products  sold to some of the Company's  customers  could fail to
          perform  some  or  all  of  their  intended  functions.  In  such
          situations,  the Company's maximum  obligation would be to repair
          or replace  the  defective  products to the extent the Company is
          required  to  do so  under  a  manufacturer's  warranty,  at  the
          manufacturer's expense.

     The Company's  contingency  plans.  The Company believes that its plans
for addressing the Year 2000 issue as outlined above are adequate to handle even
the most  reasonably  likely worst case  scenario.  The Company does not believe
that it will incur a material financial cost from the potential risk of failure,
or from the costs  associated  with  assessing the  potential  risks of failure,
arising from the Year 2000 issue.  Consequently,  the Company does not intend to
create a contingency  plan other than the Company's plans as set forth above. If
it is  determined  that  a key  electronic  trading  partner  is not  Year  2000
compliant,  the Company can adjust its IT System to transact business with a key
partner that is Year 2000 compliant. In addition, if the Company's assessment of
its vendors,  when completed,  indicates that certain  product  shortages can be
anticipated,  the Company has the  capacity  to  maintain  additional  levels of
inventory and may adjust its plans accordingly.

RESULTS OF OPERATIONS

     The  following  table sets forth  various  items as a percentage of net
sales for each of the years in the three year period ended December 31, 1998:

                                                      Year Ended December 31,
                                                   1996        1997         1998
                                                   ----        ----         ----
     Net sales.................................... 100%        100%         100%
     Gross profit.................................  11          12           10
     Selling, general and
      administrative expenses.....................   9           9           11
     Research and development expenses............  --          --           --
     Restructuring, impairment and other
      related charges.............................  --          --            1
     Operating profit (loss)......................   2           3           (2)
     Interest expense.............................   1           1            1
     Interest income and other, net...............   1          --           --
     Provision for income taxes...................   1           1           --
     Net income (loss)............................   1           1           (3)
                         
Year ended December 31, 1998 compared to the year ended December 31, 1997

     Net Sales.  Net sales for the year ended  December  31, 1998  increased  to
$763.6  million from $760.1  million in the year ended  December  31,  1997,  an
increase of $3.5 million or 0.5%.  Net sales in the United  States  decreased to
$449.8  million in 1998 from  $473.8  million in 1997,  a 5.1%  decrease,  which
reflects the impact of several factors, including substantial manufacturer price
decreases,  increased price  competition in the marketplace,  as well as overall
softer demand from the Company's domestic customers for PC products in 1998. Net
sales of the  Company's  United  Kingdom-based  operations  increased  to

                                       20

<PAGE>

$313.8 million in 1998 from $286.3  million in 1997, an increase of 9.6%,  which
generally  reflects  an increase  in the level of  distribution  sales (to other
resellers) in 1998 over 1997.

     Gross Profit.  Gross profit for the year ended  December 31, 1998 decreased
to $76.9  million  from $90.4  million in the year ended  December  31,  1997, a
decrease  of $13.5  million,  or 15%.  Gross  profit as a  percent  of net sales
decreased  from 11.9% in 1997 to 10.1% in 1998.  The  decrease  in gross  profit
percentage  in 1998  reflects  a  significant  decrease  in the  level of direct
purchases from manufacturers in the United States and a substantial  decrease in
manufacturer  funding and incremental  discounts  available to the Company.  The
decline in the gross profit  percentage also reflects a higher proportion of the
Company's  sales  being to its  larger  customers  in the United  States,  which
typically generate higher than average volume, but at lower gross profit margins
than other customers.  The Company  anticipates some level of continued pressure
on  its  gross  profit  margin.  The  United  Kingdom  group  is  authorized  to
"distribute"   certain  product  lines  to  other  PC  remarketers  through  its
distribution  entity and these sales,  which are at lower  margins than sales to
end users,  have increased in 1998 over 1997 levels,  thereby  lowering  overall
gross  profit  margins.  Increases in  professional  services  sales,  which are
generally at higher margins than product sales,  were not significant  enough to
offset the above described factors.

     Selling,  General and  Administrative  Expenses.  Selling,  general and
administrative ("S,G&A") expenses for the year ended December 31, 1998 increased
to $80.3  million from $70.2  million in the year ended  December  31, 1997,  an
increase of $10.1 million or 14%. This increase is attributable primarily to the
Company's  investment  in sales and  technical  services  personnel,  as well as
associated   operational  and  administrative   infrastructure  to  support  the
anticipated  growth of the Company's  traditional  remarketer  and  professional
services  business.  The level of sales personnel and associated  infrastructure
put in place by the Company in 1998 anticipated a significantly  higher level of
net  sales  and  gross  profit  than  was  generated  by the  Company  in  1998.
Accordingly,  at the end of 1998,  the Company took certain steps to "rightsize"
its workforce to mitigate this situation.  See "- Restructuring,  Impairment and
Other Related Charges".

     Overall,  S,G&A expenses increased as a percentage of net sales for the
year ended December 31, 1998 to 10.5% from 9.2% in 1997, reflecting the combined
impact  of the  Company's  1998  investment  in sales and  other  personnel  and
infrastructure, while sales remained essentially flat with 1997.

     Research and  Development  Expense.  Research and  development  expense
remained essentially flat in 1998 compared with 1997. The Company's research and
development  expenses are focused on developing  incremental  functionality  and
features  for  its  PECOS  product  line,   including  developing  the  PECOS.pm
technology  acquired  in  1997 in  current,  state-of-the-art  code,  as well as
modifications  to allow its PECOS  technologies to communicate and operate using
the Internet and the continued development of its browser-based and Java-enabled
version of its PECOS  technologies for license to other  companies.  The Company
expects to continue to increase its  investment in research and  development  in
the future.

     Restructuring,  Impairment  and Other  Related  Charges.  In September
1998, the Company restructured Elcom Systems, its electronic commerce technology
subsidiary, to serve as an electronic  commerce-oriented systems integration arm
of Elcom Services Group. In connection with the Elcom Systems restructuring, the
Company has recorded a total charge of approximately $3.7 million, consisting of
$.8 million of severance  costs,  a write-down  of $2.1 million to estimated net
realizable value relating to the impairment of certain  intangible  assets,  and
approximately $.8 million in other estimated expenses and asset write-downs. The
impaired  intangible  assets  generally  consist  of the value  assigned  to the
original client server coding and  architecture of PECOS.pm,  which is no longer
competitive with alternatives now available.  The Company has, and continues to,
develop PECOS.pm in current,  state-of-the-art  code,  especially for use on the
Internet.

     In August 1998, the Company  restructured  Elcom Services Group's education
sales operations and in September,  consolidated certain of its customer support
personnel in the United  States.  The total charge related to the Elcom Services
Group  restructuring is approximately $8.1 million,  consisting of approximately
$.1 million of severance  costs,  a write-down  of $7.0 million to estimated net
realizable  value  relating to the impairment of certain  intangible  assets and
approximately $1.0 million in other related 

                                       21
<PAGE>

expenses and asset write-downs. The impaired intangible assets generally consist
of the unamortized  goodwill  associated  with the February 1995  acquisition of
Computerware,  because the Company has  determined  that there are no longer any
identifiable  or  significant  cash  flows  specifically  associated  with  this
acquisition,  ultimately due to the non-renewal of the Apple  Educational  Sales
Agent contract.

     In December,  1998, the Company  streamlined its business  model,  focusing
primarily on  reengineering  its sales force and operating  infrastructure  in a
manner  intended to better align the  Company's  costs with  revenues and margin
expected to be generated by the Company. This rightsizing affected 133 positions
worldwide,  and the Company  recorded a total charge of $1.1 million,  primarily
associated  with personnel  severance and estimated costs related to closing six
United States field support and sales offices.

     Interest  Expense.  Interest  expense for the year ended  December 31, 1998
increased to $8.4 million  from $5.2 million in 1997.  Interest  expense in both
years  primarily  results from  borrowings in support of the Company's  accounts
receivable and inventory and is reflective of the substantial  increases in such
assets which began in the second half of 1997 and continued during substantially
all of 1998, prior to the Company's  significant reduction of both its inventory
and accounts  receivable balances in the fourth quarter of 1998. The increase in
interest  expense also reflects  higher  interest rates in the United Kingdom in
1998 compared to 1997.

     Interest Income and Other,  Net.  Interest  income and other,  net, for the
year ended  December 31, 1998 decreased to $.7 million from $1.1 million in 1997
and  reflects  a  reduction  in  average  on-hand  balances  of  cash  and  cash
equivalents  available for investment.  Interest  income and other,  net in 1997
includes a gain of $.4 million resulting from the sale of the Bristol, PA rental
division  in March  1997,  net of  certain  redundant  operating  and  severance
expenses  of  certain  Computerware   operations,   which  were  phased-out  and
consolidated  into the Company's  headquarters and East Coast  configuration and
distribution  facility which was opened in Canton,  MA late in the first quarter
of 1997.

     Income Tax Provision.  The income tax provisions in 1998 and 1997 primarily
relate to the income taxes of the Company's United Kingdom-based  operations, as
well as certain current federal (alternative minimum tax) and state income taxes
provided by the Company,  partially  offset by the tax benefit  associated  with
reversal of the 1997 United  States  deferred tax liability due to the Company's
tax loss in 1998.  Because of the uncertainty  related to  realizability  of the
Company's  net  operating  loss  carryforward,  the Company has  recorded a full
valuation allowance against its United States deferred tax assets.

     Net Income.  The Company  reported a net loss of $25.6 million for the year
ended December 31, 1998, versus net income of $10.3 million in 1997, as a result
of the factors described herein.


Year ended December 31, 1997 compared to the year ended December 31, 1996

     Net Sales.  Net sales for the year ended  December  31, 1997  increased  to
$760.1  million from $620.1  million in the year ended  December  31,  1996,  an
increase of $140 million or 22.6%.  Net sales in the United States  increased to
$473.8  million in 1997 from $435.1  million in 1996,  an 8.9%  increase,  which
reflected  management's  decision to defer significant expansion of its domestic
sales  force and focus its  efforts  on  consolidation  of certain  general  and
administrative   functions  of  acquisitions  and   implementation  of  its  new
management information system. Such implementation  adversely impacted net sales
in the United States in the fourth  quarter of 1997.  Net sales of the Company's
United Kingdom based operations  increased to $286.3 million in 1997 from $185.0
million in 1996, an increase of 54.8%. Net sales for the year ended December 31,
1997 in the United  Kingdom  include an aggregate of $51.1 million  generated by
Prophet Group  Limited  (acquired in December,  1996) and Data Supplies  Limited
(acquired in February, 1997).

                                       22
<PAGE>


     Gross Profit.  Gross profit for the year ended  December 31, 1997 increased
to $90.4  million from $70.0  million in the year ended  December  31, 1996,  an
increase  of $20.4  million,  or 29.1%.  The  increase in gross  profit  dollars
resulted  primarily from the  substantial  growth in net sales,  including sales
generated by recent acquisitions.  Gross profit, including the contribution from
acquisitions, as a percent of net sales increased from 11.3% in 1996 to 11.9% in
1997.  The gross profit  percentage  was higher in 1997  principally  due to new
direct purchasing  programs  implemented with several major manufacturers in the
United States,  coupled with an increase in the portion of revenues generated by
the Company's United Kingdom  operations,  and from an increase in higher margin
professional services revenues in both countries.

     Selling,  General and Administrative  Expenses. S,G&A expenses for the year
ended  December 31, 1997  increased to $70.2  million from $57.6  million in the
year ended December 31, 1996, an increase of $12.6 million or 22%. This increase
is  attributable  primarily to the cost of the  Company's  larger work force and
other expenses of the acquired companies. Other S,G&A expenses also increased as
the Company continued to invest in administrative  infrastructure to support its
current and future growth,  including the development and  implementation of its
Oracle-based, Year 2000 compliant management information system.

     Overall, S,G&A expenses decreased as a percentage of net sales for the year
ended  December  31,  1997 to 9.2% from 9.3% in 1996,  reflecting  the impact of
slower overall expense growth relative to the increase in net sales, and also is
reflective  of the  increase in  manufacturer  funding/reimbursement  of certain
S,G&A  expenses,  resulting  from  the  Company's  increased  volume  of  direct
purchasing in 1997.

     Research  and  Development   Expense.   Research  and  development  expense
increased  slightly  from $1.2  million  in 1996 to $1.3  million  in 1997.  The
Company's   research  and   development   expenses  are  focused  on  developing
incremental functionality and features for its PECOS technologies, including the
aspects of the PECOS.pm technology acquired in 1997, as well as modifications to
allow its PECOS technologies to communicate using the Internet and the continued
development  of a  browser  compliant  and  Java-enabled  version  of its  PECOS
technologies  for license to other  companies.  The Company  expects to continue
investing significant amounts in research and development.

     Interest  Expense.  Interest  expense for the year ended  December 31, 1997
increased to $5.2 million  from $3.8 million in 1996.  Interest  expense in both
years  primarily  results from  borrowings in support of the Company's  accounts
receivable and inventory and is reflective of the substantial  increases in such
assets,  net of  reductions  in the  applicable  interest  rate on the principal
United  States  credit  facility  from  prime plus 1% in the first six months of
1996,  to the prime rate as of July 1, 1996,  and a further  reduction  to prime
minus 1% as of March 1, 1997.

     Interest Income and Other,  Net.  Interest  income and other,  net, for the
year ended December 31, 1997 decreased to $1.1 million from $1.5 million in 1996
and  reflects  a  reduction  in  average  on  hand  balances  of cash  and  cash
equivalents  available for investment.  Interest  income and other,  net in 1997
includes a gain of $389,000  resulting  from the sale of the Bristol,  PA rental
division  in March  1997,  net of  certain  redundant  operating  and  severance
expenses of certain  Computerware  operations,  which have been  phased-out  and
consolidated  into the Company's  headquarters and East Coast  configuration and
distribution  facility which was opened in Canton,  MA late in the first quarter
of 1997.

     Income Tax Provision.  The income tax provisions in 1997 and 1996 primarily
relate to the income taxes of the Company's United Kingdom-based  operations, as
well as certain current federal (alternative minimum tax) and state income taxes
provided by the Company.

     Net Income.  The Company  reported net income of $10.3 million for the year
ended December 31, 1997,  versus net income of $5.6 million in 1996, as a result
of the factors described herein.

                                       23
<PAGE>



Liquidity and Capital Resources

     Net cash provided by operating  activities  for the year ended December 31,
1998 was $38.8  million,  which  primarily  reflects a total of $20.3 million in
depreciation,  amortization  and impairment of intangible  assets,  as well as a
decrease in inventory of $20.9 million, and a $12.3 million decrease in accounts
receivable.  Net cash used in investing activities was $6.8 million,  consisting
primarily of additions to property,  equipment  and  software.  Net cash used in
financing  activities was $51.1 million,  including a $50.0 million net decrease
in borrowings under floor plan lines of credit.

     Net cash used in operating  activities for the year ended December 31, 1997
was $44.2 million,  which is primarily due to an increase in accounts receivable
of $30.2 million,  resulting  primarily from the Company's increase in net sales
during 1997, and a $26.1 million  increase in inventory  which is related to the
Company's  direct  purchasing   arrangements  with   manufacturers   which  were
instituted in the United States in 1997.  Net cash used in investing  activities
was  $11.3  million,  consisting  primarily  of $7.7  million  in  additions  to
property,  equipment and software and $3.3 million related to acquisitions.  Net
cash  provided by  financing  activities  was $65.6  million,  including a $64.6
million  net  increase in  borrowings  under floor plan lines of credit and $1.8
million in proceeds from the exercise of stock options and related tax benefits.

     At December 31, 1998, the Company's principal sources of liquidity included
cash and cash equivalents of $14.3 million,  accounts  receivable and floor plan
lines of credit from Deutsche Financial Services  Corporation  ("DFSC").  During
1998,  the United  States DFSC  facility  provided for  borrowings of up to $120
million.  The facility was amended in connection  with its March 1999 renewal to
provide for aggregate  borrowings of up to $80 million, and as of April 1, 1999,
the interest rate will increase from the prime rate minus 1% to prime minus .5%.
In addition,  the Company has agreed that its interest  rate will  increase .25%
for each  quarter  that it reports a loss,  as  defined in the DFSC  agreements.
Availability of United States borrowings is based on DFSC's  determination as to
eligible  accounts  receivable  and  inventory.  As of December  31,  1998,  the
Company's  borrowings  from DFSC on its United  States floor plan line of credit
were $66.7  million,  which  approximated  the Company's  availability  based on
eligible  accounts  receivable and inventory at that date. During the first half
of 1996,  interest was payable monthly at the prime rate plus 1%, and thereafter
at the prime rate,  although  approximately  one-half of the  Company's  initial
United States borrowings do not bear interest until after interest-free  periods
of 30 to 60 days have lapsed. As of March 1, 1997, the interest rate was reduced
to prime (8.5% at December  31,  1998) minus 1%. The United  States DFSC line of
credit is  secured  primarily  by the  Company's  United  States  inventory  and
accounts  receivable,  although  substantially all of the Company's other United
States assets also are pledged as collateral on the facility.  In December 1997,
the  Company  also  established  a United  Kingdom  DFSC credit  facility  which
provides for aggregate  borrowings of up to (pound)30 million,  or approximately
$50 million, as of December 31, 1998.  Availability of United Kingdom borrowings
is based upon DFSC's  determination of eligible accounts  receivable and amounts
outstanding  bear  interest  at the Base Rate of National  Westminster  Bank plc
(7.5% at  December  31,  1998) plus  1.25%.  The United  Kingdom  DFSC  facility
replaced four separate facilities  previously  maintained in the United Kingdom.
As of December 31, 1998, the Company's  borrowings under its United Kingdom DFSC
facility were  (pound)23  million,  or $38.1  million,  which  approximated  the
Company's availability thereunder.

     The  Company is  dependent  upon the DFSC  lines of credit to  finance  its
eligible  accounts  receivable  arising from sales of PC products as well as its
United States inventory purchases.  The DFSC lines of credit limit borrowings to
defined  percentages  of eligible  inventory (in the United States) and accounts
receivable and contain customary  covenants,  including financial covenants with
respect to the Company's net income,  net worth and  debt-to-equity  ratios,  as
defined  in  the  agreements,   and  customary  default  provisions  related  to
non-payment of principal and interest,  default under other debt  agreements and
bankruptcy.  After  receiving  a waiver  from  DFSC  concerning  the net  income
covenant for 1998, the Company was in compliance with all other covenants of the
facility as of December 31, 1998. There can be no assurance,  however,  that the
DFSC lines of credit will continue to be  available,  or be increased to support
the Company's requirements.

                                       24

<PAGE>

         The Company also has a $9.5 million floor plan financing agreement with
IBM Credit Corporation ("IBMCC") to support purchases of IBM products. The IBMCC
borrowing   facility  is  secured  by  the  IBM  products  purchased  under  the
arrangement and relates to domestic  operations  only. At December 31, 1998, the
Company  had no  borrowings  outstanding  from  IBMCC on its floor  plan line of
credit.

     As  of  December  31,  1998,   the  Company  had   borrowings   aggregating
approximately $104.8 million outstanding under these borrowing facilities, which
approximated its availability thereunder.

     Based upon ongoing analyses, and the requirement that it establish a direct
purchasing  relationship  with a major PC  manufacturer  to support  fulfillment
requirements  under a contract  awarded in 1996, the Company started  purchasing
selected  products  directly  from  manufacturers  in late  1996.  Although  the
Company's  inventory  investment imposes certain costs and risks and, at the end
of 1998,  increased 14% since December 31, 1996, the Company  believes that this
investment  improves its delivery time to customers  and the quality  control of
configured systems. The Company also believes that it can substantially mitigate
the risks  associated  with its additional  inventory  positions by limiting the
range of models it stocks to those in demand and by carefully  monitoring  items
on hand and their  associated  net  carrying  costs,  relative to demand.  These
direct purchasing arrangements favorably impacted gross profit,  particularly in
the  third and  fourth  quarters  of 1997,  as the  volume  of direct  purchases
increased  significantly  over prior quarters and the Company earned substantial
direct purchasing rebates and incremental  discounts related to sales to certain
large  customers.  Nonetheless,  during 1998 the Company  reduced its  inventory
levels 34% from its 1997 year-end  position,  particularly in the United States,
where  manufacturers have  substantially  modified various policies to limit the
time frame and/or availability of price protection on products held in inventory
and  the  Company's   ability  to  return  products  also  has  been  curtailed.
Accordingly,  the Company is  continuing to evaluate the levels of products that
it purchases  directly and holds in inventory in the United  States,  versus the
incremental  cost to source the product  from its DFPs for shipment to a Company
location or directly to a customer. The Company is currently seeking to minimize
the level of inventory it stocks.  As a result of the Company's  policy changes,
as well as  manufacturer  revisions  to their  rebate and  incremental  discount
programs,  the  Company  received  substantially  reduced  manufacturer  funding
support in 1998 versus 1997, and there can be no assurance that the Company will
be in a  position  to  purchase  the  levels of  product  necessary  in order to
continue to receive even these reduced levels of funding  support in the future,
or that  manufacturers  will  continue to make such support  available.  Further
reductions in  manufacturer  funding  support  would reduce the Company's  gross
profit.  The Company intends to continue to maintain  logistical and traditional
relationships with selected distributors and/or aggregators and is investigating
outsourcing certain activities.

     As of September 30, 1997,  the Company sold options to acquire its interest
in ShopLink  Incorporated,  which now  represents  approximately  a 5% ownership
position. The Company received $418,000 in payment for the options, which may be
exercised through March 31, 1999. The Company has included the $418,000 received
in  payment  for the  options  in  other  deferred  liabilities,  and  does  not
anticipate that these options will be exercised.

     The  Company's  principal  commitments  consist  of  leases  on its  office
facilities,  obligations under lines of credit,  which are demand facilities and
are treated as current liabilities, and capital leases. In addition, the Company
will require ongoing investment in property, equipment and software.

     The  Company  believes  that  its  cash,  cash  equivalents,  and  accounts
receivable,  together with its existing  sources of liquidity and cash generated
from  operations,  will be  sufficient  to meet its working  capital and capital
expenditure  requirements  for the next year, so long as its  financing  sources
continue to make lines of credit available.  However,  there can be no assurance
the  Company's  lines of credit will  continue to be available to the Company or
that replacement  financing could be arranged if necessary,  or that the Company
will be able to timely collect its accounts receivable.  Moreover,  there can be
no  assurance  that the  Company can arrange  appropriate  financing  to allow a
substantial  increase  in its  marketing  expenditures  in order to support  the
branding of PECOS.pm and its Internet-based sales subsidiary, elcom.com.

                                       25

<PAGE>

SEASONALITY AND IMPACT OF INFLATION

     The Company historically has not experienced  observable seasonality in its
business.  Generally,  however,  sales in the PC remarketer industry slow in the
summer  months and, in the United  States,  are stronger in the fourth  calendar
quarter  and  somewhat  weaker in the first  calendar  quarter,  while sales are
generally strong in the first calendar quarter in the United Kingdom. Due to its
current size and the nature of its customer base, it is likely that the sales of
the Company will be impacted by general industry seasonality in the future.

     Inflation  has been  relatively  low in recent years and  accordingly,  the
Company has not been significantly impacted by the effects of general inflation.
However,  since the  latter  half of 1996,  the  Company  has been  increasingly
impacted by the low unemployment rate in certain of its markets, particularly in
the  Northeastern  United States and the United  Kingdom,  which has resulted in
significant  increases  in  salaries  for a variety of  personnel  (particularly
technical  personnel)  in order for the  Company  to remain  competitive  in the
employment marketplace.

     The  Company's  revenues are  effected by general  price  reductions  by PC
manufacturers, which have been substantial,  particularly in 1997 and 1998. Such
price  reductions  require  that the Company  increase its base unit volumes and
associated  peripheral product sales to existing and newly acquired customers in
order to overcome  the effect of this price  cutting and increase its net sales.
Consequently,  in order to  increase  revenues,  such unit  volumes of sales are
required to increase  substantially,  which amplifies the impact of any slowdown
in corporate customer demand on the Company's revenues.

STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT

     Except  for  the  historical  information  contained  herein,  the  matters
discussed  in this  Annual  Report on Form 10-K  could  include  forward-looking
information. All statements other than statements of historical fact, including,
without limitation,  those with respect to the Company's  objectives,  plans and
strategies  set forth  herein and those  preceded  by or that  include the words
"believes,"  "expects,"  "intends,"  "anticipates," or similar expressions,  are
forward-looking   statements.   Although   the   Company   believes   that  such
forward-looking  statements  are  reasonable,  it can give no assurance that the
Company's   expectations  are,  or  will  be,  correct.   These  forward-looking
statements  involve a number of risks and  uncertainties  which  could cause the
Company's future results to differ materially from those anticipated, including:
availability  and terms of appropriate  working capital and/or other  financing,
customer's  acceptance and usage of electronic  commerce software  systems,  the
impact of competitive  technologies,  products and pricing, control of expenses,
levels of gross margins,  revenue growth,  overall  business  conditions,  price
decreases of PC products,  corporate demand for and availability of PC products,
changes in manufacturer  policies reducing price  protection,  returns and other
policies,  the success and timing of  implementing  the Company's new management
information  system,  risks  associated  with  acquisitions  of  companies,  the
consequent  results of operations given the  aforementioned  factors,  and other
risks  detailed from time to time in this Annual Report on Form 10-K  (including
without limitation, under Item 1 and this Item 7) and in the Company's other SEC
reports,  including  the  Company's  prospectus  included  as  part  of the  S-1
Registration  Statement  declared  effective  on  December  19,  1995  under the
Securities Act of 1933.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

     The Company is exposed to market  risk from  changes in  inventory  values,
interest  rates and exchange  rates,  which could  affect its future  results of
operations and financial condition. The Company's risk associated with inventory
values is discussed elsewhere in this Form 10-K.

     The Company's cash and cash equivalents, lines of credit and long term debt
are sensitive to interest  rate  fluctuations.  Changes in interest  rates would
result in changes in interest  income and interest  expense  resulting  from the
difference between historical interest rates on these financial  instruments and
the interest  rates that these  variable-rate  instruments  may adjust to in the
future.  Based on December 31,

                                       26
<PAGE>

1998  balances,  the Company  estimates that a 1% change in interest rates would
have an effect of approximately $1 million on income before income taxes.

     The Company's investment in its United Kingdom subsidiaries is sensitive to
fluctuations  in the  exchange  rate  between the United  States  dollar and the
United Kingdom pound  sterling.  The effect of such  fluctuations is included in
accumulated  other  comprehensive  income  in  the  Consolidated  Statements  of
Stockholders'  Equity.  To date, such  fluctuations  have amounted to a positive
accumulated amount of $845,000.

Item 8.  Financial Statements and Supplementary Data

         See the  Consolidated  Financial  Statements  beginning  on  page  F-1.
Supplemental  earnings per share and  quarterly  financial  information  for the
Company  are  included  in  Notes  11 and  12,  respectively,  of the  Notes  to
Consolidated Financial Statements.

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

     None.




                                    Part III


Item 10.  Directors and Executive Officers of the Registrant

     The information concerning the directors of the Company is set forth in
the  definitive   Proxy  Statement  ("the  Proxy   Statement")  to  be  sent  to
stockholders   in  connection   with  the  Company's   1999  Annual  Meeting  of
Stockholders to be held May 12, 1999, under the heading "Election of Directors",
which information is incorporated  herein by reference.  Information  concerning
each executive  officer of the Company is set forth in the Proxy Statement under
the heading "Management - Executive Officers", which information is incorporated
herein by reference.

Item 11.  Executive Compensation

         The information  concerning executive  compensation is set forth in the
Proxy Statement under the heading "Executive Compensation", which information is
incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

         The information  concerning  security  ownership of certain  beneficial
owners and  management  is set forth in the Proxy  Statement  under the  heading
"Principal   Stockholders  and  Management  Ownership",   which  information  is
incorporated herein by reference.

Item 13.  Certain Relationships and  Related Transactions

         The   information   concerning   certain   relationships   and  related
transactions  is set forth in the Proxy  Statement  under the  heading  "Certain
Transactions", which information is incorporated herein by reference.

                                       27
<PAGE>

                                     PART IV


Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

The following documents are filed as part of this Annual Report on Form 10-K:

         (a)  (1) Consolidated Financial Statements:

                  See Index to Consolidated Financial Statements on page F-1.

              (2) Consolidated  Financial  Statement  Schedule for each of the
                  Three Years in the Period Ended December 31, 1998:

                  Report of Independent Public Accountants

                  Schedule II - Valuation and Qualifying Accounts

                  See Index to Schedule on page S-1.

                  All  other  schedules  for  which  provision  is  made  in the
applicable accounting  regulations of the Securities and Exchange Commission are
not required under the related  instructions or are inapplicable,  and therefore
have been omitted.

              (3) Index to Exhibits:

                  The exhibits filed as part of this Form 10-K are listed on the
Index to Exhibits beginning on page E-1, which Index to Exhibits is incorporated
herein by reference.  The Company's current  management  contracts and executive
compensation  plans  and  arrangements  are  listed  in the  Index to  Exhibits,
incorporated  herein by reference,  at exhibit numbers 10.1; 10.2; 10.3;  10.19;
10.22; 10.29; 10.36; 10.37, 10.38, 10.39 and 10.40.


         (b)  Reports on Form 8-K:

              None.

         (c)  Exhibits:

              See Index to Exhibits beginning on page E-1.

        ------------------------------------------------------
The Company will provide copies of the Consolidated Financial Statement Schedule
and Index to Exhibits to stockholders upon request. Such request can be made to:
Chief Financial Officer,  Elcom International,  Inc., 10 Oceana Way, Norwood, MA
02062.

                                       28
<PAGE>



                                   SIGNATURES

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

                                      Elcom International, Inc.
                                      (Registrant)

Date:  March 29, 1999                 By: /s/  Robert J. Crowell
                                          -----------------------
                                          Robert J. Crowell
                                          Chairman and Chief Executive Officer

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the date indicated.


        Signatures                   Title                             Date
 
   /s/  Robert J. Crowell      Chairman of the                    March 29, 1999
-----------------------------  Board of Directors
   Robert J. Crowell           and Chief Executive Officer
                              (Principal Executive Officer)

  /s/  Laurence F. Mulhern     Corporate Executive                March 29, 1999
-----------------------------  Vice President,
  Laurence F. Mulhern          Chief Financial Officer, Treasurer
                               and Secretary (Principal Financial
                               and Accounting Officer)

  /s/  William W. Smith        Vice Chairman and Director         March 29, 1999
-----------------------------
  William W. Smith


  /s/James Rousou              Corporate Executive                March 29, 1999
-----------------------------  Vice President and Director
 James Rousou                 


 /s/  Richard J. Harries, Jr.  Director                           March 29, 1999
-----------------------------
 Richard J. Harries, Jr.


 /s/  John W. Ortiz            Director                           March 29, 1999
-----------------------------
John W. Ortiz

                                       29

<PAGE>

                            ELCOM INTERNATIONAL, INC.
                         1998 ANNUAL REPORT ON FORM 10-K
                                INDEX TO EXHIBITS

Exhibit No.                                 Description
----------                                  -----------
2.1      Agreement for the sale and purchase of shares in the capital of Prophet
         Group Limited dated December 6, 1996, by and among Lantec  (Management)
         Limited (a  subsidiary of the  Registrant)  and the Vendors (as defined
         therein). (3)

2.5      Agreement  for the sale and  purchase of shares in the capital of
         Data  Supplies  Limited  dated  February 21, 1997,  by and among Elcom
         Group Limited (a subsidiary of the Registrant), the Vendor (as defined
         therein) and Mr. Savage. (4)

3.3      Second Restated Certificate of Incorporation of the Registrant. (5)

3.4      By-Laws of the Registrant, amended as of November 6, 1995. (1)

4.4      Specimen certificate of the Registrant's Common Stock. (1)

4.5      Form of 8% Series A Cumulative Convertible Preferred ("Series A") Stock
         Purchase  Agreement,  with attached  list of  purchasers  and number of
         shares purchased, as of December 10, 1993. (1)

4.8      Form of Series B Preferred  Stock Purchase  Agreement for Closings held
         on April  15,  June 21 and  August  11,  1994,  with  attached  list of
         purchasers and number of shares purchased. (1)

4.9      Form of Series B Preferred  Stock Purchase  Agreement for Closings held
         on  December  30,  1994 and  February 6, 1995,  with  attached  list of
         purchasers and number of shares purchased. (1)

4.10     Form of Series C Preferred  Stock Purchase  Agreement for Closings held
         on June 22 and June 30, 1995,  with  attached  list of  purchasers  and
         number of shares purchased. (1)

4.12     Securities  Agreement,  dated September 1, 1993, as amended February 1,
         1994,  by and among the  Registrant,  Robert J.  Crowell,  and 19 other
         listed purchasers,  as of June 2, 1995 (1), and list of other assignees
         of certain registration rights thereunder. (14)

4.13     Securities  Agreement,  dated October 28, 1994, by and among
         the former stockholders of CSI and the Registrant. (1)

4.14     Computerware  Stockholders' Agreement, dated February 6, 1995, by
         and among the Registrant, Robert J.Crowell and the former shareholders
         of Computerware. (1)

4.15     Amended and Restated  Lantec  Stockholders'  Agreement,  dated April 6,
         1996,  by and among the  Registrant,  Robert J.  Crowell and the former
         shareholders of Lantec. (6)

4.16     Form of Lantec Warrant  Agreement,  dated June 22, 1995 (1), with
         attached First Amended List of Holders of Warrants to Purchase Common
         Shares of the Registrant. (10)

4.17     AMA  Securities  Agreement,  dated February 29, 1996, by and among the
         Registrant and the former stockholders of AMA (UK) Limited. (9)

4.18     Final  Agreement  of  Settlement  and Mutual  Release of All Claims and
         Demands,  dated March 26, 1997, by and among the Registrant and certain
         of its  subsidiaries,  and  the  Former  Shareholders  of  Computerware
         Business Trust. (13)

                                      E-1
<PAGE>

Exhibit No.                                 Description
----------                                  ------------
10.1     Form of Indemnity  Agreement for Executive Officers and/or Directors of
         the  Registrant  (1), with attached list of Director  and/or  Executive
         Officer Indemnitees. (15) (*)

10.2     Stock Option Plan of the  Registrant  dated February 23, 1993, as
         amended June 3, 1994 and November 6, 1995. (1) (*)

10.3     1995  (Computerware)  Stock Option Plan of the Registrant,  dated
         February 6, 1995 (1), as amended by  Amendment  No. 1 dated August 19,
         1996. (9)(*)

10.4     $120,000,000 Business Credit and Security Agreement Dated as
         of March 1,  1997  among  Elcom  Services  Group,  Inc.  and  Deutsche
         Financial Services  Corporation (9), and Amendments to Business Credit
         and Security Agreement. (12)(15)

10.5     Lease Agreement for the Registrant's Headquarters,  dated July 5, 1993,
         by and  among  Oceana  Way  Associates  and  the  Registrant  (1),  and
         Agreement of Amendment thereto, dated October 20, 1997. (14)

10.6     Lease Agreements for Lantec Headquarters, among Allied Dunbar Assurance
         PLC to Businessland (UK) Limited and Businessland  Inc., dated November
         23, 1988, with Licenses to Assign to Lantec Information  Services Ltd.,
         and Supplemental Deed dated November 4, 1993. (1)

10.13    Lock Box  Agreement,  dated May 1, 1994, by and among  Deutsche,  Fleet
         Bank of Massachusetts and the Registrant;  and Storage Agreement by and
         between Ingram Micro and Deutsche. (1)

10.15    Guaranty  by the  Registrant  in favor of Deutsche  Financial  Services
         Corporation (UK) LTD., dated December 1, 1997,  guarantying Elcom Group
         Limited's indebtedness to Deutsche. (14)

10.19    Amended  Employment  Agreement by and between the Registrant and Robert
         J. Crowell dated June 1, 1997 (11),  and Form of  Consulting  Agreement
         appended thereto as Exhibit A. (12) (*)

10.22    Employment  Agreement by and between the  Registrant  and James Rousou,
         dated April 1, 1996 (7), and First  Amendment to Employment  Agreement,
         dated November 5, 1997. (14) (*)

10.24    Standard  Conditions for the Sale and Purchase of Debts, dated December
         3, 1997,  between Elcom Group Limited and Deutsche  Financial  Services
         (UK) LTD. (14)

10.25    Agreement  for the Sale and  Purchase of Debts dated  December 3, 1997,
         between Elcom Group Limited and Deutsche Financial Services (UK) LTD.
         (14)

10.29    1995  Non-Employee  Director  Stock  Option  Plan  of  the Registrant,
         dated October 9, 1995 (1), and Amendment No. 1 thereto. (11) (*)

10.33    Guaranty  by the  Registrant  in favor of Deutsche  Financial  Services
         Corporation,  dated November 6, 1995, guarantying Elcom Services Group,
         Inc.'s indebtedness to Deutsche. (1)

10.36    The 1996 Stock Option Plan of Elcom International, Inc. (8) (*)

10.37    Amended Employment Agreement by and between the Registrant and Laurence
         F. Mulhern dated June 1, 1997 (11),  and Form of  Consulting  Agreement
         appended thereto as Exhibit A. (12) (*)

10.38    The 1997 Stock Option Plan of Elcom  International,  Inc. (11),  and
         Amendments One and Two thereto.  (14) (x) (*)

                                      E-2

<PAGE>

Exhibit No.                                 Description
----------                                  -----------
10.39    Elcom  International,  Inc.  Executive  Profit  Performance
         Bonus Plan for Executive  Officers dated  September 4, 1997.  (12) (*)

10.40    Elcom International, Inc. Key Personnel Profit Performance Bonus
         Plan dated September 4, 1997. (12) (*)

10.41    Engagement letter between the  Registrant and Salomon Smith Barney Inc.
         dated July 21, 1997.(12), and Extension and Termination thereof. (16)

21.1     List of the Registrant's Subsidiaries. (x)

23.1     Consent of Arthur Andersen  LLP. (x)

23.2     Consent of Deloitte & Touche. (x)

27       Financial Data Schedule. (x)
-------------------------------------------------------------------------------
(1)  Previously  filed as an exhibit to  Registration  Statement No. 33-98866 on
     Form S-1 and incorporated herein by reference.

(2)  Previously  filed as an  exhibit  to  Current  Report  on Form 8-K (date of
     report February 29, 1996) filed March 14, 1996, and incorporated  herein by
     reference.

(3)  Previously  filed as an  exhibit  to  Current  Report  on Form 8-K (date of
     report December 6, 1996) filed December 19, 1996, and  incorporated  herein
     by reference.

(4)  Previously  filed as an  exhibit  to  Current  Report  on Form 8-K (date of
     report February 21, 1997) filed March 6, 1997, and  incorporated  herein by
     reference.

(5)  Previously  filed as an exhibit to Registrant's  Annual Report on Form 10-K
     for the year ended December 31, 1995, and incorporated herein by reference.

(6)  Previously  filed as an exhibit to  Registrant's  Quarterly  Report on Form
     10-Q for the  quarter  ended March 31,  1996,  and  incorporated  herein by
     reference.

(7)  Previously  filed as an exhibit to  Registrant's  Quarterly  Report on Form
     10-Q for the  quarter  ended  June 30,  1996,  and  incorporated  herein by
     reference.

(8)  Previously  filed as an exhibit to  Registrant's  Quarterly  Report on Form
     10-Q for the quarter ended September 30, 1996, and  incorporated  herein by
     reference.

(9)  Previously  filed as an exhibit to Registrant's  Annual Report on Form 10-K
     for the year ended December 31, 1996, and incorporated herein by reference.

(10) Previously  filed as an exhibit to  Registrant's  Quarterly  Report on Form
     10-Q for the  quarter  ended March 31,  1997,  and  incorporated  herein by
     reference.

(11) Previously  filed as an exhibit to  Registrant's  Quarterly  Report on Form
     10-Q for the  quarter  ended  June 30,  1997,  and  incorporated  herein by
     reference.

(12) Previously  filed as an exhibit to  Registrant's  Quarterly  Report on Form
     10-Q for the quarter ended September 30, 1997, and  incorporated  herein by
     reference.

(13) Previously  filed as an exhibit to Registrant's  Current Report on Form 8-K
     dated March 26, 1997 and incorporated herein by reference.

                                      E-3
<PAGE>


(14) Previously  filed as an exhibit to Registrant's  Annual Report on Form 10-K
     for the year ended December 31, 1997, and incorporated herein by reference.

(15) Previously  filed as an exhibit to  Registrant's  Quarterly  Report on Form
     10-Q for the  quarter  ended  June 30,  1998,  and  incorporated  herein by
     reference.

(16) Previously  filed as an exhibit to  Registrant's  Quarterly  Report on Form
     10-Q for the quarter ended September 30, 1998, and  incorporated  herein by
     reference.

(x)  Filed herewith.

(*)  Management contract or compensatory plan or arrangement.


                                      E-4
<PAGE>



                        CONSOLIDATED FINANCIAL STATEMENTS

                   ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                DECEMBER 31, 1998


        The   following    consolidated    financial   statements   of   Elcom
International, Inc. are included in response to Item 8:

                                                                      Page

Report of Independent Public Accountants                             F-2
Reports of Other Auditors                                            F-3 to F-4
Consolidated Balance Sheets as of December 31, 1997 and 1998         F-5
Consolidated Statements of Operations and Other Comprehensive
   Income for the years ended December 31, 1996, 1997 and 1998       F-6
Consolidated Statements of Stockholders' Equity for the years
   ended December 31, 1996, 1997 and 1998                            F-7
Consolidated Statements of Cash Flows for the years ended
   December 31,1996, 1997 and 1998                                   F-8
Notes to Consolidated Financial Statements                           F-9 to F-23


                                      F-1
<PAGE>




                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS





To Elcom International, Inc.:

         We have audited the accompanying  consolidated  balance sheets of Elcom
International, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1997 and 1998, and the related  consolidated  statements of operations and other
comprehensive income,  stockholders' equity and cash flows for each of the three
years in the period  ended  December  31,  1998.  These  consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our  audits.   We  did  not  audit  the  1996  financial   statements  of  Elcom
International  Limited  and AMA (UK)  Limited,  both of which  are  wholly-owned
subsidiaries,  which  statements,  in  the  aggregate,  reflect  net  income  of
$4,301,000 of the 1996 consolidated financial statement totals. Those statements
were audited by other  auditors whose reports have been furnished to us, and our
opinion,  insofar  as it relates to  amounts  included  for Elcom  International
Limited  and AMA (UK)  Limited  is based  solely  upon the  reports of the other
auditors.

         We conducted our audits in accordance with generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We  believe  that our  audits  and the  reports  of  other  auditors  provide  a
reasonable basis for our opinion.

         In our opinion, based on our audits, and the reports of other auditors,
the consolidated  financial  statements referred to above present fairly, in all
material  respects,  the  financial  position of Elcom  International,  Inc. and
subsidiaries  as of December 31, 1997 and 1998 and the  consolidated  results of
its  operations  and its cash  flows for each of the three  years in the  period
ended  December 31, 1998,  in  conformity  with  generally  accepted  accounting
principles.


/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP



Boston, Massachusetts
March 23, 1999

                                      F-2
<PAGE>



                            REPORT OF OTHER AUDITORS



AUDITORS' REPORT TO THE DIRECTORS OF



ELCOM INTERNATIONAL LIMITED
(formerly Elcom Holdings Limited)
(formerly PCO 138 Limited)



We have audited the  financial  statements of Elcom  International  Limited (not
separately  presented  herein)  which have been  prepared  under the  accounting
policies set out in the notes to the accounts.

Respective responsibilities of directors and auditors

As described on page 3 of the financial  statements the company's  directors are
responsible   for  the   preparation   of  financial   statements.   It  is  our
responsibility  to form an  independent  opinion,  based on our audit,  on those
statements and to report our opinion to you.

Basis of opinion

We conducted  our audit in  accordance  with  Auditing  Standards  issued by the
Auditing  Practices  Board. An audit includes  examination,  on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the  significant  estimates and judgments made by
the directors in the preparation of the financial  statements and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.

We  planned  and  performed  our audit so as to obtain all the  information  and
explanations  which  we  considered  necessary  in  order  to  provide  us  with
sufficient evidence to give reasonable  assurance that the financial  statements
are  free  from  material  misstatement,   whether  caused  by  fraud  or  other
irregularity  or error.  In forming  our opinion we also  evaluated  the overall
adequacy of the presentation of information in the financial statements.

Opinion

In our opinion the financial  statements  give a true and fair view of the state
of the  company's  affairs as at 31 December 1996 and 1995 and of its profit for
the years then ended.



/s/  DELOITTE & TOUCHE

Chartered Accountants
London

21 March 1997

                                      F-3
<PAGE>



                            REPORT OF OTHER AUDITORS




AUDITORS' REPORT TO THE DIRECTORS OF

AMA (UK) LIMITED



We have audited the  financial  statements  of AMA (UK) Limited (not  separately
presented herein) which have been prepared under the accounting policies set out
in the notes to the accounts.

Respective responsibilities of directors and auditors

As described on page 2 of the financial  statements the company's  directors are
responsible   for  the   preparation   of  financial   statements.   It  is  our
responsibility  to form an  independent  opinion,  based on our audit,  on those
statements and to report our opinion to you.

Basis of opinion

We conducted  our audit in  accordance  with  Auditing  Standards  issued by the
Auditing  Practices  Board. An audit includes  examination,  on a test basis, of
evidence relevant to the amounts and disclosures in the financial statements. It
also includes an assessment of the  significant  estimates and judgments made by
the directors in the preparation of the financial  statements and of whether the
accounting policies are appropriate to the company's circumstances, consistently
applied and adequately disclosed.

We  planned  and  performed  our audit so as to obtain all the  information  and
explanations  which  we  considered  necessary  in  order  to  provide  us  with
sufficient evidence to give reasonable  assurance that the financial  statements
are  free  from  material  misstatement,   whether  caused  by  fraud  or  other
irregularity  or error.  In forming  our opinion we also  evaluated  the overall
adequacy of the presentation of information in the financial statements.

Opinion

In our opinion the financial  statements  give a true and fair view of the state
of the  company's  affairs as at 31 December 1996 and 1995 and of its profit for
each of the three years in the period ended 31 December 1996.



/s/  DELOITTE & TOUCHE

Chartered Accountants
London

21 March 1997

                                      F-4
<PAGE>





                       ELCOM INTERNATIONAL, INC.
                            AND SUBSIDIARIES

                      CONSOLIDATED BALANCE SHEETS
                   (in thousands, except share data)
<TABLE>
<CAPTION>

                                                                      December 31,
                                                                   1997           1998
                                                                -----------    ----------
<S>                                                              <C>            <C>

                      ASSETS
CURRENT ASSETS:
 Cash and cash equivalents                                       $  33,165      $ 14,315
 Accounts receivable:
   Trade                                                           154,223       134,753
   Other                                                            32,200        36,068
                                                                -----------    ----------
                                                                   186,423       170,821
   Less--Allowance for doubtful accounts                             5,474         6,796
                                                                -----------    ----------
     Accounts receivable, net                                      180,949       164,025
  Inventory                                                         60,437        39,617
  Prepaids and other current assets                                  3,255         2,458
                                                                -----------    ----------
     Total current assets                                          277,806       220,415
                                                                -----------    ----------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
 Computer hardware and software                                     22,118        26,556
 Land, buildings and leasehold improvements                          3,402         3,507
 Furniture, fixtures and equipment                                   8,579         9,228
                                                                -----------    ----------
                                                                    34,099        39,291
 Less -- Accumulated depreciation and amortization                  17,649        25,034
                                                                -----------    ----------
                                                                    16,450        14,257
                                                                -----------    ----------
GOODWILL AND OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION          37,812        27,179
                                                                -----------    ----------
                                                                  $332,068      $261,851
                                                                ===========    ==========
       LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
 Lines of credit                                                  $154,714      $104,772
 Accounts payable                                                   43,271        49,341
 Accrued expenses and other current liabilities                     19,557        20,747
 Current portion of capital lease obligations                          680           991
 Current portion of long-term debt                                      78            78
                                                                -----------    ----------
     Total current liabilities                                     218,300       175,929
                                                                -----------    ----------
OTHER DEFERRED LIABILITIES                                           2,213           418
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION                      920           191
LONG-TERM DEBT, NET OF CURRENT PORTION                                 332           296
                                                                -----------    ----------
                                                                     3,465           905
                                                                -----------    ----------
COMMITMENTS AND CONTINGENCIES (Note 6)

STOCKHOLDERS' EQUITY:
 Preferred stock,$.01 par value;Authorized--10,000,000 shares--
      Issued and outstanding - none                                     -             -
 Common stock, $.01 par value;Authorized--50,000,000 shares--
       Issued -- 27,218,239 and 27,547,061 shares                      272           275
 Additional paid-in capital                                        100,726       101,271
 Retained earnings (accumulated deficit)                             9,369       (16,192)
  Treasury stock, at cost -- 56,319 and 236,338 shares                (549)       (1,182)
  Accumulated other comprehensive income                               485           845
                                                                -----------    ----------
         Total stockholders' equity                                110,303        85,017
                                                                -----------    ----------
                                                                  $332,068      $261,851
                                                                ===========    ==========
The accompanying notes are an integral part of these consolidated financial statements.

</TABLE>

                                      F-5

<PAGE>


                         ELCOM INTERNATIONAL, INC.
                              AND SUBSIDIARIES

                   CONSOLIDATED STATEMENTS OF OPERATIONS
                       AND OTHER COMPREHENSIVE INCOME
                   (in thousands, except per share data)
<TABLE>
<CAPTION>
                                                             For Years Ended December 31,
                                                         1996            1997           1998
                                                      -----------     -----------    ----------
<S>                                                    <C>            <C>            <C>

Net sales                                             $ 620,115       $ 760,136      $ 763,600
Cost of sales                                           550,076         669,742        686,658
                                                      -----------     -----------    ----------
Gross profit                                             70,039          90,394         76,942
Expenses:
  Selling, general and adminstrative                     57,551          70,200         80,285
  Research and development                                1,200           1,275          1,178
  Restructuring, impairment and other related charges      -               -            12,892
                                                      -----------     -----------    ----------
Total expenses                                           58,751          71,475         94,355
                                                      -----------     -----------    ----------
Operating profit (loss)                                  11,288          18,919        (17,413)
Interest expense                                         (3,837)         (5,203)        (8,355)
Interest income and other, net                            1,534           1,061            691
                                                      -----------     -----------    ----------
Income (loss) before income taxes                         8,985          14,777        (25,077)
Provision for income taxes                                3,410           4,489            484
                                                      -----------     -----------    ----------

Net income (loss)                                       $ 5,575        $ 10,288       $(25,561)
                                                      ===========     ===========    ==========

Basic net income (loss) per share                       $  0.21        $   0.38       $  (0.94)
                                                      ===========     ===========    ==========

Basic weighted average shares outstanding                26,363          26,937         27,322
                                                      ===========     ===========    ==========

Diluted net income (loss) per share                     $  0.19        $   0.35       $  (0.94)
                                                      ===========     ===========    ==========

Diluted weighted average shares outstanding              29,739          29,461         27,322
                                                      ===========     ===========    ==========

Other comprehensive income, net of tax:
  Net income (loss)                                     $ 5,575        $ 10,288        $(25,561)
  Foreign currency translation adjustments                1,162            (653)            360
                                                      -----------     -----------    ----------
Comprehensive income (loss)                             $ 6,737        $  9,635        $(25,201)
                                                      ===========     ===========    ==========

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

</TABLE>

                                      F-6

<PAGE>



                            ELCOM INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                     (in thousands, except number of shares)




<TABLE>
<CAPTION>
                                              Common Stock                     Retained                Accumulated
                                          ----------------------  Additonal    Earnings    Treasury        Other         Total
                                            Number     $.01 Par    Paid in   (Accumulated    Stock,    Comprehensive  Stockholders'
                                          Of Share       Value     Capital      Deficit)    At cost        Income        Equity
                                          ---------------------- ----------  ------------  ----------- -------------- -------------
<S>                                       <C>          <C>       <C>         <C>           <C>          <C>            <C>

BALANCE, DECEMBER 31, 1995                 25,510,297   $    255  $ 91,113    $  (6,494)    $    -        $     (24)    $   84,850
  Proceeds from sale of common stock,
   net of offering costs of
   approximately $200                         629,489          6     6,234          -            -               -           6,240
  Exercise of common stock options            523,726          6       920          -          (366)             -             560
  Tax effect of AMA (U.K.)Limited pooling        -             -       216          -            -               -             216
  Net income                                     -             -        -         5,575          -               -           5,575
  Cumulative translation adjustment              -             -        -           -            -             1,162         1,162
                                           ----------- --------- ----------  -----------   ----------  -------------- -------------
BALANCE, DECEMBER 31, 1996                  26,663,512       267    98,483         (919)       (366)           1,138        98,603
  Exercise of common stock options,
   including related tax benefit of
   approximately $450                          505,447         5     1,954           -         (183)             -           1,776
  Purchase of procurement technology            49,280         -       289           -           -               -             289
  Net income                                      -            -        -        10,288          -               -          10,288
  Cumulative translation adjustment               -            -        -            -           -              (653)         (653)
                                           ----------- ---------- --------- ------------  -----------  ------------- --------------
BALANCE, DECEMBER 31, 1997                  27,218,239       272   100,726        9,369        (549)             485       110,303
  Exercise of common stock options             328,822         3       545           -           -               -             548
  Purchase of treasury stock                      -            -        -            -         (633)             -            (633)
  Net loss                                        -            -        -       (25,561)         -               -         (25,561)
  Cumulative translation adjustment               -            -        -            -           -               360           360
                                           ----------- ---------- ---------  -----------   ----------  -------------- -------------
BALANCE, DECEMBER 31, 1998                  27,547,061  $    275  $101,271    $ (16,192)    $ (1,182)     $      845    $    85,017
                                           =========== ========== ========== ===========   ==========  ==============  ============

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


</TABLE>

                                      F-7
<PAGE>


                       ELCOM INTERNATIONAL, INC.
                           AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (in thousands)
<TABLE>
<CAPTION>

                                                                        For Years Ended December 31,
                                                                    1996            1997           1998
                                                                 -----------     ----------     ----------
<S>                                                              <C>             <C>            <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)                                                 $  5,575       $ 10,288       $ (25,561)
 Adjustments to reconcile net income(loss)to net cash
  provided by (used in) operating activities --
    Depreciation , amortization andimpairment of intangible assets    6,704          8,795          20,343
    Provision for doubtful accounts                                   2,586          3,058           4,975
  Changes in current assets and liabilities,
    net of purchase acquisitions --
     Accounts receivable                                            (71,095)       (30,168)         12,266
     Inventory                                                      (13,955)       (26,088)         20,939
     Prepaids and other current assets                                1,064         (1,995)            799
     Accounts payable                                                (6,858)         5,088           5,860
     Accrued expenses and other current liabilities                  19,695        (15,356)          1,013
  Increase (decrease) in other deferred liabilities                     (11)         2,183          (1,795)
                                                                   ---------      ---------     -----------
      Net cash provided by (used in) operating activities           (56,295)       (44,195)         38,839
                                                                   ---------      ---------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property, equipment and software                        (6,506)        (7,723)         (7,284)
 (Increase) decrease in other assets and deferred costs                (795)          (321)            527
 Tax effect of AMA (U.K.) Limited pooling                               216            -               -
 Purchase of Prophet Group, net of cash acquired                     (8,331)          (625)            -
 Purchase of Data Supplies, net of cash acquired                       -            (2,660)            -
                                                                   ---------       --------       ---------
     Net cash (used in) investing activities                        (15,416)       (11,329)         (6,757)
                                                                   ---------       --------       ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Net borrowings (payments) under lines of credit                     43,009         64,570         (50,041)
 Sale of common stock, net of offering costs                          6,240            -               -
 Repayment of capital lease obligations and long-term debt             (215)          (731)           (965)
 Exercise of common stock options including
  related tax benefit                                                   560          1,776             548
 Purchase of treasury stock                                            -               -              (633)
                                                                   ---------       --------       ---------
     Net cash provided by (used in)financing activities              49,594         65,615         (51,091)
                                                                   ---------       --------       ---------
FOREIGN EXCHANGE EFFECT ON CASH                                         399           (185)            159
                                                                   ---------       --------       ---------
NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                       (21,718)         9,906         (18,850)
CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD                                                44,977         23,259          33,165
                                                                   =========      =========       =========
CASH AND CASH EQUIVALENTS, END OF PERIOD                           $ 23,259       $ 33,165        $ 14,315
                                                                   =========      =========       =========
SUPPLEMENTAL DISCLOSURE OF CASH
  FLOW INFORMATION:
  Interest paid                                                    $  3,711       $  5,141        $  8,232
                                                                   =========      =========       =========
  Income taxes paid                                                $    523       $  1,620        $    636
                                                                   =========      =========       =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
  INVESTING AND FINANCING ACTIVITIES:
  Increase in capital lease obligations                            $    787       $  1,488        $    510
                                                                   =========      =========       =========
  Purchase of procurement technology                               $    -         $    289        $    -
                                                                   =========      =========       =========
 Acquisitions of businesses (Note 2):
     Fair value of assets acquired                                 $  16,931      $  6,332        $    -
     Less cash paid                                                    8,600         1,600             -
                                                                   ---------      ---------       ---------
        Liabilities assumed                                        $   8,331      $  4,732        $    -
                                                                   =========      =========       =========

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


</TABLE>

                                      F-8
<PAGE>




                            ELCOM INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

          Elcom  International,  Inc.  (the  "Company")  develops  and  licenses
automated   procurement  software  applications  which  enable  the  conduct  of
interactive electronic commerce and, through its PC remarketing subsidiary, uses
a version of the  technology  (primarily  the  Personal  Electronic  Catalog and
Ordering  System,  hereinafter  referred  to as  "PECOS"),  as well  as  certain
Web-based  technologies  to support the sale and  marketing of PC products,  the
source of  substantially  all of the  Company's net sales since  inception.  The
Company commenced development operations in September 1992, and began commercial
operations in December 1993, as a remarketer of personal computer products.

(a) Principles of Consolidation

         The accompanying consolidated financial statements include the accounts
of the Company and its  subsidiaries.  The accounting and reporting  policies of
the Company conform with generally accepted accounting principles.  All material
intercompany transactions and balances have been eliminated in consolidation.

(b) Use of Estimates

         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the  amounts  reported  in the  consolidated  financial
statements  and  accompanying   notes.  Actual  results  may  differ  from  such
estimates.

(c) Cash and Cash Equivalents

         Cash and cash  equivalents  at December  31, 1997 and 1998  consists of
deposits  with banks and financial  institutions  which are  unrestricted  as to
withdrawal or use, and which have  original  maturities of three months or less.
Interest  earned on all cash  equivalents  is included  in  interest  income and
other, net in the Consolidated  Statements of Operations and Other Comprehensive
Income.

(d) Inventory

         Inventory consists of purchased personal computer products, peripherals
and  accessories  available for resale.  Inventories  are stated at the lower of
cost  (first-in,  first-out)  or market.  The Company  periodically  reviews its
inventory for potential excess, slow-moving, nonsaleable or obsolete inventory.

(e) Prepaids and Other Current Assets

         Consistent  with the provisions of the American  Institute of Certified
Public  Accountants'   Statement  of  Position  (SOP)  No.  93-7,  Reporting  on
Advertising  Costs,  the  costs of  maintaining,  reproducing  and  mailing  the
Company's PECOS front-end software, which constitute direct-response advertising
costs, are deferred and charged to operations over the estimated  periods during
which related  sales are expected to be realized,  which is estimated to be five
months.  Such net capitalized costs totaled $114,000 and $55,000 at December 31,
1997  and  1998,  respectively.  The  Company  charged  approximately  $839,000,
$590,000 and $227,000, in 1996, 1997 and 1998,  respectively,  of these costs to
operations, none of which represented write-downs to net realizable value of the
capitalized costs.

                                      F-9
<PAGE>
(f) Depreciation and Amortization

         The  Company  provides  for  depreciation  and  amortization  using the
straight-line  method by charges to operations in amounts that allocate the cost
of property,  equipment and software over their estimated  useful lives of three
to five years.  Buildings are  depreciated  over a useful life of 50 years.  The
capitalized  cost of leased  equipment and leasehold  improvements are amortized
over the shorter of the  estimated  life of the related  assets or related lease
instrument.

(g) Software, Goodwill and Other Assets

         In March 1998 the American  Institute of Certified  Public  Accountants
issued SOP 98-1,  Accounting  for the Costs of Computer  Software  Developed  or
Obtained for Internal Use which provides  guidance on accounting for such costs.
SOP 98-1 requires  computer  software costs that are incurred in the preliminary
project stage to be expensed as incurred.  Once the  capitalization  criteria of
SOP 98-1  have been  met,  directly  attributable  development  costs  should be
capitalized.  It also  provides  that  upgrade and  maintenance  costs should be
expensed. The Company's treatment of such costs has historically been consistent
with SOP 98-1,  with the costs  capitalized  being  amortized  over the expected
useful life of the software, ranging from two to five years.

         The  Company  generally  expenses  research  and  development  costs as
incurred.  However,  in  accordance  with SFAS No. 86,  Accounting  for Costs of
Computer  Software  to Be  Sold,  Leased  or  Otherwise  Marketed,  the  Company
capitalizes  certain  software   development  costs,   consisting  primarily  of
personnel costs,  subsequent to the  establishment of technological  feasibility
until the product is available for general product release. Costs incurred prior
to the  establishment  of  technological  feasibility are charged to operations.
Development costs associated with product  enhancements that extend the original
product's life or significantly improve the original product's marketability are
also  capitalized,   as  incurred,  after  technological  feasibility  has  been
achieved,  as is the  cost  to  acquire  complementary  technology.  Capitalized
software  development costs are amortized over an estimated useful life of 24 to
30 months. Net capitalized costs amounted to $1,853,000 (including approximately
$1.2 million  related to the purchase of a procurement  technology) and $0 as of
December  31,  1997 and 1998,  respectively.  Amortization  expense  amounted to
$195,000 in 1996,  $325,000 in 1997 and $355,000 in 1998.  In  addition,  in the
third quarter of 1998,  the Company  determined  that certain of its  technology
could be  substantially  enhanced by re-writing it using newly available  coding
techniques.  Accordingly, the Company determined that approximately $2.3 million
(including  1998 additions to capitalized  software  development  costs) was not
realizable  and the  write-down of such costs is included in the  restructuring,
impairment and other related charges line item in the Consolidated Statements of
Operations  and Other  Comprehensive  Income.  This item also is included in the
depreciation,  amortization and impairment of intangible assets line item in the
Consolidated Statements of Cash Flows (See Note 7).

         The  excess of the  purchase  price  over the fair  value of net assets
acquired  in each  acquisition  accounted  for as a purchase  is  classified  as
goodwill and included in the accompanying  Consolidated Balance Sheets. Goodwill
is amortized on a straight-line basis over an estimated useful life of 15 years.
Goodwill (net of  accumulated  amortization  of $5,715,000 and  $6,405,000)  was
$35,526,000 and $26,529,000 at December 31, 1997 and 1998,  respectively.  Other
intangible  assets (net of accumulated  amortization of $1,231,000 and $354,000)
associated with acquisitions amounted to $1,321,000 and $270,000 at December 31,
1997  and  1998,  respectively,   and  have  been  assigned  a  five-year  life.
Amortization  of goodwill  and such other  intangibles  amounted to  $2,210,000,
$3,252,000 and $3,178,000 for the years ended December 31, 1996,  1997 and 1998,
respectively.

         In  accordance  with SFAS No. 121,  Accounting  for the  Impairment  of
Long-Lived  Assets and for  Long-Lived  Assets to Be  Disposed  Of, the  Company
evaluates the  realizability  of goodwill based on  profitability  expectations,
using the undiscounted  cash flow method,  for each subsidiary having a material
goodwill  balance.  As a result of such an  evaluation  in the third  quarter of
1998,  the  Company  determined  that  approximately  $7.0  million of  goodwill
associated with its acquisition of Computerware, Inc. was not realizable and the
write-down of such  goodwill is included in the  restructuring,  impairment  and
other related charges line item in the Consolidated Statements of Operations and
Other Comprehensive Income. This item also is included in the depreciation,


                                       F-10
<PAGE>


amortization  and impairment of intangible  assets line item in the Consolidated
Statements  of Cash Flows (See Note 7). Based on its most recent  analysis,  the
Company believes that no additional  impairment of the remaining goodwill exists
at December 31, 1998.

(h) Revenue Recognition

         The Company  derives  substantially  all of its  revenue  from sales of
personal computer  products,  peripherals and accessories.  The Company provides
for  estimated  returns  at the  time of sale.  Revenue  from  product  sales is
recognized upon shipment.

         The Company recognizes  software license revenue in accordance with the
American  Institute  of  Certified  Public  Accountants'  Statement  of Position
("SOP") No. 97-2,  Software Revenue  Recognition.  Revenue from the licensing of
software is recognized upon shipment of the software if there are no significant
post-delivery  obligations and  collectibility of the revenue is assured.  If an
acceptance  period is  required,  revenues  are  recognized  upon the earlier of
customer  acceptance  or the  expiration  of the  acceptance  period,  unless an
additional  performance target is mandated,  in which case revenue is recognized
upon  satisfaction  of that target,  in each case, as defined in the  applicable
software license agreement.

         The Company also offers maintenance contracts and training. Maintenance
and  training  revenues  are  recognized  ratably  over the terms of the related
contracts.  Amounts received in advance for maintenance  agreements are deferred
and  included  in  accrued  expenses  and  other  current   liabilities  in  the
accompanying consolidated balance sheets.

(i) Post Retirement Benefits

     The Company has no material obligations for post retirement  benefits.  The
Company  and  an  indirect  U.K.   subsidiary  each  maintain  separate  defined
contribution  benefit plans  covering all eligible  employees,  as defined.  The
plans  contain  provisions  allowing for  discretionary  Company  contributions.
Discretionary  Company  contributions to the U.K. defined  contribution plan for
the years ended  December 31, 1996,  1997 and 1998 were  $266,000,  $263,000 and
$300,000, respectively.

(j) Foreign Currency Translation

     The accounts of the Company's indirect U.K.  subsidiaries are translated in
accordance with SFAS No. 52, Foreign Currency Translation.  Accordingly,  assets
and liabilities of the Company's  indirect  foreign  subsidiaries are translated
into U.S. dollars using the exchange rate at each balance sheet  date.Income and
expense  accounts are  translated  using an average rate of exchange  during the
period.  Foreign currency translation  adjustments are accumulated as a separate
component of stockholders' equity.

(k) Income Taxes

          The Company provides for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes.  Under the liability  method  specified by SFAS No.
109, a deferred  tax asset or liability is  determined  based on the  difference
between the  financial  statement  and tax bases of assets and  liabilities,  as
measured by the enacted tax rates in effect when these  differences are expected
to reverse. (See Note 9.)

(l) Stock Options

     The  Company  accounts  for  its  stock-based   compensation   plans  under
Accounting  Principles  Board  Opinion No. 25,  Accounting  for Stock  Issued to
Employees. In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation,  which is currently effective.
SFAS No. 123  establishes  a fair value based  methodology  for  accounting  for
stock-based  compensation  plans.  The Company  has adopted the  disclosure-only
alternative  under SFAS No.  123,  which  requires  disclosure  of the pro forma
effects on earnings and earnings per share as if SFAS No. 123 had been  adopted,
as well as certain other information. (See Note 5.)


                                      F-11
          <PAGE>



(m) Net Income (Loss) Per Share

         Net income (loss) per share is based on the weighted  average number of
common and common  equivalent shares  outstanding  during each period presented,
calculated in accordance with SFAS No. 128,  Earnings Per Share.  This statement
establishes  revised  standards  for  computing  earnings  per share  ("EPS") by
replacing  the  presentation  of primary EPS with a  presentation  of basic EPS.
Basic EPS  excludes  dilution  and is computed by dividing  income  available to
common  stockholders by the weighted average number of common shares outstanding
for the period.  SFAS No. 128 also requires  presentation  of diluted EPS on the
face of the  Consolidated  Statements  of  Operations  and  Other  Comprehensive
Income.  Diluted EPS gives effect to all  potential  common  shares  outstanding
during the  period.  In 1998,  diluted  EPS is the same as basic EPS because the
Company  has  reported a net loss,  in which case  dilutive  securities  are not
included in the determination of per share calculations. (See Note 11.)

(n)   Fair Value of Financial Instruments

         The Company's  financial  instruments  consist  mainly of cash and cash
equivalents,   accounts  receivable,  lines  of  credit,  accounts  payable  and
long-term debt. The carrying amounts of the Company's cash equivalents, accounts
receivable  and accounts  payable  approximate  fair value due to the short-term
nature of these instruments. Lines of credit and long-term debt bear interest at
variable market rates therefore, the carrying amounts approximate fair value.

(o)   Comprehensive Income

         Effective January 1, 1998, the Company adopted SFAS No. 130,  Reporting
Comprehensive  Income.  This statement  establishes  standards for reporting and
displaying comprehensive income and its components.  The Company's comprehensive
income consists of net income and foreign currency translation adjustments.


(2) ACQUISITIONS

         The Company has consummated the following acquisitions:

                                                                       Method of
 Entity                     Date           Consideration              Accounting
--------------------------  ------------   ----------------------     ----------
 Computer Specialties, Inc. October 1994   510,345 shares of         Pooling of
                                           common stock              Interests

 Computerware, Inc.         February 1995  1,326,417 shares of       Purchase
                                           common stock

 Lantec                     June 1995      2,899,820 shares of       Purchase
                                           common stock and $6.4
                                           million of cash

 AMA (UK) Limited           February 1996  3,247,371 shares of       Pooling of
                                           common stock               Interests

 Prophet Group Limited      December 1996  $8.9 million of cash      Purchase

 Data Supplies Limited      February 1997  $1.6 million of cash      Purchase
                                           and an interest bearing
                                           note of $752,000


                                      F-12
<PAGE>

         For the acquisitions accounted for as poolings of interests, previously
issued financial  information,  including the financial  position and results of
the operations of the Company,  have been  retroactively  restated for all prior
periods  presented  to give  effect  to  those  acquisitions.  For  acquisitions
accounted for as purchases, the purchase prices were allocated based on the fair
value of the tangible and intangible  assets  acquired and  liabilities  assumed
(See Note 1(g)).  Results of  operations  of those  companies  are included from
their respective dates of acquisition.


(3) LINES OF CREDIT


         At December  31, 1998,  the Company had a $120 million U.S.  floor plan
and  accounts  receivable  line of  credit  available  from  Deutsche  Financial
Services  Corporation  ("DFSC").  On March 1, 1999, the U.S. DFSC line of credit
was renewed for an additional year and provides for direct payment by the lender
to certain Company vendors.  In the case of certain U.S. product purchases,  the
borrowings  bear  interest  immediately,  and  the  borrowings  related  to  the
remaining   purchases   bear  interest   after  the  lapse  of  the   applicable
interest-free  periods,  which vary  generally from 30 to 60 days. The U.S. DFSC
line of  credit  limits  the  borrowings  to  defined  percentages  of  eligible
inventories and accounts receivable. The U.S. DFSC line of credit agreement also
contains certain covenants relating to net income and debt-to-equity ratios. The
U.S. DFSC line of credit is secured  primarily by the Company's  U.S.  inventory
and accounts receivable,  although substantially all of the Company's other U.S.
assets also are pledged as collateral on the facility.  After receiving a waiver
from DFSC  concerning  the net income  covenant  for 1998,  the  Company  was in
compliance  with all other  covenants  of the  facility as of December 31, 1998.
Interest is payable  monthly at the prime rate (7.75% at December 31, 1998) less
1%. As of December 31, 1998,  the Company had $66.7  million  outstanding  under
this line of credit,  which  approximated the Company's  availability as of that
date.  As of December  31, 1998,  the Company  also had a  $3,000,000  unsecured
demand  note  outstanding  under its  facility  with DFSC on which  interest  is
payable  monthly,  at a rate of prime plus 1%. In January  1999,  the  unsecured
demand note was repaid.

         In conjunction with the one-year renewal of the U.S. DFSC facility, the
Company has agreed to an $80 million facility with interest payable monthly at a
rate of prime minus .5%. In  addition,  the Company has agreed that its interest
rate will  increase  .25% for each quarter that it reports a loss, as defined in
the DFSC agreements. All other terms of the facility have remained substantially
the same.

         The Company also has a $9.5 million floor plan financing agreement with
IBM Credit  Corporation  to support  purchases of IBM  products.  The  Company's
purchases  under this  arrangement  bear  interest  at the prime rate  (7.75% at
December 31, 1998) plus 6.25% after the lapse of  interest-free  periods,  which
vary generally from 30 to 90 days.  The Company  typically  repays this facility
upon the lapse of the interest-free periods. As of December 31, 1998, there were
no borrowings outstanding under this line of credit.

     At December 31, 1998,  Elcom Group Ltd.  had a financing  arrangement  with
Deutsche  Financial  Services (U.K.) Ltd. which provides for borrowings of up to
(pound)30  million  (approximately  $49.8  million  based on  December  31, 1998
exchange  rates)  based upon DFSC  U.K.'s  determination  of  eligible  accounts
receivable.  The financing arrangement expires in December 1999. Borrowings bear
interest at a rate of 1.25% above the National  Westminster Bank base rate (7.5%
at December 31, 1998), and are limited to defined percentages of and are secured
primarily by the Company's  U.K.  accounts  receivable.  The DFSC U.K.  facility
incorporates  the reporting and compliance  covenants of the U.S. DFSC facility.
As of December  31,  1998,  there was  approximately  $38.1  million  ((pound)23
million)  outstanding under this financing  arrangement,  which approximated the
Company's availability as of that date.


                                      F-13
<PAGE>


(4)   LONG-TERM DEBT

Long-term debt consists of the following:

                                                          December 31,
                                                         1997            1998
                                                     ------------    -----------
Mortgage  payable to a bank,  interest  at the
greater of the bank's  base rate (7.50% at
December 31, 1998) plus 3% or 10.25%,
due in monthly  installments of principal plus 
interest through June 2005,
secured by certain land and buildings                    $410,000       $374,000
Less current portion                                       78,000         78,000
                                                     ------------    -----------
                                                         $332,000       $296,000
                                                     ============    ===========




(5) STOCKHOLDERS' EQUITY

(a) Common Stock

         The Company has authorized  50,000,000  shares of $.01 par value common
stock.


(b) Preferred Stock

         The  Company  has  authorized  10,000,000  shares  of  $.01  par  value
preferred  stock,  with the Board of  Directors  authorized  to fix the  rights,
privileges,  preferences  and  restrictions  of  any  series  thereof  as it may
designate.

(c) Stock Options

         The  Company's  Board of Directors  has adopted five stock option plans
and stockholders  have approved the adoption of all five such stock option plans
(the "Option Plans"). As of December 31, 1998, the Option Plans provided that up
to an aggregate of 10,650,000  incentive  stock options (ISOs) and  nonqualified
options  may be granted  to key  personnel,  directors  and  consultants  of the
Company,  as determined by the Compensation  Committee of the Board of Directors
(the  "Compensation  Committee").  Under the terms of the Option Plans, ISOs are
granted at not less than the estimated fair market value of the Company's common
stock on the date of grant.  The Option  Plans also provide that the options are
exercisable at varying dates, as determined by the Compensation  Committee,  and
have terms not to exceed 10 years.

         One of the Option Plans,  the 1995  Nonemployee  Director  Stock Option
Plan (the "1995 Nonemployee  Director Plan") provides that an aggregate of up to
250,000  nonqualified  stock options to acquire the  Company's  common stock are
reserved for grant to outside  directors of the Company.  Upon joining the Board
of  Directors,  any new  nonemployee  director is  automatically  granted  5,000
nonqualified stock options. All nonemployee  directors are granted an additional
5,000  nonqualified  stock  options  annually on each June 1  thereafter,  while
remaining on the Board of Directors. The 1995 Nonemployee Director Plan provides
that  options are granted at fair market  value on date of grant,  vest  ratably
over three years, and have terms not to exceed 10 years.


                                      F-14

<PAGE>

         On April 29, 1997,  the Board of Directors  adopted and on February 17,
1998 and  March  11,  1999 it  amended,  The  1997  Stock  Option  Plan of Elcom
International,  Inc. (the "1997 Plan").  As of December 31, 1998,  the 1997 Plan
provided that an aggregate of up to 2,000,000, and as amended on March 11, 1999,
up to 3,000,000 ISO's and  nonqualified  options to acquire the Company's common
stock may be granted to key personnel,  directors and consultants of the Company
as determined by the Compensation  Committee.  Under the terms of the 1997 Plan,
ISO's are granted at not less than the fair market value of the Company's common
stock on the date of grant.  The 1997 Plan also  provides  that the  options are
exercisable at varying dates, as determined by the Compensation  Committee,  and
have terms not to exceed ten years.  The March 11,  1999  amendment  to the 1997
Plan will be submitted to a vote of  stockholders  at the Company's  1999 Annual
Meeting.

         On  April 3,  1997,  the  Board  of  Directors  voted  to  reprice  all
outstanding  options  (excluding  those  issued  to  executive  officers  of the
Company)  with an  exercise  price in excess  of $6.57 per share to an  exercise
price of $6.57 per share. The repricing covered a total of 1,292,000 shares with
a  weighted  average  exercise  price of $7.95  per  share.  Such  repricing  is
reflected in the December 31, 1997 options outstanding in the table below.

         Information relating to the Company's stock option plans during each of
the three years in the period ended December 31, 1998 is as follows:
                                                                       Weighted
                                                                        Average
                                             Number     Option Price   Exercise
                                           of Shares      Per Share     Price
                                         ------------  ------------- -----------
Outstanding, December 31, 1995..........   4,174,326    $.11 - 10.28     $3.17
  Granted...............................   3,101,975    5.31 - 14.25      6.63
  Terminated............................    (323,461)    .11 - 10.28      5.90
  Exercised.............................    (523,726)    .11 -  5.99      1.77
                                         ------------  ------------- -----------
Outstanding, December 31, 1996..........   6,429,114    $.11 - 14.25     $4.64
 Granted................................   2,073,275    5.03 -  8.80      5.84
 Terminated.............................    (266,517)   4.00 - 14.25      7.19
 Exercised..............................    (505,447)    .11 -  6.57      2.98
                                         ------------  ------------- -----------
Outstanding, December 31, 1997..........   7,730,425    $.11 -  8.80     $4.73
 Granted................................   1,691,000    1.28 -  6.22      3.14
 Terminated.............................  (1,793,489)   1.44 -  7.69      5.30
 Exercised..............................    (328,822)   0.11 -  5.99      1.67
                                         ===========   ============= ===========
 Outstanding, December 31, 1998........    7,299,114    $.11 -  8.80     $4.40
                                         ===========   ============= ===========


Exercisable, December  31, 1996........    2,032,325    $.11 - 10.28     $2.72
                                         ===========   ============= ===========
Exercisable, December  31, 1997........    3,665,547    $ 11 -  8.80     $3.86
                                         ===========   ============= ===========
Exercisable, December  31, 1998........    4,538,781    $.11 -  8.80     $4.43
                                         ===========   ============= ===========

                                      F-15


<PAGE>



         The  following  table  summarizes   information   about  stock  options
outstanding as of December 31, 1998:

                          Options Outstanding            Options Exercisable
               ------------------------------------  ---------------------------
                            Weighted      Weighted                    Weighted
   Range of                  Remaining    Average                     Average
   Exercise      Number     Contractual   Exercise     Number         Exercise
   Prices     Outstanding    Life         Price      Exercisable       Price
------------- ------------ ------------  --------   -------------    ----------
$0.11 - 1.31      850,591   4.31 years   $  0.26       825,591        $  0.23
 1.34 - 3.47      811,666   8.72 years      2.09       181,666           3.00
 3.63 - 3.86      178,400   8.16 years      3.74        63,950           3.63
        4.00    1,020,139   6.12 years      4.00       988,910           4.00
 4.09 - 4.50      475,000   9.16 years      4.12         2,000           4.09
        4.75      172,050   6.47 years      4.75       130,050           4.75
        4.81       29,000   9.37 years      4.81          -                -
        5.03    1,198,375   8.33 years      5.03       525,179           5.03
 5.06 - 5.81    1,237,105   7.61 years      5.61       849,127           5.57
 5.88 - 8.80    1,326,788   7.45 years      6.99       972,308           7.16
              ============                          =============    ==========
                7,299,114                            4,538,781        $  4.43
              ============                          =============    ==========


         As of December  31,  1998,  9,282,042  shares of common stock have been
reserved for issuance under the Company's  stock option plans and 750,000 shares
have been reserved for issuance  pursuant to warrants  issued in connection with
the Lantec purchase as described below.

         As  described in Note 1(l),  the Company  adopted the  disclosure  only
alternative under SFAS No. 123. Had compensation  costs for awards in 1996, 1997
and 1998 under the  Company's  stock-based  compensation  plans been  determined
based on the fair value at the grant dates  consistent with the method set forth
in SFAS No. 123, the effect on the  Company's  net income and earnings per share
would have been as follows:

                                       1996            1997           1998
                                   ------------    -----------    ------------
                                       (in thousands, except per share data)
     Net income (loss):...........
         As reported..............     $5,575       $10,288        $(25,561)
         Pro forma................     $3,330        $5,981        $(29,762)
     Net income (loss) per share:
         As reported - basic......      $0.21         $0.38          $(0.94)
         Pro forma - basic........      $0.13         $0.22          $(1.09)
         As reported - diluted....      $0.19         $0.35          $(0.94)
         Pro forma - diluted.......     $0.11         $0.20          $(1.09)

         Because the method  prescribed  by SFAS No. 123 has not been applied to
options  granted prior to January 1, 1995, the resulting pro forma  compensation
expense may be greater as additional options are granted.

         The fair  value of each  option  grant is  estimated  on the grant date
using the Black-Scholes option pricing model with the following weighted average
assumptions:

                                   1996          1997            1998
                                 ----------    ----------     -----------
Volatility.....................    53.52%        60.25%          60.25%
Risk-free interest rate........     6.2%         5.94%           5.41%
Expected life of options ......   5 years       5 years         5 years
Expected dividend yield........      0%            0%              0%

                                      F-16
<PAGE>

     The weighted  average fair value per share of options  granted during 1996,
1997 and 1998 were $3.48, $3.28, and $1.76, respectively.

         The  Black-Scholes  option  pricing  model  was  developed  for  use in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully transferable. In addition, option pricing models require the input
of highly subjective  assumptions.  Because the Company's employee stock options
have characteristics  significantly  different from those of traded options, and
because changes in the subjective  input  assumptions can materially  affect the
fair  value  estimate,  in  management's  opinion,  the  existing  models do not
necessarily  provide a reliable single measure of the fair value of its employee
stock options.

(d) Warrants

         In June 1995, the Company issued warrants to purchase 750,000 shares of
the Company's common stock at $4.75 per share in connection with the purchase of
Lantec  (see  Note 2).  As of  December  31,  1998,  all of these  warrants  are
outstanding and exercisable. The warrants expire in June 2005.

(e) Initial Public Offering and Underwriter Over-allotment Option

         On December 19, 1995,  the  Company's  S-1  registration  statement was
declared  effective  and on December 26, 1995,  the  underwriters  closed on the
purchase of 5,500,000  shares of the Company's common stock at $11 per share. Of
the shares sold,  4,000,000  were sold by the Company and 1,500,000 were sold by
certain  stockholders  of the Company.  Net proceeds to the Company upon closing
were approximately $39.4 million.

         On January 19, 1996, the  underwriters of the Company's  initial public
offering exercised their  over-allotment  option and purchased 800,000 shares of
common stock at $11 per share. Of the 800,000 shares sold,  629,489 were sold by
the Company and 170,511 were sold by certain  stockholders  of the Company.  Net
proceeds  to  the  Company  as  a  result  of  this   transaction   amounted  to
approximately $6.2 million.

(f) Open Market Stock Purchase Plan

         On May 28, 1998,  the Board of Directors of the Company  authorized the
purchase of up to an aggregate  of 800,000  shares of common stock to be held as
treasury  stock  targeted   specifically   for  reissuance  in  connection  with
acquisitions. Subject to legal requirements, the purchases may be made from time
to time in the open market based upon then-existing  market  conditions.  During
1998, the Company  purchased  180,019 shares of the Company's common stock at an
aggregate cost of $633,000 pursuant to this authorization.

(6) LEASES AND OTHER COMMITMENTS AND CONTINGENCIES

(a)  Leases

         The Company  has  entered  into  capital  leases for various  software,
furniture,  computer,  telephone and other equipment. The lease terms range from
three to four years and, upon expiration, all leases provide purchase options at
a nominal price. Property,  equipment and software includes assets under capital
leases of $2,200,000  and  $2,710,000 and related  accumulated  amortization  of
$881,885  and  $1,262,000  as of  December  31,  1997  and  1998,  respectively.
Amortization of leased assets is included in depreciation expense.

         The Company has entered into operating  leases for office and warehouse
space, software, computers, autos and other equipment. The period covered by the
leases  ranges  from one to 25 years.  Certain  leases for office and  warehouse
space require  payment by the Company of all related  operating  expenses of the
building, including real estate taxes and utilities.

                                      F-17
<PAGE>


         Future minimum rental payments as of December 31, 1998, are as follows:

                                                    Capital         Operating
     Year Ending December 31,                       Leases           Leases
     ------------------------                   --------------     -------------
     1999..............................             $1,048,000       $4,408,000
     2000..............................                198,000        4,082,000
     2001..............................               --              2,675,000
     2002..............................               --              1,190,000
     2003..............................               --                867,000
     Thereafter........................               --              6,798,000
                                                 -------------    --------------
     Total minimum lease payments...               $1,246,000       $20,020,000
                                                                  ==============
      Less - Amounts representing interest             64,000
                                                 -------------
      Present value of net minimum lease payments  $1,182,000
      Current portion..................               991,000
                                                 =============
      Long term portion................            $  191,000
                                                 =============

     Rent  expense  for  operating  leases  for each of the  three  years  ended
December  31,  1996,  1997  and  1998  amounted  to  approximately   $2,808,000,
$4,042,000 and $4,312,000, respectively.

(b) Employment Contracts

         The Company has employment  contracts with certain key executives which
provide  for  annual  salary  and  incentive   payments  as  well  as  severance
arrangements.

(c) Contingencies

     The Company is party to various  litigation as both plaintiff and defendant
in cases related to contractual  issues,  employment  matters and issues arising
out of the  conduct  of its  business.  The  Company  believes  that,  based  on
discussions  with its  counsel,  the  estimable  range of loss,  if any,  is not
material in relation to the financial statements.

(7) RESTRUCTURING, IMPAIRMENT AND OTHER RELATED CHARGES

     In August and September  1998,  the Company's  senior  management  approved
restructuring plans related to its Elcom Systems,  Inc. ("ESI") subsidiary,  its
Elcom Services Group,  Inc. ("ESG")  government and educational sales operations
and  consolidation of certain of its customer support personnel in the U.S. This
restructuring  entailed  a  workforce  reduction  of  approximately  35  of  the
Company's U.S. employees.

         As a result of this restructuring, ESI discontinued general maintenance
of its Commerce  Manager  technology  and will focus the efforts of its software
division  primarily  on  serving  as  an  electronic  commerce-oriented  systems
integration  arm of ESG,  thereby  enabling ESG with the capability to offer its
U.S. and U.K.  customers PECOS  Procurement  Manager,  ESI's  multi-catalog  and
multi-vendor electronic ordering and automated procurement management system. In
addition,  the  Company  is no longer an Apple  Educational  Sales  Agent and is
concentrating instead on providing Windows and Intel-based  ("Wintel") solutions
to the education market in the U.S.

         In  December  1998,   the  Company   undertook  a  rightsizing  of  its
organization in both the U.S. and U.K,  primarily  focused on  streamlining  the
Company's  sales  organization.  The Company  deems these steps as  necessary to
better  align the  Company's  cost  infrastructure  and expense  levels with its
revenue and gross  profit  margin  generation.  As a result,  approximately  133
positions were affected, and the Company closed six sales offices in the U.S.

                                      F-18
<PAGE>



         The 1998 pre-tax  charge of $12.9  million is comprised of $1.8 million
in  severance  costs,  $.6  million  of  estimated  liabilities  related  to the
Company's  responsibilities  concerning certain existing technology  licenses, a
$10 million  write-down to estimated  fair market value of certain  unrealizable
intangible  assets related to prior U.S.  acquisitions  (see note 1(g)), and $.5
million of other charges,  including  costs related to lease  terminations.  The
Company  estimates  that the  restructuring  will  entail cash  expenditures  of
approximately  $2.3 million to be incurred on a declining  basis from the fourth
quarter of 1998 through the end of 1999.

(8) INDUSTRY SEGMENT AND GEOGRAPHIC DATA

     In 1998,  the Company  adopted the  provisions of SFAS No. 131  Disclosures
About  Segments  of  an  Enterprise  and  Related  Information.  This  statement
establishes the standards for reporting information about segments in annual and
interim financial  statements.  The statement introduces a new model for segment
reporting,  the "management  approach".  The management approach is based on the
way the chief operating  decision-maker  organizes segments within a company for
making operating  decisions and assessing  performance.  Reportable segments are
based on products and services, geography, legal structure, management structure
- any  manner in which  management  desegregates  a  company.  The  Company  has
included the required disclosure under this standard.  The Company believes that
substantially  all of its  material  operations  are  part of the  computer  and
peripherals industry, and it currently reports as a single industry segment. The
Company's  professional  services and software  licensing  activities are deemed
immaterial in respect of segment reporting.  Foreign operations are conducted in
the United Kingdom through the Company's wholly-owned  subsidiaries.  Geographic
segments are identified based upon the origin of shipment.  Information relating
to the  Company's  geographic  segment  operations is set forth in the following
table.

     Prior to the  Company's  acquisition  of  Lantec  in June 1995 and AMA (UK)
Limited in February 1996,  substantially all of the net sales, net income (loss)
and  identifiable  assets of the Company  related to  operations in the U.S. Net
sales,  net income (loss) and  identifiable  assets  (adjusted for allocation of
goodwill and related  amortization for the Lantec acquisition) for the Company's
U.S. and U.K.  operations for the years ended  December 31, 1996,  1997 and 1998
are as follows (in thousands):



          Year Ended                  United       United
        December 31, 1996             States       Kingdom     Consolidated
     -------------------------      -----------   -----------  ------------
     Net sales...............        $  435,133   $   184,982  $    620,115
                                    ===========   ===========  ============
     Net income..............        $    1,274   $     4,301  $      5,575
                                    ===========   ===========  ============
     Identifiable assets.....        $  161,890   $    98,879  $    260,769
                                    ===========   ===========  ============


          Year Ended
        December 31, 1997
    -------------------------
    Net sales................       $   473,806    $  286,330  $    760,136
                                   ============   ============ ============
    Net income...............       $     5,627    $    4,661  $     10,288
                                   ============   ============ ============
    Identifiable assets......       $   224,718    $  107,350  $    332,068
                                   ============   ============ ============

                                      F-19

<PAGE>



           Year Ended                 United         United
        December 31, 1998             States         Kingdom    Consolidated
     -------------------------      -----------   ------------  ------------
    Net sales................       $   449,844    $  313,756   $   763,600
                                   ============   ============  ============
    Net loss.................       $   (25,528)   $      (33)  $   (25,561)
                                   ============   ============  ============
    Identifiable assets......       $   151,648    $  110,203   $   261,851
                                   ============   ============  ============

         Substantially all revenues,  net income and identifiable  assets relate
to the remarketing of personal computer products and related services.

(9)  INCOME TAXES

Income (loss) before provision for income taxes consisted of:

                               1996           1997             1998
                            -----------     -----------     -----------
           U.S.               $1,992          $ 6,977          $(25,780)
           Foreign             6,993            7,800               703
                            ===========    ===========      ===========
                              $8,985          $14,777          $(25,077)
                            ===========    ===========      ===========

The provision (benefit) for income taxes consisted of:

                                                1996        1997        1998
                                             ----------  ----------  ----------
Current tax provision
   U.S. federal..................             $   --      $    250    $    190
   State.........................                  718         375         701
   Foreign.......................                2,692       2,400         276
                                             ----------  ----------  ----------
  Total current tax provision (benefit)..     $  3,410    $  3,025    $  1,167
                                             ----------  ----------  ----------

Deferred tax provision (benefit)
   U.S. federal..................                --           468         (743)
   State.........................                --           257         (400)
   Foreign.......................                --           739          460
                                             ----------  ----------  ----------
  Total deferred  tax provision (benefit)..   $  --       $ 1,464     $   (683)
                                             ----------  ----------  ----------

  Provision for income taxes.....             $ 3,410     $ 4,489     $    484
                                             ==========  ==========  ==========

The following  table  summarizes the  significant  differences  between the U.S.
federal  statutory tax rate and the  Company's  effective tax rate for financial
statement purposes:

                                                     1996       1997      1998
                                                   --------   --------   -------
Statutory tax rate.................................  34.0%      34.0%    (34.0%)
State taxes, net of U.S. federal tax benefit.......   5.3        2.8      (0.8)
Foreign taxes......................................  (0.8)      (1.6)      0.1
Valuation reserve provided against (utilization of)
  net operating loss carryforwards................. (29.5)     (21.0)     24.3
Non deductible goodwill and other..................  29.0       16.2       8.5
                                                   --------   --------  --------
                                                     38.0%      30.4%     (1.9%)
                                                   --------   --------  --------

                                      F-20
<PAGE>


Deferred tax assets (liabilities) consisted of the following as of December 31,

                                               1996       1997          1998
                                          ----------- ------------- ------------
Deferred tax assets:
 Depreciation.............................$  228,000    $    -       $    -
 Nondeductible reserves...................   358,000         -        1,776,000
 Capitalized inventory costs..............      -          497,000      178,000
 State income taxes.......................      -          101,000      578,000
 Accrued expenses.........................      -          632,000      801,000
 Other temporary differences.............. 1,121,000       522,000      667,000
 Foreign net operating loss carryforwards.      -            -            -
 Net federal and state operating loss
   carryforwards.......................... 1,619,000         -         6,095,000
                                          =========== ============= ============
                                           3,326,000     1,752,000   10,095,000
                                          =========== ============= ============
Deferred tax liabilities:
   Depreciation..........................       -         (374,000)    (372,000)
   Other intangible assets...............       -         (620,000)       -
   Catalog costs.........................       -       (1,067,000)  (1,065,000)
   Other temporary differences...........    (671,000)    (834,000)    (556,000)
                                           ----------- -----------  ------------
                                             (671,000)  (2,895,000)  (1,993,000)
                                           ----------- -----------  ------------
Valuation allowance......................  (2,655,000)       -       (8,102,000)
                                           ----------- -----------  ------------
Net deferred tax liabilities.............  $    -      $(1,143,000) $     -
                                          ============ ============ ============


         Prior to 1997  and in  1998,  due to the  uncertainty  surrounding  the
realization  of the  benefit  of its  favorable  tax  attributes  in future  tax
returns,  the Company placed a full valuation allowance against its net deferred
tax asset.

         The federal and state net operating loss carryforwards  relative to the
Company's U.S. operations  cumulatively  amount to approximately  $15,200,000 at
December  31,  1998.  Such  net  operating  loss   carryforwards  are  primarily
attributable to the Company's U.S.  operating  losses, as well as deductions for
nonqualifying  stock option exercises and  disqualifying  dispositions of common
stock  acquired upon the exercise of incentive  stock  options.  The federal and
state net operating loss carryforwards will begin to expire in 2010.

         U.S.  income  taxes have not been  provided  on the  undistributed  net
earnings  of  the   foreign   subsidiaries.   The  Company   plans  to  reinvest
substantially   all  such  earnings  outside  of  the  U.S.,  thus  indefinitely
postponing the remittance of taxes,  which would be reduced by available foreign
tax credits, on such earnings.

(10)  RELATED PARTY TRANSACTIONS

(a)    Transactions with Affiliated Company

         As of December 31, 1998, the Company owns  approximately 5% of ShopLink
Incorporated  ("ShopLink"),  a development stage company that licensed the PECOS
electronic  commerce system to service the home grocery and consumables  market.
The Company's financial statements do not reflect any investment in ShopLink, as
its $4,000 initial investment was expensed in a prior year.  Accounts receivable
from  ShopLink  at  December  31,  1997 and 1998  were  $185,000  and  $336,000,
respectively.

         As of  September  30,  1997,  the Company  sold  options to acquire its
equity ownership interest in ShopLink.  The Company received $418,000 in payment
for the options,  which may be exercised through March 31, 1999. The Company has
included  the  $418,000  received in payment  for the options in other  deferred
liabilities,  in the accompanying  consolidated balance sheets. The Company does
not anticipate that these options will be exercised.


                                      F-21
<PAGE>



(b)  Employee Loans

         In certain instances,  the Company  periodically makes loans to certain
of its officers and employees.  These loans are included in accounts  receivable
in the accompanying  consolidated  balance sheets and amounted to $1,082,000 and
$699,000 at December 31, 1997 and 1998,  respectively.  As of December 31, 1998,
these  loans are  collateralized  by the  employees'  options to acquire  common
stock, and accrue interest at a rate of prime plus 1%.

(11) EARNINGS PER SHARE (in thousands, except per share data)

Basic and diluted earnings per share were calculated as follows:

Basic                                       1996         1997          1998
--------------------------------------   ---------    ---------      ---------
Net income (loss).....................     $5,575     $ 10,288       $(25,561)
                                         =========    =========      =========

Weighted average shares outstanding...     26,363       26,937         27,322
                                         =========    =========      =========

Basic net income (loss) per share.....      $0.21        $0.38         $(0.94)
                                         =========    =========      =========

Diluted
--------------------------------------
Net income (loss).....................     $5,575     $ 10,288       $(25,561)
                                         =========    =========      =========

Weighted average shares outstanding...     26,363       26,937         27,322

Dilutive effect of stock options......      3,376        2,524            -
                                         ---------    ---------      ---------

Weighted average shares as adjusted...     29,739       29,461         27,322
                                         =========    =========      =========

Diluted net income (loss) per share...      $0.19        $0.35         $(0.94)
                                         =========    =========      =========

         Options to purchase  536,000  shares of common stock at prices  ranging
from $6.75 to $8.80 were  outstanding at December 31, 1997 but were not included
in the computation of diluted  earnings per share because the options'  exercise
prices were greater than the average market price of the common shares in 1997.

         Dilutive  net loss per  share in 1998  does not  reflect  the  dilutive
effect  of stock  options  and  warrants,  as the  impact of  including  them is
antidilutive.  Based on the average market price of the Company's  common shares
in 1998,  a net total of  917,000  shares  covered  by  options  would have been
dilutive,  and 6,963,000  shares  covered by options and warrants with per share
exercise prices ranging from $3.72 to $8.80, would not have been dilutive.


(12) QUARTERLY FINANCIAL DATA (UNAUDITED)

(in thousands, except per share data)
<TABLE>

<CAPTION>
                                               First      Second        Third      Fourth
                                              Quarter     Quarter      Quarter     Quarter       Year
                                             ---------   ---------    ---------   ---------   ---------
<S>                                           <C>         <C>          <C>         <C>         <C>

Year Ended December 31, 1997
Net sales...................................  $176,279    $198,157     $198,373    $187,327    $760,136
Gross profit................................    20,202      22,692       24,036      23,464      90,394
Operating profit............................     3,559       4,095        5,764       5,501      18,919
Net income..................................     1,962       2,061        3,412       2,853      10,288
Basic net income per share..................      $.07        $.08         $.13        $.11        $.38
Basic weighted average shares outstanding...    26,739      26,869       27,017      27,117      26,937
Diluted net income per share................      $.07        $.07         $.11        $.10        $.35
Diluted weighted average shares outstanding.    29,519      28,847       29,481      29,907      29,461


</TABLE>

                                      F-22
<PAGE>


<TABLE>
<CAPTION>

                                               First       Second       Third      Fourth
                                              Quarter      Quarter     Quarter     Quarter        Year
                                             ---------   ---------    ---------   ---------   ---------
<S>                                          <C>         <C>          <C>         <C>          <C>

Year Ended December 31, 1998
Net sales................................... $190,048    $191,778     $194,993    $186,781     $763,600
Gross profit................................   22,154      22,586       19,463      12,739       76,942
Operating profit (loss).....................    4,021       3,234      (15,186)     (9,482)     (17,413)
Net income (loss)...........................    1,372         515      (15,036)    (12,412)     (25,561)
Basic net income (loss) per share...........    $ .05       $ .02        $(.55)      $(.46)       $(.94)
Basic weighted average shares outstanding...   27,230      27,379       27,356      27,321       27,322
Diluted net income (loss) per share.........    $ .05       $ .02        $(.55)      $(.46)       $(.94)
Diluted weighted average shares outstanding.   28,802      28,254       27,356      27,321       27,322

</TABLE>

                                      F-23
<PAGE>


                   ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES
                         1998 ANNUAL REPORT ON FORM 10-K
                                INDEX TO SCHEDULE

                                                                         Page
                                                                      Reference
                                                                     -----------
Report of Independent Public Accounts                                    S-2

Schedule II - Valuation and Qualifying Accounts for the Years Ended
         December 31, 1996, 1997 and 1998                                S-3


                                      S-1
<PAGE>






              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To Elcom International, Inc.:

         We  have  audited,  in  accordance  with  generally  accepted  auditing
standards,  the consolidated  financial statements of Elcom International,  Inc.
and subsidiaries  included in this Form 10-K, and have issued our report thereon
dated March 23, 1999. Our audits were made for the purpose of forming an opinion
on the basic  consolidated  financial  statements taken as a whole. The schedule
listed in the index of this Form  10-K is the  responsibility  of the  Company's
management  and is presented for purposes of complying  with the  Securities
and  Exchange  Commission's  rules  and is not  part of the  basic  consolidated
financial  statements.   This  schedule  has  been  subjected  to  the  auditing
procedures applied in our audits of the basic consolidated  financial statements
and, in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.


/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP



Boston, Massachusetts
March 23, 1999




                                      S-2
<PAGE>


                                                                     SCHEDULE II

                   ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
              For the years ended December 31, 1996, 1997 and 1998
                                 (in thousands)


                                   Balance,                            Balance,
                                  Beginning             Utilization/    End
Allowance for Doubtful Accounts   of Period  Additions  Other (1)     Of Period
-------------------------------   ---------  ---------  -----------   ----------

Year ended December 31, 1996      $   1,709  $  2,586   $        17   $   4,312
                                  ========== ========== ============ ===========
Year ended December 31, 1997      $   4,312  $  3,058   $    (1,896)  $   5,474
                                  ========== ========== ============ ===========
Year ended December 31, 1998      $   5,474  $  4,975   $    (3,653)  $   6,796
                                  ========== ========== ============ ===========
(1) Includes allowances for doubtful accounts acquired through acquisition,  net
  of write-offs.


                                   Balance,                             Balance,
                                  Beginning                                End
Inventory Valuation Accounts      of Period   Additions  Utilization   of Period
-------------------------------  ----------   ---------  -----------  ----------
Year ended December 31, 1996      $   1,340   $   564    $     (546)  $   1,358
                                 =========== =========== =========== ===========
Year ended December 31, 1997      $   1,358   $ 1,796    $   (1,791)  $   1,363
                                 =========== =========== =========== ===========
Year ended December 31, 1998      $   1,363   $ 1,651    $   (1,022)  $   1,922
                                 =========== =========== =========== ===========

                                  Balance,                             Balance,
                                 Beginning                              End
Deferred Tax Valuation Accounts  of Period    Additions  Utilization  of Period
------------------------------- ----------    ---------  -----------  ---------

Year ended December 31, 1996     $   4,359    $   -      $   (1,704)  $   2,655
                                =========== ===========  =========== ===========
Year ended December 31, 1997     $   2,655    $   -      $   (2,655)  $     -
                                =========== ===========  =========== ===========
Year ended December 31, 1998     $     -      $ 8,102    $      -     $   8,102
                                =========== ===========  =========== ===========


                                  Balance,                             Balance,
Reserve for Restructuring and    Beginning                               End
Other Related  Charges           of Period    Additions  Utilization  of Period
------------------------------- ----------    ---------  -----------  ----------
Year ended December 31, 1996     $    -       $    -     $      -     $     -
                                ===========  ==========  =========== ===========
Year ended December 31, 1997     $    -       $    -     $      -     $     -
                                ===========  ==========  =========== ===========
Year ended December 31, 1998     $    -       $  2,239   $     (321)  $   1,918
                                ===========  ==========  =========== ===========


                                      S-3