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, 2001 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 15, 2002, was  approximately  $25,585,000.  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  30,902,000  shares of Common  Stock,  $.01 par value,
outstanding as of March 15, 2002.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  registrant's  definitive  proxy  statement  for the 2002 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

     On March 29, 2002, Elcom International, Inc. (the "Company") announced that
it was  divesting  itself of certain  assets  associated  with its United States
("U.S.")  computer-oriented  information technology products ("IT Products") and
services  business  to ePlus  Technology,  Inc.  ("ePlus").  This will allow the
Company to transition to being a leading provider of remotely-hosted, electronic
procurement   ("eProcurement")  and  electronic   marketplace   ("eMarketplace")
Internet  software  solutions  (collectively  the "Technology  Business").  As a
result of this  divestiture  and the previously  completed sale of the Company's
United Kingdom ("U.K.") IT Products  business on December 31, 2001, as described
more fully  elsewhere  herein,  commencing  with the second quarter of 2002, the
Company  will not record any  revenues  arising from the sale of IT Products and
associated services.  From the second quarter of 2002, the Company's sole source
of revenue will be from  eProcurement and eMarketplace  solutions and associated
professional  services.  As of  December  31,  2001,  the  historical  financial
statements  present the U.K. IT Products  business as a discontinued  operation,
and since no decision  had been made to divest the U.S. IT Products and services
business at that time, that business is presented as a continuing operation.  As
provided by applicable accounting conventions,  future financial statements will
present all the IT Products and services  business as a discontinued  operation,
which will allow a more focused presentation.

     As it  relates to the  Company's  principal  business  going  forward,  the
Company  develops and licenses  remotely-hosted,  self-service  eProcurement and
eMarketplace,  Internet  and  intranet-based  purchasing  systems.  The  Company
intends  to  augment  its core  eProcurement  Marketplace  solutions  with other
licensed  supply  chain-oriented  systems to enable the  conduct of  interactive
supply  chain  automation  for  businesses.  The Company has already  licensed a
dynamic trading system platform to provide auction,  reverse auction,  and other
electronic negotiation,  or ("eNegotiation")  functions.  Since its inception in
1992, elcom, inc., the Company's eBusiness technology subsidiary,  has developed
its PECOS(TM) (Professional Electronic Commerce Online System) technology, which
is licensed to companies  to enable them to  communicate,  market,  buy and sell
various goods and services  electronically  over the Internet or through private
networks and eMarketplaces. The Company's PECOS(TM) technology can support large
numbers of  end-user  clients,  products,  suppliers  and  transactions  and its
transaction server middleware  provides a scalable  foundation for robust system
performance and high transaction capacity.

     Since 1993, the Company has marketed and sold  value-added  services and IT
Products to  commercial  clients  through Elcom  Services  Group,  Inc.  ("Elcom
Services  Group"),  its  wholly-owned IT Products direct  marketing  subsidiary.
Elcom  Services  Group  was  created  in 1993 as the  proof  of  concept  of the
Company's original client/server PECOS(TM) technology. Elcom Services Group uses
Starbuyer.com,  its owned and  operated  business-to-business  eMarketplace  and
PECOS.web,  an  Internet-based  ordering and information  system, to support its
clients.

     Since 1993,  the Company has  purchased IT Products from  distributors  and
directly from certain manufacturers and, as an authorized remarketer of those IT
Products, resold them to commercial customers. As is typical of a reseller of IT
Products,  because the Company took title to those  purchased  IT Products,  and
assumed  the  risks  of  ownership   associated   with  inventory  and  accounts
receivable;  the Company  recorded gross revenues on each sale  transaction.  In
January 2001, the Company announced that it had signed an agreement to outsource
its IT Product  fulfillment,  logistics,  configuration  and distribution in the
U.S. to TD Fulfillment  Services,  L.L.C., a subsidiary of Tech Data Corporation
("Tech Data"), one of the world's largest  distributors of  computer-oriented IT
Products.  Under that  agreement,  Tech Data became the  Company's  fulfillment,
logistics,  configuration  and distribution  outsourcing  partner and recognized
gross  revenues and owned and managed the  inventory  and customer  receivables.
This outsource  agreement allowed the Company to hold virtually no inventory and
substantially  reduce its IT Product-related  accounts  receivables in the U.S.;
thereby significantly reducing inventory risks and working capital requirements.
As a sales agent for Tech Data, the Company received  transaction-oriented fees,
which were related to the gross profit generated on each sale  transaction.  The
first live orders processed  through this outsourcing  arrangement were recorded
in February 2001 and the  transition  was completed in July 2001

                                       2
<PAGE>

with 96% of the Company's  U.S.  customers  transitioning  to the new outsourced
model. The Company  continued to provide its suite of professional  services and
support  directly to its clients,  while acting as an agent for IT Product sales
transactions  in the U.S.  The U.K.  IT  Products  remarketer  business  was not
affected by this  arrangement  and  continued  to own  inventory,  record  gross
revenues on IT Product sales and collect customer  receivables up until the time
it was sold on December 31, 2001, as described more fully herein.

     For IT  Products  which were sold under the Tech Data  agreement,  reported
transaction  fees were  approximately  5% to 6% of the  previously  reported  IT
Product revenues.  Services-oriented  revenues  continued to be reported as they
had been historically. In the third quarter of 2001, the substantial majority of
the Company's U.S. sales orders were processed  through the Tech Data agreement.
Due to the  Company's  transition  to the Tech  Data  outsourcing  model and the
resultant  reporting  of  transaction  fees rather than gross  revenues  for the
majority of IT Product sales in the U.S.,  certain  financial  comparisons  with
prior periods are difficult.

     After approximately ten months of preparation and planning,  Elcom Services
Group  commenced  its PECOS.IT  initiative  in August 2001,  as a way to acquire
incremental  customers.  This initiative involved offering prospective customers
an  advanced  multi-organizational  version of the  PECOS(TM)  technology,  with
functionality  that  supports  complex  purchasing  of IT Products  and services
(PECOS.icm).  The Company considered the amount of transaction fees projected to
be  generated  by a  prospective  customer  through  the  Company's  outsourcing
agreement with Tech Data and, if deemed sufficient, deployed PECOS.icm at little
or no cost to the new customer.

     As part of its strategy to  transition  to a  transaction-based  model,  on
December  31,  2001,  the  Company  sold  substantially  all of the  assets  and
liabilities  of its U.K. IT Products  remarketing  business to AJJP  Limited,  a
company  formed by certain  members of the former U.K.  IT Products  remarketing
business.  AJJP  Limited  subsequently  changed  its name to  Elcom  Information
Technology  Limited.  Elcom Systems Limited,  an indirect U.K. subsidiary of the
Company,  will  continue  to operate the  Company's  U.K.  Technology  Business,
primarily  focusing on  eProcurement  and  eMarketplaces  in the  commercial and
government sectors. As a result of the sale of the U.K. IT Products  remarketing
business,  the  consolidated  financial  statements,  including  the  results of
operations and selected financial data contained herein,  have been presented as
if the U.K. IT Product  remarketing  business were a discontinued  operation for
all periods presented.  Accordingly,  the results of operations of the business,
including  revenues,  gross profit and  expenses,  are reported as a single line
item below net income (loss) from continuing operations.

     To transition to a pure technology based model and because of the continued
low demand for IT  Products  in the U.S.  in 2001,  particularly  following  the
September  2001 terrorist  attacks,  on March 29, 2002, the Company sold certain
assets that were used in the Company's U.S. IT Products and services  activities
to ePlus. The principal assets sold were customer lists,  customer contracts and
certain  fixed  assets.  In  addition,  ePlus  acquired a perpetual  license for
certain of the  Company's  sales  management  software  and  assumed  one of the
Company's  property leases.  The terms of the sale also provide that the Company
will provide ePlus with up to six months of managed support to transition the IT
Products and services  activities to ePlus.  The Company also issued warrants to
purchase 300,000 shares of the Company's common stock to ePlus. The warrants are
exercisable after September 29, 2002, have an exercise price of $1.03 and expire
on March 29, 2009.

elcom, inc.

     The eBusiness technology  subsidiary of the Company,  elcom, inc., develops
and   licenses   PECOS(TM)   remotely-hosted,    self-service,    Internet   and
intranet-based  automated  purchasing  and  marketplace  systems.  In  addition,
through September 30, 2001,  elcom, inc. marketed IT Products to U.S.  customers
via various  implementations  of the Company's  PECOS(TM)  technologies.  elcom,
inc.'s IT Product  customers  were  transferred  to Elcom  Services  Group as of
October 1, 2001 and from that date,  elcom, inc. ceased to record any IT Product
sales in the U.S. For comparative  purposes,  the business  segment  information
contained  herein has been presented as if Elcom Services Group had reported all
U.S.  IT Product  revenues

                                       3


<PAGE>

and gross  profits for all  periods  presented.  The  automated  purchasing  and
marketplace systems the Company offers for licensing include:

     PECOS Internet Procurement Manager ("PECOS.ipm") PECOS.ipm is based on nine
years of eCommerce technology  development and, as an Internet-based system, has
been in  development  for  approximately  four years.  PECOS.ipm is a robust and
feature-rich  Internet-based,  remotely-hosted,  automated procurement system. A
basic patent (#5,799,157)  covering certain elements of this system was filed in
December  1994 and granted and issued to the  Company on August 25,  1998.  As a
remotely-hosted  system,  PECOS.ipm  allows the  Company's  clients to use their
intranet/Internet  to access the system to identify and select  products,  check
pricing,  automate the internal  approval  process and facilitate  invoicing and
payment  to  suppliers.  Since  it  is  remotely-hosted,  PECOS.ipm  is  rapidly
deployable and has a minimal impact on a client's  computer system and personnel
resources.  elcom,  inc. acts as its own application  service provider and hosts
PECOS.ipm on its own hardware platform, giving clients a single point of contact
and responsibility.  In addition, PECOS.ipm is configurable by a client and does
not require scripting or consultants to modify  administrative items or approval
workflows.  PECOS.ipm  can operate as a standalone  system  without an expensive
back-end Enterprise Resource Planning ("ERP") system in place,  thereby enabling
easier  implementation.  Clients may integrate  PECOS.ipm  into their ERP system
using  data  feeds  with  PECOS.ipm  already  operating.  Further,  the  Company
facilitates  supplier  catalog loads and manages  catalog content for the client
when the system is  remotely-hosted.  In 2001,  the  Company  announced  two new
releases of its PECOS.ipm  software for deployment.  Version 7.1, referred to as
the multi-organizational  version, was announced in April 2001, and was targeted
for use by  large,  multi-organizational  companies  and  contained  significant
functionality  enhancements,  such as dynamic  documents,  eForms  and  improved
organizational  data  security.  In addition,  in late October 2001, the Company
announced version 8.0 of its next generation PECOS(TM) technology.  This version
of PECOS(TM) is designed to offer a single solution which includes  eProcurement
("buy-side":  the  capability of a client to order  products from its supplier),
ePurchasing ("sell-side":  the capability of a client to have its customers make
purchases   electronically)  and  private  eMarketplace   ("eMarketplace":   the
capability for a client to offer an  eMarketplace  to both buy and sell products
in a "community"  of users which may include both suppliers and  customers).  In
addition,  version 8.0 offers enhanced  multi-organizational,  multi-lingual and
multi-currency capabilities.

     PECOS   Internet   Commerce   Manager   ("PECOS.icm")   is  the   Company's
eDistribution  configuration  version of  PECOS(TM)  that  automates  the online
selling process from product information through financial settlement. PECOS.icm
supports  the sales of  virtually  any type of  product  or  services,  includes
functionality  such as  electronic  catalogs,  shopping  cart and shopping  cart
transfer, access to real time price and availability,  product configuration and
credit card  processing.  PECOS.icm also supports a virtual sourcing engine that
enables  the online  purchase  and/or  sale of IT  Products  without the need to
maintain  inventory.  Elcom  Services  Group,  the  Company's  direct  marketing
subsidiary, offers a version of PECOS.icm to prospective customers in return for
a  portion  of  their  IT  Product  purchases,  creating  a  major  value  added
differentiator to acquire new IT Product customers.

     In July 2001, the Company announced the availability of an optional dynamic
trading system licensed from a third party, which includes request for proposal,
private  reverse  auctioning and other  features.  The Company has also recently
announced the availability of an asset  management  system and is in discussions
with several other  software  firms to offer their  systems.  This addition will
allow the Company to offer a suite of supply  chain  modules to augment its core
eProcurement  and  eMarketplace  functionality.  Further,  the Company is in the
process of developing eMarketplace World Network(TM), a global eMarketplace hub,
which is designed to  interconnect  with world-wide  eMarketplaces  comprised of
vertical  and  geographic  trading  communities  within  an  industry,  allowing
eMarketplaces  to connect  their trading  communities  so that buyers can easily
review participating eMarketplaces and trade with the suppliers participating in
those eMarketplaces.

Business-to-Business Electronic Commerce Overview

     Market Overview.  With the widespread  implementation  of intranets and the
adoption of the Internet as a business communication platform, organizations can
now automate enterprise-wide and inter-

                                       4

<PAGE>

organizational  commerce  activities.  The  availability  of the  Internet  as a
ubiquitous  communications  network creates a significant market opportunity for
Internet-based  business-to-business electronic commerce solutions for operating
resources.

     Internet-based  procurement,  often  referred  to as  eProcurement,  is the
process of buying goods and  services  from  suppliers  over the  Internet.  The
Company  believes  that the market for  eProcurement  solutions,  which is still
emerging and consists of buy-side software that automates the requisitioning and
workflow  approval  process,  and  Internet-based  software that enables  online
transactions in eMarketplaces,  is currently at the beginning of a growth cycle.
Internet-based  automated  procurement  systems  have  only been  available  for
approximately  three years and  represent a new category of cost  reduction  and
productivity-enhancing  supply chain management systems. As indicated by various
research reports,  the marketplace is nascent;  however,  it is projected that a
substantial  percentage of  corporations  of various  sizes and across  multiple
industries  will adopt some form of  eProcurement  solution in the next  several
years.

     Forrester  Research  estimates  that  the  business-to-business  electronic
commerce  market will grow from $403  billion in 2000 to $2.7  trillion by 2004.
International   Data  Corporation   ("IDC")   forecasts  that  eProcurement  and
eMarketplace application license revenues will grow from $770 million in 1999 to
$9.7 billion in 2004.  Gartner Group has forecasted the market for  eProcurement
license revenues to grow $2.6 billion by 2005. These research forecasts indicate
that  adoption of  eProcurement  and  eMarketplace  systems  will create a large
market  opportunity  for  solution  providers  as the  market  moves  from early
adopters,  currently  characterized  primarily  by Fortune  1000  companies,  to
mid-market and mainstream companies in 2002 and beyond.

Elcom Services Group

     The IT Products  and  services  business  has at various  times  during the
Company's  history been divided and accounted for between Elcom  Services  Group
and elcom,  inc. From October 1, 2001,  all of the U.S. IT Products and services
business previously undertaken by elcom, inc., was transferred to Elcom Services
Group and,  accordingly,  prior period segment financial  information  presented
herein has been  restated to reflect all of the U.S.  IT Products  and  services
business as flowing through Elcom Services Group. As more fully described above,
on December 31, 2001, the Company divested its U.K. IT Products  business and on
March 29,  2002,  the Company  sold  certain  assets of the U.S. IT Products and
services  business such that,  from March 29, 2002, the Company has  effectively
exited the IT Products  and services  business and will focus on its  Technology
Business.  However,  since  the  Company's  various  IT  Products  and  services
businesses  were  owned by the  Company  throughout  2001,  they  are  important
historically  and help  explain the  evolution of the  Company,  therefore,  the
following IT Products and services business description is provided.

     Elcom Services Group, the Company's direct  marketer,  which,  prior to the
divestiture  of that  business in March 2002,  marketed and sold IT Products and
professional  services to business  clients.  Elcom  Services  Group  served its
clients using various versions of the Company's PECOS(TM) technology,  including
Starbuyer.com,  PECOS.web and more  recently,  PECOS.icm.  Elcom  Services Group
commenced  operations in December  1993 as the original  proof of concept of the
Company's  technology,  and  experienced  rapid growth through 1997. The Company
achieved its initial growth by offering its client/server PECOS Commerce Manager
("PECOS.cm") and PECOS.web technology to its Elcom Services Group clients and by
various marketing efforts, including direct sales, and by the acquisition of six
PC remarketers.

     Primarily  due  to  declining  gross  profit  margins  with  certain  large
customers and changes in manufacturer  policies which increased  inventory risks
starting in 1999, the Company  introduced a strategy for Elcom Services Group to
reduce its revenues and related  inventory  exposure by declining to do business
with clients that did not pay the Company on time as per agreements, or demanded
pricing  which  the  Company  was  unwilling  to  provide  due to many  factors,
including decreases in marketing development funding from various manufacturers.
This strategy resulted in a significant decrease in revenues over the last three
years, but effectively eliminated a majority of the Company's marginal clients.

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<PAGE>


     After approximately ten months of preparation and planning,  Elcom Services
Group  commenced  its PECOS.IT  initiative  in August 2001,  as a way to acquire
incremental  customers.  This initiative involved offering prospective customers
PECOS.icm, an advanced multi-organizational version of the PECOS(TM) technology,
with functionality that supports complex purchasing of IT Products and services.
The Company  considered the amount of transaction fees projected to be generated
by a prospective customer through the Company's  outsourcing agreement with Tech
Data and, if deemed  sufficient,  deployed PECOS.icm at little or no cost to the
new customer.

     On October 1, 2001, as part of the Company's ongoing strategy,  the U.S. IT
Product  business  conducted  by  elcom,  inc.,  including  Starbuyer.com,   was
transferred  to Elcom Services Group to separate the companies into two distinct
models, one a pure technology  company and the other an IT Products  remarketer.
For comparative purposes, the business segment information disclosed herein, has
been presented as if all of the U.S. IT Products  revenues and gross profit were
recorded by Elcom Services Group for all periods presented.

     In order to allow the  Company to  transition  more fully to a license  and
transaction fee model, on December 31, 2001, the Company sold  substantially all
of the assets and liabilities of the Company's U.K. business to AJJP Limited,  a
company that was formed by certain members of the former U.K.  management  team.
The sales price for the transaction consisted of the assumption of approximately
$3 million of net  liabilities,  plus a nominal  payment  to the  Company,  as a
result of which  the  Company  recorded  a pre-tax  gain of  approximately  $2.7
million.  The results of  operations  of the U.K.  reseller  business  have been
classified as discontinued  operations for all periods presented.  See Note 9 to
the consolidated  financial  statements.  In the U.K., the Company  continues to
operate Elcom Systems Limited, the Company's U.K. technology business,  which is
primarily focusing on eProcurement marketplaces in the commercial and government
sectors. The Company believes it will begin expanding this operation during 2002
as the Scottish Executive (Government of Scotland) and other licenses have begun
generating technology-related revenues.

     On March 29, 2002, the Company  announced that it was transitioning to be a
leading provider of  remotely-hosted,  eProcurement  and  eMarketplace  Internet
software solutions,  collectively the Technology Business, by the divestiture of
certain  assets  associated  with its U.S. IT Products and services  business to
ePlus. As a result of this divestiture and the previously  completed sale of the
Company's U.K. IT Products  business on December 31, 2001,  commencing  with the
second  quarter of 2002 the Company will cease to record any  revenues  from the
sale of IT Products and  associated  services.  From the second quarter of 2002,
the Company's sole source of revenue will be from  eProcurement and eMarketplace
solutions and associated professional services.

     Elcom  Services  Group has  historically  marketed  thousands  of  products
manufactured  by  leading   companies,   such  as  Compaq,   IBM,   Toshiba  and
Hewlett-Packard.  Historically, orders placed through PECOS.web or Starbuyer.com
for IT Products that were in stock generally were fulfilled  automatically  from
the inventory of one of Elcom Services Group's Distribution Fulfillment Partners
("DFPs"), which included Tech Data and Ingram Micro, Inc., two of the largest IT
Product  distributors in the world. Elcom Services Group also offered a range of
professional  services  to its U.S.  clients.  As  described  elsewhere  herein,
commencing in the first quarter of 2001,  Elcom Services Group outsourced its IT
Product fulfillment  process to Tech Data. Under the Tech Data agreement,  Elcom
Services  Group  received  a  transaction-oriented  fee as agent for each  sale,
rather than recording gross revenues.

Products and Pricing

     Products. elcom, inc., develops and licenses its PECOS(TM) remotely-hosted,
self-service,  Internet  and  web-based  automated  purchasing  and  marketplace
systems. The Company also offers a dynamic trading system from a third party.

     Prior to the  divestiture of the IT Products and services  businesses,  the
Company   offered   approximately   130,000  IT  Products   from   thousands  of
manufacturers.  Historically, the substantial majority of IT Products offered by
the  Company  were  purchased  from DFPs in both the U.S.  and U.K.  The

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<PAGE>

Company  provided  clients  with a large  selection  of IT  Products,  including
personal  computer  systems,  monitors,  printers,   peripherals  and  software,
together with a broad range of professional services.

     Pricing. The Company believes that PECOS(TM), including its remotely-hosted
automated  eProcurement and  eMarketplace  system(s),  is  competitively  priced
compared to license fees charged by other eProcurement software providers.

     Prior to the  divestiture of the IT Products and services  businesses,  the
Company  believes  that its IT Product  pricing was generally  competitive  with
other  remarketers.  The Company  typically  offered larger corporate  clients a
greater discount than other clients,  reflecting the economies of a higher level
of purchases by such clients.  The Company used a  proprietary,  customized  and
automated  pricing  system  for its  clients  through  various  versions  of the
Company's PECOS(TM) technologies and back-end server systems, which supports and
tracks a variety  of pricing  methodologies,  including  the  ability to provide
customized pricing for each client, by product.

Professional Services

     elcom,  inc.'s  professional  services group offers various  consulting and
supplier  services to its clients.  These services range from  implementation of
PECOS.ipm and training,  to  interfacing  data from  PECOS.ipm into back-end ERP
systems. Suppliers are also offered services associated with catalog content and
categorization, loading procedures and automated data update methodologies.

     Elcom Services Group offered a wide range of  professional  services in the
U.S., including advising on project and roll-out  management,  providing on-site
engineers for network  integration and systems support,  responsive  "Help" desk
and, on a  subcontractor  basis,  break/fix  services.  The Company also offered
national dispatch service for warranty and repair contracts.

Management Information Systems

     In the U.S.,  the  Company  licenses  and  utilizes  software  from  Oracle
Corporation  and other  software  firms for its  Management  Information  System
("MIS") to allow management to monitor and manage the Company. The Company's MIS
incorporates  modules supporting general ledger,  accounts payable,  purchasing,
accounts  receivable,  inventory and order entry.  The Company's MIS design is a
unique  implementation  of  Oracle  software  applications  that  have  been and
continue  to be  enhanced  to provide  functionality  not found in the  standard
system, including the ability to:

     -    Accept electronically  delivered sales orders such as PECOS(TM),  EDI,
          and XML orders, as well as converted quotations; and

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

     The Company's  operations are dependent in part upon its ability to protect
its MIS network  infrastructure in its Norwood,  MA facility against damage from
physical break-ins, natural disasters, operational disruptions and other events.
The Company  operates a redundant  Internet access system for the U.S. with data
centers in Norwood, MA and San Diego, CA. The Company has 24x7 physical security
at its Norwood data center. To protect the Company's data and provide service if
both   data   centers   were  to  become   inoperative,   the   Company   has  a
disaster-recovery  system agreement with a major computer and services  company.
Although the Company believes that its technology and operating  systems will be
adequate for its current needs,  such MIS systems will undoubtedly  require some
ongoing investments to modify and enhance them as the Company evolves.

Marketing and Sales

     Prior to the  divestiture of the IT Products and services  businesses,  the
Company  historically used direct and telemarketing sales forces in the U.S. and
U.K. to market IT Products and  services to targeted  business,  education,  and
corporate accounts. As of December 31, 2001, the Company employed

                                       7


<PAGE>

approximately 50 sales  representatives,  account executives and related support
personnel to service client accounts. As described elsewhere herein, the Company
sold its U.K. IT Products remarketing business on December 31, 2001 and its U.S.
IT Products remarketing business on March 29, 2002.

     As of December 31, 2001, the Company's sales and support personnel operated
from Field Support and Sales Offices  ("FSSO's") in four  metropolitan  areas in
the U.S.,  as well as one  location  in the U.K.  and one in South  Africa.  The
Company's primary locations and FSSO's are listed below:

                                  UNITED STATES
                     -------------------------------------
                   Norwood, MA (Boston Headquarters and FSSO)
                              San Diego, CA (FSSO)
                               Edison, NJ (FSSO)
                    Bristol, PA (FSSO and Services Business)

                             INTERNATIONAL LOCATIONS
                     -------------------------------------
                            Slough, Berkshire, U.K.
                             Parkview, South Africa

     Corporate Accounts. The Company's primary target group for IT Product sales
were  corporations  that wished to purchase IT Products in an efficient  manner.
Corporate   accounts   typically  employ   purchasing   agents  or  buyers  with
above-average product knowledge who view most IT Products as commodities.

     Educational and Governmental  Accounts.  Prior to the divestiture of the IT
Products and services  businesses,  the Company's government and education sales
operation was based in Bristol,  Pennsylvania and has historically  concentrated
on  building  educational-based  sales by  focusing  on  providing  Windows  and
Intel-based ("Wintel") solutions to the education market in the U.S.

Client and Technical Services

     Prior to the  divestiture of the IT Products and services  businesses,  the
Company provided a wide range of client service and technical support, including
nationwide toll-free pre-sale and post-sale telephone-based support. The Company
believed that  maintaining  a direct client and technical  support link with its
clients was an important competitive factor and promoted client satisfaction. In
addition,  certain  manufacturers  require their  remarketers to provide certain
levels of technical support as an ongoing condition to authorize  remarketers to
sell their IT  Products.  The Company did not  outsource  its  customer  support
function to Tech Data under the outsourcing agreement.

Competition

     eBusiness Systems Marketplace. The market for eProcurement and eMarketplace
solutions  is  relatively  new  and  evolving   rapidly.   The  Company  expects
competition  in this market to  intensify  in the future.  Among other  factors,
before licensing an eBusiness  system,  the Company believes  potential  clients
consider the cost of the system  compared to the level of features and functions
available in  electronic  commerce  ("eCommerce")  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
computer  system.  The Company  competes with vendors of  prepackaged  eCommerce
software,  vendors of software tools for developing  eCommerce  applications and
systems  integrators.  The Company's  competitors  include Ariba, Inc., Commerce
One, Inc., and Clarus  Corporation.  The Company  anticipates future competition
from other emerging and established  companies,  including Oracle,  IBM, and SAP
AG, all of which have  announced  products or alliances to offer  Internet-based
eCommerce.  The Company's potential competitors also include systems integrators
such as Electronic Data Systems (EDS) and a number of EDI solution vendors.

     Certain of these and other competitors have longer operating  histories and
most  have  significantly  greater  financial,  technical,  marketing  and other
resources  than  the  Company  and  thus  may  have  more  extensive   sales  or
distribution  networks and may be able to develop or respond more quickly to new
or

                                       8

<PAGE>

changing opportunities, technologies and client requirements. Also, many current
and  potential  competitors  have greater name  recognition  and more  extensive
client  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.

     IT Products  Marketplace.  The overall  market of  companies  which sell IT
Products  is  highly  fragmented  and  the  Company  operated  in  an  extremely
competitive  environment  which is  continuously  evolving  and subject to rapid
technological  change. A prospective  purchaser of IT Products has the option to
purchase directly from a manufacturer  (e.g., IBM, Compaq, Dell Computer Corp.),
from a major remarketer  (e.g.,  CompuCom  Systems,  Inc.), from a computer mail
order company (e.g., CDW Computer  Centers,  Inc., Micro Warehouse Inc.), from a
systems integrator (e.g., EDS), from computer  superstores (e.g., CompUSA Inc.),
from Internet-based companies (e.g. Insight Enterprises, Inc.), from electronics
superstores  and  from  local  computer  stores,  among  others.  Prior  to  the
divestiture of the IT Products and services business,  the Company competed with
all of these entities for the sale of its IT Products. Each of these entities in
the IT Product  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 expansion of  Internet-based  sales companies  added  substantial
additional  pressure to price  competition in the  marketplace  and continued to
exacerbate  gross profit  pressures.  Certain of the  companies  noted above and
other potential competitors have substantially greater financial,  technical and
marketing  resources  than the Company did before it sold its IT businesses  and
greater name recognition and more extensive client bases.

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 competitive position. Although the
Company has  received a patent on  certain,  specific  aspects of its  PECOS(TM)
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.

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 PCs, among local area networks or on the Internet.  However,  due to the
increasing  popularity  and use of PCs and the  Internet,  it is  possible  that
additional laws and regulations  may be adopted with respect  thereto,  covering
issues such as user privacy,  pricing and characteristics,  taxation of Internet
sales and quality of products  and  services.  The  adoption of any such laws or
regulations  may  decrease the growth of eCommerce  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.

                                       9


<PAGE>

Moreover,  the  applicability  to the Internet of existing laws governing issues
such as property ownership, libel and personal privacy is uncertain.

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,  2001,  the  Company  had a  total  of 247  personnel,
including 238 salaried and 9 hourly personnel. Subsequent to the sale of certain
assets to ePlus,  the Company expects its personnel to number  approximately  97
including its U.K. 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.  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.

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, 2001, the Company leased the properties set forth below,
and rented four other FSSOs. The facility leases vary in remaining length,  from
6 months to 12 years and,  in some  cases,  include  options to extend the lease
terms. See Note 8 to the consolidated  financial statements,  included elsewhere
in this Annual Report on Form 10-K.

                      APPROXIMATE
                        SQUARE
LOCATION               FOOTAGE          USE
--------------------------------------------------------------------------------

Norwood, Massachusetts  36,000    Corporate Headquarters, Boston-area FSSO,
                                  elcom, inc. Headquarters

Canton, Massachusetts   42,800    Elcom Services Group Headquarters
                                  (U.S., East Coast)

Canton, Massachusetts   84,000    Elcom Services Group Configuration and (U.S.,
                                  East Coast) Distribution

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

     In  addition,  the Company  has  operating  leases in the U.K.,  which were
assumed by Elcom Information  Technology  Limited as part of the purchase of the
U.K.  remarketer  business  on December  31,  2001 and are  included as sublease
income.  See Notes (8) and (9).  Negotiations  are  currently  underway with the
landlords of those  properties  to transfer  those  leases to Elcom  Information
Technology Limited.


                                       10
<PAGE>


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.  During 2001,  the Company  commenced an action against a software
supplier to recover its  acquisition  costs and other  expenses  incurred in the
purchase  of certain  software  technology.  In the opinion of  management,  the
outcome  of  this  matter  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

     A special  meeting of the Company's  stockholders  was held on December 19,
2001.  Two  matters  specified  in the  Company's  Notice of Special  Meeting of
Stockholders  Proxy  Statement dated November 15, 2001, a copy of which has been
previously filed with the Securities and Exchange  Commission,  were considered,
voted upon and approved by the stockholders.  The specific results of the voting
on the two matters are as follows:

Proposal I:

     The  Company's  stockholders  approved  and  adopted the  Company's  Second
Restated  Certificate  of  Incorporation  in order to  increase  the  number  of
authorized  shares of the Company's common stock, par value $0.01 per share (the
"Common Stock"), from 50,000,000 to 100,000,000, by the following vote:

           For                 Against               Abstain
        ----------            ---------             ---------
        26,517,666            1,145,171               84,856

Proposal II:

     The  Company's  stockholders  approved,  for the purpose of complying  with
Nasdaq  Marketplace  Rule  4350(i)(1)(D)  (or any  similar  amended,  revised or
alternative  rule), the potential issuance and sale in a private placement of up
to $25 million of equity  securities which, by their terms, may represent twenty
percent or more of the issued and  outstanding  shares of the  Company's  Common
Stock (or securities  convertible  into Common Stock,  including the issuance of
any securities  upon  conversion  thereof)  and/or twenty percent or more of the
Company's  voting power  outstanding  prior to such  issuance,  by the following
vote:

           For                 Against               Abstain
        ----------            ---------             ---------
        11,266,957            1,696,698              93,075


                                    PART II

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  National  Market(R) under
the  symbol  ELCO.  As of  December  31,  2001,  there  were  approximately  275
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 which persons or entities are estimated by the
Company  to be in excess of 20,000 as of  December  31,  2001.  The high and low
closing  sales  prices  reported by the Nasdaq  National  Market for each of the
quarters in the two year  period  ended  December  31, 2001 are set forth in the
table below.  For the period from  January 1, 2002 to March 15, 2002,  such high
and low closing sales prices were $1.50 and $.93, respectively.

                                       11
<PAGE>



                                             2001                  2000
                                    --------------------  ---------------------
     Quarter Ended                     High       Low        High        Low
     --------------------------------------------------------------------------
     March 31,                        $5.125     $1.719     $35.438     $14.063
     June 30,                         $2.850     $1.531     $14.375      $4.250
     September 30,                    $1.730     $0.910      $7.000      $4.438
     December 31,                     $1.950     $1.240      $4.875      $1.219

     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.

Recent Sales of Unregistered Securities

     The Company issued warrants to purchase  145,200 and 4,800 shares of common
stock to Cripple Creek on December 3, 2001. The warrants were issued pursuant to
the Structured Equity Line Flexible Financing  Agreement ("Equity Line"),  dated
as of December 30, 1999 (described  elsewhere  herein),  which was terminated on
November  29,  2001.  The  warrants  to purchase  145,200  and 4,800  shares are
currently   exercisable   and  have  an  exercise  price  of  $1.81  and  $6.30,
respectively.   The  warrants  expire  on  December  2,  2006.   Exemption  from
registration for the issuance of the warrants is claimed pursuant to Section (2)
of the Securities Act of 1933, as amended.

Item 6. Selected Financial Data

     The following table sets forth selected consolidated financial data for the
Company for the years ended  December 31, 1997 through  December 31, 2001 and at
the end of each of those years. The historical financial data for 1999, 2000 and
2001 is  derived  from the  Consolidated  Financial  Statements  of the  Company
audited by KPMG LLP. The  historical  financial data for 1997 to 1998 is derived
from the  Consolidated  Financial  Statements  of the Company  audited by Arthur
Andersen LLP. 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  various
write-offs  and  write-downs  in 1998 and 1999 and  acquisitions  consummated at
various  times during the periods  presented  and the  transition of the U.S. IT
Products business to Tech Data in 2001. In addition,  for all periods presented,
the results of  operations of the U.K. IT Products  business,  described in more
detail elsewhere herein, have been accounted for within discontinued  operations
as a result of the sale of the business on December 31, 2001.



                                       12
<PAGE>
<TABLE>
<CAPTION>


                                                                Years ended December 31,
                                           --------------------------------------------------------------
                                             1997          1998         1999         2000         2001
                                           ----------   ----------   ----------   ----------   ----------
INCOME STATEMENT DATA:
<S>                                        <C>          <C>          <C>          <C>          <C>
Net sales                                  $  568,367   $  530,585   $  411,751   $  235,997   $   62,221
                                           ==========   ==========   ==========   ==========   ==========
Gross profit                               $   66,594   $   50,931   $   35,396   $   22,031   $   15,090
                                           ==========   ==========   ==========   ==========   ==========
Selling, general and administrative
    expenses                               $   54,128   $   57,666   $   52,885   $   42,719   $   36,633
                                           ==========   ==========   ==========   ==========   ==========
Research and development expenses          $    1,275   $    1,178   $    1,343   $    1,695   $    1,089
                                           ==========   ==========   ==========   ==========   ==========
Asset impairment, restructuring and
    other related charges                  $       --   $   12,892   $   10,057   $       --   $    1,776
                                           ==========   ==========   ==========   ==========   ==========


Operating profit (loss)                    $   11,191   $  (20,805)  $  (28,889)  $  (22,383)  $  (24,408)
Interest and other income (expense), net         (977)      (5,371)      (2,143)       1,035         (151)
                                           ----------   ----------   ----------   ----------   ----------
Income profit (loss) before income taxes       10,214      (26,176)     (31,032)     (21,348)     (24,559)
Income tax expense (benefit)                    2,307          186         (965)        (642)          --
                                           ----------   ----------   ----------   ----------   ----------
Net income (loss) from continuing
    operations, net of tax                      7,907      (26,362)     (30,067)     (20,706)     (24,559)
Net income (loss) from discontinued
    operations                                  2,389          802      (12,471)         952        1,942
Gain from discontinued operations, net of
    tax                                            --           --           --           --        2,738
                                           ----------   ----------   ----------   ----------   ----------
Net income (loss)                          $   10,296   $  (25,560)  $  (42,538)  $  (19,754)  $  (19,879)
                                           ==========   ==========   ==========   ==========   ==========


Basic net income (loss) per share for
    continuing operations                  $     0.29   $    (0.97)  $    (1.08)  $    (0.68)  $    (0.79)
Basic net income (loss) per share for
    discontinued operations                      0.09         0.03        (0.45)        0.03         0.06
Basic net income per share from gain of
    discontinued operations                        --           --           --           --         0.09
                                           ----------   ----------   ----------   ----------   ----------
Basic net income (loss) per share          $     0.38   $    (0.94)  $    (1.53)  $    (0.65)  $    (0.64)
                                           ==========   ==========   ==========   ==========   ==========
Basic weighted average shares outstanding      26,937       27,322       27,846       30,487       30,912
                                           ==========   ==========   ==========   ==========   ==========

Diluted net income (loss) per share for
    continuing operations                  $     0.27   $    (0.97)  $    (1.08)  $    (0.68)  $    (0.79)
Diluted net income (loss) per share for
    discontinued operations                      0.08         0.03        (0.45)        0.03         0.06
Diluted net income per share from  gain
    of discontinued operations                     --           --           --           --         0.09
                                           ----------   ----------   ----------   ----------   ----------
Diluted net income (loss) per share        $     0.35   $    (0.94)  $    (1.53)  $    (0.65)  $    (0.64)
                                           ==========   ==========   ==========   ==========   ==========
Diluted weighted average shares
    outstanding                                29,461       27,322       27,846       30,487       30,912
                                           ==========   ==========   ==========   ==========   ==========


                                                                Years ended December 31,
                                           --------------------------------------------------------------
                                             1997          1998         1999         2000         2001
                                           ----------   ----------   ----------   ----------   ----------
CONSOLIDATED BALANCE SHEET DATA
    OF CONTINUING OPERATIONS:
Current assets                             $  223,185   $  198,801   $   69,003   $   55,575   $   15,115
                                           ==========   ==========   ==========   ==========   ==========

Total assets                               $  210,676   $  230,962   $   77,886   $   67,991   $   21,552
                                           ==========   ==========   ==========   ==========   ==========
Current liabilities                        $  158,979   $  155,228   $   34,302   $   33,519   $   10,007
                                           ==========   ==========   ==========   ==========   ==========
Long-term liabilities, net of current
    portion                                $    3,133   $      905   $      260   $      813   $      311
                                           ==========   ==========   ==========   ==========   ==========
Stockholders' equity                       $  110,303   $   85,017   $   46,928   $   30,601   $   11,234
                                           ==========   ==========   ==========   ==========   ==========
Total liabilities and stockholders' equity $  272,415   $  241,150   $  132,601   $   64,933   $   21,552
                                           ==========   ==========   ==========   ==========   ==========
</TABLE>

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

OVERVIEW

     The Company's  focus has evolved to developing  and licensing  eProcurement
and eMarketplace,  Internet and intranet-based  purchasing systems, which enable
the conduct of interactive  eCommerce for businesses.  The Company also offers a
dynamic trading system  licensed from a third party.  The Company was founded in
1992 as Elcom  Systems,  Inc., and over the last eight years,  elcom,  inc., the
Company's  eBusiness   technology   subsidiary,   has  developed  its  PECOS(TM)
technology,  which is licensed to  companies  to enable them to market,  buy and
sell various goods and services electronically over the Internet.

                                       13

<PAGE>


     Since 1993,  the Company has  marketed  and sold  value-added  services and
computer-oriented  IT Products to  commercial  clients  through  Elcom  Services
Group, its direct  marketing  subsidiary using various versions of its PECOS(TM)
technology.  The  Company  achieved  its  early  growth by  offering  the use of
PECOS(TM) to prospective  customers and by various marketing efforts,  including
the expansion of its direct sales force  nationwide,  and by the  acquisition of
six VAR's during 1994 to 1996. In addition,  in the U.S.,  the Company  operated
Starbuyer.com, its owned and operated business-to-business eMarketplace.

     On July  31,  1999,  the  Company  completed  the  sale of the  substantial
majority  of  its  U.K.   remarketer  group  operations,   which  accounted  for
approximately  75% of U.K.  revenues in both 1998 and the first seven  months of
1999.  These  operations are included in the financial  statements as continuing
operations.  Generally,  the Company sold its U.K. field-based  operations,  its
professional services organization, its distribution business and certain of its
inventory and fixed assets. The Company retained its U.K.  telemarketing  group,
which  it  began  to   transition  to  a   business-to-business   Internet-based
eMarketplace  model in March 2001,  similar to that  conducted by the Company in
the U.S. through  Starbuyer.com,  the Company's owned and operated eMarketplace.
On October 1, 1999, the ownership of the U.K.  operations was  transferred  from
Elcom Services Group to elcom, inc. to help facilitate this strategy.

     In January 2001,  the Company  announced that it had signed an agreement to
outsource its U.S. IT Product fulfillment,  distribution,  logistics and product
configuration  to Tech Data.  Since its inception,  the Company had purchased IT
Products  from  distributors,  including  Tech Data,  and directly  from certain
manufacturers and, as an authorized  remarketer of those products,  resold those
products  to  commercial  customers.  Because  the  Company  took title to those
purchased IT Products and assumed risks of ownership  associated  with inventory
and  accounts  receivable,  the Company  recorded  gross  revenues for each sale
transaction.  Under the  outsourcing  agreement,  Tech Data became the Company's
logistics,   fulfillment,  and  distribution  outsourcing  partner  and  assumed
virtually all logistics and  fulfillment  functions,  including the Company's IT
Product  financing  in the U.S.,  allowing  the  Company  to hold  virtually  no
inventory  or IT  Product  accounts  receivable  in the U.S.,  thereby  reducing
associated  risks and working capital  requirements.  Under this agreement,  the
Company received transaction fees based on the gross profit associated with each
sale. The transition to the Tech Data outsource agreement commenced in the first
quarter of 2001 and by the third quarter of 2001,  the  substantial  majority of
U.S. IT Product sales were being  recorded as transaction  fees.  Under the Tech
Data agreement,  reported  transaction  fees, which  represented the substantial
majority of sales transactions  recorded on IT Product sales in the U.S. for the
year ended  December 31, 2001,  were  expected to be  approximately  5% to 6% of
previously  reported  IT  Product  revenues  in the  U.S.  Due to the  Company's
transition to the Tech Data  outsourcing  model and the  resultant  reporting of
transaction  fees  rather than gross  revenues on IT Product  sales in the U.S.,
certain financial comparisons with prior periods may be difficult.

     Since 1993, the  substantial  majority of the Company's  revenues have been
derived from the sale of IT Products and services, and this transition to a pure
Technology  Business  will have a  significant  effect on the  revenues and cost
basis of the Company  going  forward.  As of December 31, 2001,  the  historical
financial  statements  present the U.K. IT Products  business as a  discontinued
operation,  and since no  decision  had been made to divest the U.S. IT Products
and services  business at that time,  that business is presented as a continuing
operation.  As provided by applicable accounting  conventions,  future financial
statements  will  present  all of the IT  Products  and  services  business as a
discontinued  operation,  which will allow a more  focused  presentation  of the
historical financial trends of the on-going Technology Business.

elcom, inc.

     The eBusiness subsidiary of the Company, elcom, inc., develops and licenses
PECOS(TM) remotely- hosted, self-service, Internet and intranet-based purchasing
systems.  Through September 30, 2001, elcom, inc., marketed and sold IT Products
in the U.S.  using  Starbuyer.com,  the  Company's  owned and operated  Internet
eMarketplace. On October 1, 2001, all IT Product sales in the U.S. were recorded
through Elcom Services Group. For comparative purposes,  sales of IT Products in
the U.S.  have been  reclassified  as if they had been  recorded  through  Elcom
Services Group for all periods presented. In addition,  elcom, inc., owns all of
the U.K.  operations.  On December 31, 2001,  the U.K. IT Products  business was
sold and the

                                       14


<PAGE>

results of operations  from that business have been classified as a discontinued
operation  for  financial  reporting  purposes.   Accordingly,  the  results  of
operations of elcom, inc., for all periods presented reflect  technology-related
revenues only.  Technology-related revenues for the year ended December 31, 2001
were $4.3 million  compared to $1.1 million recorded in the prior year. The 2001
technology-related  revenues  included $2.9 million arising from a one-time sale
of certain proprietary  software to Elcom Information  Technology  Limited,  the
unrelated  company that  acquired the U.K. IT Products  reseller  business.  The
gross profit for the year ended  December 31, 2001 was $3.1 million  compared to
$1.1 million in the prior year,  primarily  as a result of the one-time  sale of
software  to  Elcom  Information  Technology  Limited.   Substantially  all  the
technology-related  revenues and gross profit were  recorded in the U.S. in both
2001 and 2000.

Elcom Services Group

     Prior to the  divestiture of the U.S. IT Products and services  business to
ePlus on March  29.  2002,  Elcom  Services  Group was a direct  marketer  of IT
Products  and  professional  services to business  customers.  Primarily  due to
declining  gross profit margins on hardware sales with certain large  customers,
changes  in  certain  manufacturer's  product  return  policies,  and  resultant
increased inventory risks starting in 1999, the Company introduced a strategy to
reduce its revenues and related  inventory  exposure by declining to do business
with clients that did not pay the Company on time as per agreements, or demanded
pricing  which the  Company  was not  willing  to provide  due to many  factors,
including decreases in marketing development funding from various manufacturers.
This strategy resulted in a planned  significant  decrease in revenues for Elcom
Services  Group,  which  effectively  eliminated  a  majority  of the  Company's
marginal clients and exposure thereto. The Company's  outsourcing agreement with
Tech Data was designed to eliminate  virtually  all  inventory and most accounts
receivable-oriented risks in the U.S.

     Historically,  Elcom Services  Group's  revenues and resultant gross profit
have been affected by price  reductions and decreases in vendor support programs
offered by computer  manufacturers.  Consequently,  in order to  increase  gross
profit historically,  the Company had to sell incremental amounts of IT Products
to offset such price  reductions  which  amplified  the impact on the  Company's
gross profit of any slowdown in corporate client demand.  These price reductions
and manufacturer  cutbacks had been substantial over the last several years. The
Company  experienced  a  softening  of demand  from its  clients in 2000,  which
continued throughout 2001, related to many factors, including a slow-down in the
IT Products markets and the general economic downturn, exacerbated by the events
of September  11th,  which created  further  economic  uncertainty and a greater
curtailing of capital  spending  programs  across almost every  industry.  Elcom
Services Group's gross margins have varied from quarter to quarter, depending on
the level of key vendor support programs, including rebates, return policies and
price protection,  as well as product mix, pricing strategies and other factors.
In addition,  as discussed  further  elsewhere,  the Company  outsourced  its IT
Product logistics,  fulfillment and distribution to Tech Data in early 2001. Due
to the  transition  to this  outsourcing  model and the  resultant  reporting of
transaction  fees rather than gross revenues on IT Products,  certain  financial
comparisons with prior periods may be difficult.

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, 2001:

                                                   1999      2000      2001
                                                  ------    ------    ------
     Net sales                                    100.0%    100.0%    100.0%
     Gross profit                                   8.6%      9.3%     24.3%
     Sales, general and administrative expenses    12.8%     18.1%     58.9%
     Asset impairment, restructuring and other
         related charges                            2.4%        --      2.9%
     Operating profit (loss)                       (7.0%)    (9.5%)   (39.2%)
     Interest expense                              (0.7%)    (0.6%)    (0.5%)
     Income tax expense (benefit)                  (0.2%)    (0.3%)    --
     Net income (loss) from continuing operations  (7.3%)    (8.8%)   (39.5%)

                                       15


<PAGE>

     Net income (loss) from discontinued
         operations                                (3.0%)     0.4%      3.1%
     Gain on sale of discontinued operations          --        --      4.4%
     Net income (loss)                            (10.3%)    (8.4%)   (31.9%)

Results of Operations

     The results of operations for the U.K. IT Products remarketer business that
was sold on December 31, 2001 has been presented as a discontinued operation for
all periods.

Year ended December 31, 2001 compared to the year ended December 31, 2000.

     Net Sales.  Net sales for the year ended  December  31, 2001  decreased  to
$62.2  million  from $236.0  million in 2000,  a decrease  of $173.8  million or
73.6%.  The decrease in net sales primarily  reflects the significant  impact of
the  industry-wide  slowdown in the U.S. for IT Product sales  together with the
planned   reduction   in   revenues    attributable   to   the   transition   to
transaction-oriented  fees in the U.S. under the Tech Data outsourcing agreement
whereby the Company recorded  transaction fees rather than gross revenues.  U.S.
net sales  decreased from $235.9 million to $62.1 million,  a decrease of 73.7%,
also due to the reasons described above.

     Gross Profit.  Gross profit for the year ended  December 31, 2001 decreased
to $15.1  million  from $22.0  million in 2000,  a decrease  of $6.9  million or
31.5%.  The  decrease in gross  profit  dollars is  primarily as a result of the
reduction in the volume of sales in the U.S. from the industry-wide  slowdown in
purchasing by the Company's customers. Technology-related gross profit increased
to $3.1 million in 2001 from $1.1 million in 2000,  an increase of $2.0 million,
or 178.5%, primarily related to the one-time sale to the acquirer of the U.K. IT
Products reseller business.  Gross profit as a percentage of net sales increased
to 24.3%  in 2001  from  9.3% in  2000,  due to both  the  effect  of  recording
transaction-oriented  fees  under the Tech  Data  outsourcing  program,  without
incurring the related cost of sales,  thereby positively  affecting gross profit
as  a   percentage   of  sales,   and  the   increase   of  gross   profit  from
technology-related sales.

     Selling,  General and Administrative  Expenses.  Total selling, general and
administrative  ("SG&A") expenses for the year ended December 31, 2001 decreased
to $36.6  million  from $42.7  million in 2000,  a decrease  of $6.1  million or
14.2%. SG&A expenses in the U.S. decreased to $34.7 million for the period ended
December 31, 2001 from $40.7  million for the period ended  December 31, 2000, a
decrease of $6.1 million or 14.9%,  primarily due to cost  reductions  resulting
from the savings in personnel  costs  implemented as a result of the outsourcing
agreement  with Tech Data. As a percentage of sales,  SG&A expenses for the year
ended December 31, 2001 rose to 58.9%  compared to 18.1% in 2000,  primarily due
to the  decrease  in net  sales  in  the  U.S.,  and  resulting  from  recording
transaction-oriented fees under the Tech Data agreement.

     Research and Development Expense.  Research and development expense for the
years  ended  December  31, 2001 and 2000 were $1.1  million  and $1.7  million,
respectively,  a decrease of $0.6 million or 35.8%. The expenditures reflect the
on-going  product  development  of the  PECOS(TM)  technology  prior to reaching
technological  feasibility  of each  new  version.  The  decrease  is due to the
increase in expenditures  after reaching  technological  feasibility,  which are
reflected in cost of sales.

     Asset  Impairment,  Restructuring  and Other Related Charges.  In 2001, the
Company recorded asset impairment  charges of $1.8 million.  Approximately  $1.6
million of this charge is related to the decreased  utility of software acquired
to augment the Company's PECOS(TM)  technology and software purchased to be used
for the IT Products business.

     Interest  Expense.  Interest  expense for the year ended  December 31, 2001
decreased to $0.3 million  from $1.3 million in the  comparable  year of 2000, a
decrease of $1.0 million.  Interest expense in both periods result from the line
of credit borrowings.

     Interest Income and Other,  Net.  Interest  income and other,  net, for the
year ended  December  31, 2001  decreased  to $0.1  million from $2.4 million in
2000.  This  decrease  was due to lower  monthly  cash  balances  and lower U.S.
interest  rates in 2001.  The Company also  recorded an $0.8 million gain on the
sale of assets in 2000.

                                       16

<PAGE>


     Net Income (Loss) From Continuing  Operations.  The Company generated a net
loss for the year ended  December  31, 2001 of $24.6  million as a result of the
factors described herein.

     Net  Income   (Loss)  From   Discontinued   Operations.   Net  income  from
discontinued  operations  increased from $1.0 million in the year ended December
31, 2000 to $1.9 million in the year ended  December  31, 2001, a 90%  increase.
This is primarily  due to an increase in IT Product  sales of $12.1 million from
the prior  year.  Net income from  discontinued  operations  represents  the net
operating results for the Company's U.K. remarketer operations,  which have been
classified as discontinued operations.

     Gain (Loss) From Disposal of  Discontinued  Operations  (net of tax).  Gain
from the disposal of  discontinued  operations  (net of tax) was $2.7 million in
the year  ended  December  31,  2001,  resulting  from  the sale of the U.K.  IT
Products reseller business.

Year ended December 31, 2000 compared to the year ended December 31, 1999.

     Net Sales.  Net sales for the year ended  December  31, 2000  decreased  to
$236.0  million  from $411.8  million in 1999,  a decrease of $175.8  million or
42.7%. This decrease was primarily due to the sale of a substantial  majority of
the  Company's  U.K.  remarketer  group  operation  in July 1999,  as well as an
industry-wide  slowdown of IT Products  sales.  U.S.  net sales  decreased  from
$292.5  million to $235.9  million,  a decrease  of 19.4%,  primarily  due to an
industry-wide  slowdown and  continued  adherence to the  Company's  strategy to
reduce its  exposure to clients  that do not pay on time,  demand  pricing  that
negatively  impacts  margins  or  that  would  require  unacceptable   inventory
exposure.  U.K. sales decreased from $119.3 million to $0.1 million,  due to the
sale of the Company's U.K. remarketer group operation in July, 1999. The results
of  operations  for  the  substantial  majority  of the  U.K.  remarketer  group
operations that were sold in 1999 are classified as continuing operations.

     Gross Profit.  Gross profit for the year ended  December 31, 2000 decreased
to $22.0  million  from $35.4  million in 1999,  a decrease of $13.4  million or
37.8%.  The  decrease  in gross  profit  dollars  is  primarily  a result of the
decrease in net sales as described  above.  Gross profit as a percentage  of net
sales  increased  to 9.3% in 2000 from 8.6% in 1999 as the  Company  reduced its
exposure to clients who demanded pricing that negatively  impacted margins.  The
increase  in gross  profit  margin was  partially  offset by a  decrease  in the
availability of manufacturer rebate and incremental discount programs.

     Selling,  General and Administrative  Expenses. Total SG&A expenses for the
year ended  December 31, 2000  decreased to $42.7  million from $52.9 million in
1999, a decrease of $10.2 million or 19.2%. Most of this decrease  reflected the
sale of a substantial majority of the Company's U.K. operations in July 1999. As
a percentage of sales,  SG&A expenses for the year ended  December 31, 2000 rose
to  18.1%  compared  to  12.8% in 1999 due to a  decrease  in sales  while  many
administrative and overhead expenses remained fixed.

     Research and Development Expense.  Research and development expense for the
years  ended  December  31, 2000 and 1999 were $1.7  million  and $1.3  million,
respectively,  an increase of $0.4 million or 26.2%. The expenditures  reflected
the increased product development of the PECOS.ipm  technology prior to reaching
technological feasibility of each new version.

     Interest  Expense.  Interest  expense for the year ended  December 31, 2000
decreased to $1.3 million  from $2.8 million in the  comparable  year of 1999, a
decrease of $1.5 million. Interest expense in both periods results from the line
of credit  borrowings.  The  reduction in 2000 has a reflection of a decrease in
average monthly borrowings under the Company's line of credit,  partially offset
by an increase  in average  U.S.  interest  rates from 8.25% in 1999 to 9.75% in
2000.

     Interest Income and Other,  Net.  Interest  income and other,  net, for the
year ended  December  31, 2000  increased  to $2.4  million from $0.6 million in
1999.  This increase was primarily a result of recording an $0.8 million gain on
the sale of assets  related  to the  receipt  of funds  which were being held in
escrow  pursuant  to the U.K.  remarketer  group  purchase  and sale  agreement.
Additionally,  the  Company  had an

                                       17


<PAGE>

89% increase in average  monthly  interest  earnings due to higher  monthly cash
balances and an increase in interest rates in the U.S.

     Income Tax  Expense  (Benefit).  The income tax  benefit in 1999  primarily
related to the refund of income  taxes paid in prior  years in the U.K.,  net of
certain estimated current state income taxes payable by the Company.  The income
tax benefit in 2000 related to the refund of income taxes paid in prior years.

     Net Income (Loss) For Continuing  Operations.  The Company  generated a net
loss for the year ended  December  31, 2000 of $20.7  million as a result of the
factors described herein.

     Net Income  (Loss) From  Discontinued  Operations.  Net income  (loss) from
discontinued  operations  represents  the net  operating  results  for our  U.K.
remarketer business,  which has been classified as discontinued  operations as a
result of the sale of the business on December 31, 2001.  Net income (loss) from
discontinued operations increased from a loss of $12.5 million in the year ended
December 31, 1999 to a gain of $1.0 million in the year ended December 31, 2000,
primarily due to a reduction in U.K. SG&A expenses.


Liquidity and Capital Resources

     Net cash provided by operating  activities from  continuing  operations for
the year ending  December 31, 2001 was $9.1 million,  resulting  primarily  from
$26.2 million generated from the decrease in accounts  receivable,  (a result of
the  transition to the Tech Data model),  $5.7 million in non-cash  depreciation
and amortization,  and $1.8 million from impairment charges, offset by the $24.6
million loss from continuing operations. Net cash provided by operations may not
be indicative of future  results due to the sale of certain  operations  and the
transition to a technology business.

     Cash used in financing operations was $23.1 million,  which primarily was a
result of the payoff of the Company's line of credit,  due to  transitioning  to
the Tech Data  agreement.  Cash used in investing  activities was primarily $1.0
million for the purchase of property,  equipment and software.  Net cash used in
discontinued operations was $6.4 million.

     At December 31, 2001, the Company's principal sources of liquidity included
cash and cash equivalents of $10.8 million.  Cash and cash  equivalents  include
$125,000  that was pledged as  collateral  for a Letter of Credit  issued in the
ordinary course of business.

     In  January  2001,  the  Company  outsourced  its IT  Product  fulfillment,
distribution,  inventory,  logistics,  and product  configuration in the U.S. to
Tech  Data.  As a  result  of this  agreement,  the  Company's  working  capital
requirements   for   inventory   and  accounts   receivable  in  the  U.S.  were
substantially  reduced.  Accordingly,  the Company notified  Deutsche  Financial
Services Corporation ("DFSC") of its intent to terminate its DFSC line of credit
in the  U.S.,  and the  Company  paid off its  entire  balance  with  DFSC.  The
Company's  letter of credit of $15 million that secured the DFSC  facility  also
expired, and the pledge of $15 million of cash became unrestricted.

     As described  elsewhere  herein,  on December  31,  2001,  the Company sold
substantially  all  of the  assets  and  liabilities  of its  U.K.  IT  Products
remarketing  business to AJJP Limited. As a result, AJJP assumed the U.K. Lloyds
credit facility. The terms of an agreement with Lloyds provide that AJJP will be
solely  entitled  to  and  responsible  for  the  discharge  of all  rights  and
obligations of the Company under a debt purchase  agreement.  Lloyds will notify
the Company in writing as soon as all debt from any obligations arising prior to
the sale is collected and all  obligations  referred to are therein  discharged.
Since all customer  receivables  become ineligible for the purpose of serving as
collateral  borrowing after 90 days, the Company anticipates  receiving a notice
of discharge during the second quarter of 2002.

     On September 17, 2001,  the Company  announced  that its Board of Directors
had  authorized  the  repurchase of up to 800,000 shares in the aggregate of the
Company's common stock.  During 2001, the Company  repurchased 121,100 shares of
its common  stock on the open market at a cost of $160,000.  Further,  purchases
may be made from time to time in the open market or in privately negotiated

                                       18

<PAGE>

transactions  based  on  then-existing  market  conditions.   The  common  stock
purchased  will be used for  employee  stock option  grants and other  corporate
purposes.

     On December 30, 1999,  the Company signed an Equity Line with Cripple Creek
Securities, an investor introduced to the Company by Wit Soundview. In September
2000,  the Company sold 60,952 shares to Cripple Creek under the Equity Line for
$320,000.  The  Company  terminated  the Equity Line on November  29,  2001.  On
December 3, 2001,  in final  payment of its  obligation  to Cripple  Creek,  the
Company issued warrants to purchase  145,200 and 4,800 shares of common stock to
Cripple Creek. The warrants are currently exercisable, have an exercise price of
$1.81 and $6.30, respectively, and expire on December 2, 2006.

     The  Company's  principal  commitments  consist  of  leases  on its  office
facilities  and  capital  leases.  See  Note  8 to  the  consolidated  financial
statements.  In  addition,  the Company  will  require  ongoing  investments  in
property, equipment and software.

Risk Factors

     As of December 31, 2001,  the Company had  approximately  $10.8  million of
cash and cash equivalents and did not have any outstanding debt. The Company has
incurred $82.2 million of cumulative net losses for the three-year  period ended
December 31, 2001.  Total  shareholders'  equity decreased from $30.6 million at
December 31, 2000 to $11.2 million at December 31, 2001. The Company believes it
will  continue  to incur  losses  throughout  2002,  and that  the  Company  has
sufficient  liquidity to fund  operations into the third quarter of 2002 without
the need to raise additional capital.

     The  Company's  consolidated  financial  statements as of December 31, 2001
have been  prepared  under the  assumption  that the Company will  continue as a
going concern for the year ending  December 31, 2002. The Company's  independent
accountants,  KPMG LLP,  have issued a report dated March 29, 2002 that included
an explanatory paragraph referring to the Company's significant operating losses
and  substantial  doubt in its ability to continue  as a going  concern  through
December 31, 2002 without additional capital becoming  available.  The Company's
ability to continue  as a going  concern is  dependent  upon its ability to grow
revenue,  attain  further  operating  efficiencies  and  attract  new sources of
capital.  The Company intends to seek additional capital,  which would result in
dilution for its  shareholders.  There can be no assurance that the Company will
be able to raise  capital,  or if so, on what terms or what the  timing  thereof
might be. The consolidated  financial  statements do not include any adjustments
that might result from the outcome of this uncertainty.

Critical Accounting Policies and Estimates

     The preparation of consolidated  financial  statements requires the Company
to make  estimates  and  judgments  that affect the reported  amounts of assets,
liabilities,  revenue and expenses,  and related disclosure of contingent assets
and  liabilities.  On an on-going  basis,  the Company  evaluates its estimates,
including those related to bad debts, income taxes, and impairment of long-lived
assets. The Company bases its estimates on historical  experience and on various
other  assumptions that are believed to be reasonable  under the  circumstances,
the  results  of which form the basis for making  judgments  about the  carrying
values of assets  and  liabilities  that are not  readily  apparent  from  other
sources.  Actual  results  may  differ  from  these  estimates  under  different
assumptions or conditions.

     The Company believes that the following critical accounting policies affect
its more  significant  judgments and estimates  used in the  preparation  of its
consolidated financial statements:

     The Company maintains allowances for doubtful accounts for estimated losses
     resulting  from  customers  that fail to make required  payments,  however,
     additional  allowances  may be required.  In analyzing  the adequacy of the
     allowance,  the Company  considers past  experiences with the customers and
     related  payment  history,   the  viability  of  the  customers'  financial
     condition,  and  overall  historical  loss  experience.  At a minimum,  the
     Company  maintains an allowance for accounts  greater than 90 days past due
     and an  estimate  for  all  other  accounts  based  on the  results  of the
     assumptions previously mentioned.

     The Company records a valuation allowance to reduce its deferred tax assets
     to the amount  that is more likely  than not to be  realized.  Based on the
     Company's  recent  losses and belief that losses will  continue  throughout
     2002, the

                                       19


<PAGE>

     Company  has  recorded a valuation  allowance  to reduce its  deferred  tax
     assets to $0. In the event the Company were to  determine  that it would be
     able to realize its  deferred tax assets in the future in excess of its net
     recorded  amount,  an  adjustment  to  the  deferred  tax  asset  valuation
     allowance would increase income in the period such determination was made.

     The Company records  impairment  losses on long-lived assets to be held and
     used or to be disposed of other than by sale when events and  circumstances
     indicate that the assets might be impaired and the undiscounted  cash flows
     estimated to be generated by those assets are less than the carrying amount
     of  those  items.  The  Company's  cash  flow  estimates  are  made for the
     remaining  useful  life of the assets and are based on  historical  results
     adjusted  to reflect  the best  estimate  of future  market  and  operating
     conditions.  The net carrying value of assets not recoverable is reduced to
     fair  value.  The  Company's  estimates  of fair value  represent  the best
     estimate  based on  industry  trends  and  reference  to  market  rates and
     transactions.

     Significant  management  judgments and estimates must also be made and used
in connection  with the revenue  recognized in any accounting  period.  Material
differences may result in the amount and timing of revenue for any period if the
Company's  management made different judgments or utilized different  estimates.
For most of its  transactions,  the Company  applies the provisions of SEC Staff
Accounting  Bulletin No. 101,  "Revenue  Recognition  in Financial  Statements."
However, revenues from sales of software are recognized in accordance with AICPA
Statement of Position (SOP) 97-2, "Software Revenue Recognition," as amended and
interpreted.  The  Company  recognizes  revenue  from the sale of  hardware  and
software products when persuasive evidence of an arrangement exists, the product
has been  delivered,  the fee is fixed and  determinable,  and collection of the
resulting receivable is reasonably assured.

Seasonality and Impact of Inflation

     Generally,  sales in the business and computer products remarketer industry
slow in the summer months and, in the U.S., are stronger in the fourth  calendar
quarter and somewhat  weaker in the first calendar  quarter.  Due to its current
size and the nature of its client base, the Company's  sales have reflected this
seasonality;  however,  the Company has now  completed its shift in focus to the
licensing of eProcurement and eMarketplace Internet software solutions.

     Inflation has been  relatively  low in recent years and,  accordingly,  the
Company has not been significantly impacted by the effects of general inflation.

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," "targets," "intends,"  "anticipates,"  "plans," 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,  particularly in light of the qualified opinion from the
Company's  independent  accountants as to the Company's  ability to survive as a
going concern absent any such  financing;  the overall  marketplace and client's
acceptance and usage of eCommerce  software  systems,  the impact of competitive
technologies,  products and pricing,  particularly given the subsequently larger
size and scale of certain  competitors  and  potential  competitors;  control of
expenses,  revenue growth,  corporate  demand for  eProcurement and eMarketplace
solutions;  and  availability of IT Products,  changes in manufacturer  policies
reducing price  protection,  returns and other policies,  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, the Company's 2000 Annual Report on Form 10-K and in
the  Company's  other SEC reports and  statements,  including  particularly  the
Company's "Risk Factors" contained in the prospectus included as part of the S-3
Registration Statement that became effective on May 11, 2000.

                                       20

<PAGE>

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     The  Company is exposed to market risk from  changes in interest  rates and
exchange  rates,  which  could  affect its  future  results  of  operations  and
financial condition.

     The  Company's  cash and cash  equivalents  are  sensitive to interest rate
fluctuations.  Changes in  interest  rates  would  result in changes in interest
income 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, 2001  balances,
the Company estimates that a 1% change in interest rates would have no impact on
income (loss) before income taxes.

     The  Company's  investment  in  its  U.K.   subsidiaries  is  sensitive  to
fluctuations  in the exchange  rate between the U.S.  dollar and the U.K.  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 an accumulated amount of $(519,000).


Item 8. Financial Statements and Supplementary Data

See the Consolidated Financial Statements beginning on page F-1. Supplemental
earnings (loss) per share and quarterly financial information for the Company
are included in Notes 14 and 15, respectively, of the Notes to Consolidated
Financial Statements.


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

         No items to report.

                                    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  2002 Annual Meeting of  Stockholders,  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.


                                    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, 2001:

               Report of Independent Auditors on Supplementary Information

               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.

     (b)  Reports on Form 8-K:

          The Company  filed a current  Report on Form 8-K,  dated  November 27,
2001, announcing that Elcom Systems, Limited, its U.K. eBusiness subsidiary, had
been selected by the Scottish  Executive to provide an  eProcurement  system for
the Scottish government's departments and agencies with Cap Gemini Ernst & Young
selected as the primary contractor.

          The Company filed a current  Report on 8-K,  dated  November 30, 2001,
announcing  the  Company had entered  into a heads of  agreement  with a company
(formed by AJJP Limited), the management team of its U.K. information technology
products  subsidiary,  Elcom  Holdings  Limited,  to sell its  U.K.  information
technology remarketer business.

     (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.

                                       22
<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, 2002                 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, 2002
 Robert J. Crowell              Board of Directors
                                and Chief Executive Officer
                                (Principal Executive Officer)

 /s/  Peter A. Rendall          Corporate Executive              March 29, 2002
 Peter A. Rendall               Vice President,
                                Chief Financial Officer
                                and Secretary (Principal Financial
                                and Accounting Officer)

 /s/  William W. Smith          Vice Chairman and Director       March 29, 2002
 William W. Smith


 /s/  Richard J. Harries, Jr.   Director                         March 29, 2002
 Richard J. Harries, Jr.


 /s/  John W. Ortiz             Director                         March 29, 2002
 John W. Ortiz

                                       23


<PAGE>

                       CONSOLIDATED FINANCIAL STATEMENTS

                   ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 2001


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

                                                                    Page
                                                                    ____
Independent Auditors' Report                                         F-2
Consolidated Balance Sheets as of December 31, 2000 and 2001         F-3
Consolidated Statements of Operations and Other Comprehensive
    Income (Loss) for the years ended December 31, 1999, 2000
    and 2001                                                         F-4
Consolidated Statements of Stockholders' Equity for the years ended
    December 31, 1999, 2000 and 2001                                 F-5
Consolidated Statements of Cash Flows for the years ended December
    31, 1999, 2000 and 2001                                          F-6
Notes to Consolidated Financial Statements                           F-7 to F-24

                                      F-1
<PAGE>

                          Independent Auditors' Report





To the Board of Directors and Shareholders of
Elcom International, Inc.:

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Elcom
International,  Inc. and  subsidiaries as of December 31, 2000 and 2001, and the
related  consolidated  statements of operations and other  comprehensive  income
(loss),  stockholders'  equity,  and cash  flows  for  each of the  years in the
three-year  period  ended  December  31,  2001.  These  consolidated   financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  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  provide  a
reasonable basis for our opinion.

In our opinion, 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, 2000 and 2001, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 2001, in conformity  with  accounting  principles  generally
accepted in the United States of America.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern.  As discussed in Note 1(a) to
the consolidated financial statements, the Company has suffered recurring losses
from  operations and has an  accumulated  deficit that raise  substantial  doubt
about its ability to continue as a going concern.  Management's  plans in regard
to these matters are also  described in Note 1(a).  The  consolidated  financial
statements do not include any adjustments  that might result from the outcome of
this uncertainty.

As discussed in Note 1(i) to the consolidated financial statements,  the Company
changed its method of  accounting  for the  impairment or disposal of long-lived
assets.



/s/ KPMG LLP

KPMG LLP

Boston, Massachusetts
March 29, 2002

                                      F-2
<PAGE>

                           ELCOM INTERNATIONAL, INC.
                                AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)



                                                             December 31,
                                                           2000         2001
                                                        ----------   ----------
                       ASSETS
CURRENT ASSETS:
    Cash and cash equivalents (including restricted
        cash of $15,000 and $125 at December 31, 2000
        and 2001, respectively)                         $   23,250   $   10,813
                                                        ----------   ----------
    Accounts receivable (Notes 2 and 5):
        Trade                                               26,466        3,783
        Other                                                4,715          374
                                                        ----------   ----------
                                                            31,181        4,157
        Less-Allowance for doubtful accounts                 1,856          317
                                                        ----------   ----------
            Accounts receivable, net                        29,325        3,840
    Inventory (Note 5)                                       1,276            3
    Prepaids and other current assets                        1,724          459
    Current assets of discontinued operations
        (including cash of $9,063 at December 31,
        2000) (Note 9)                                      25,104           --
                                                        ----------   ----------
        Total current assets                                80,679       15,115
                                                        ----------   ----------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
    Computer hardware and software                          28,365       27,868
    Land, buildings and leasehold improvements               2,132        2,125
    Furniture, fixtures and equipment                        6,245        5,941
                                                        ----------   ----------
                                                            36,742       35,934
    Less -- Accumulated depreciation and amortization       24,698       29,706
                                                        ----------   ----------
                                                            12,044        6,228

OTHER ASSETS                                                   372          209
    NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS
        (Note 9)                                             2,109           --
                                                        ----------   ----------
                                                        $   95,204   $   21,552
                                                        ==========   ==========
         LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
    Lines of credit (Note 5)                            $   22,141   $       --
    Accounts payable                                         2,974        3,374
    Accrued expenses and other current liabilities           7,283        6,131
    Current portion of capital lease obligations
        (Note 8)                                               474          502
    Short-term debt (Note 6)                                   647           --
    Current liabilities of discontinued operations
        (including lines of credit of $11,100 at
        December 31, 2000) (Note 9)                         30,271           --
                                                        ----------   ----------
        Total current liabilities                           63,790       10,007
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION
    (Note 8)                                                   813          311
                                                        ----------   ----------
        Total liabilities                                   64,603       10,318
                                                        ----------   ----------

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS' EQUITY (Note 7):
    Preferred stock, $.01 par value; Authorized
        -- 10,000,000 shares -- Issued and
        outstanding - none                                      --           --
    Common stock, $.01 par value; Authorized --
        50,000,000 and 100,000,000 shares --
        issued -- 31,207,477 and 31,406,796 shares             312          314
    Additional paid-in capital                             114,196      114,514
    Accumulated earnings (deficit)                         (78,484)     (98,363)
    Treasury stock, at cost -- 409,609 and
        530,709 shares                                      (4,552)      (4,712)
    Accumulated other comprehensive income (loss)             (871)        (519)
                                                        ----------   ----------
        Total stockholders' equity                          30,601       11,234
                                                        ----------   ----------
                                                        $   95,204   $   21,552
                                                        ==========   ==========


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

                                      F-3

<PAGE>

                           ELCOM INTERNATIONAL, INC.
                                AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     AND OTHER COMPREHENSIVE INCOME (LOSS)
                     (in thousands, except per share data)



<TABLE>
<CAPTION>

                                                                             For the years ended December 31,
                                                                               1999          2000        2001
                                                                           ------------   ----------   ---------
Net sales:
<S>                                                                        <C>            <C>          <C>
    Product related sales                                                  $    410,886   $  234,885   $  54,355
    License sales                                                                   865        1,112       4,277
    Transaction fees                                                                 --           --       3,589
                                                                           ------------   ----------   ---------

Total net sales                                                                 411,751      235,997      62,221
                                                                           ------------   ----------   ---------

Cost of sales
    Product related sales                                                       376,355      213,954      45,917
    License sales                                                                    --           12       1,214
                                                                           ------------   ----------   ---------
Total cost of sales                                                             376,355      213,966      47,131
                                                                           ------------   ----------   ---------
Gross profit                                                                     35,396       22,031      15,090
                                                                           ------------   ----------   ---------

Operating Expenses:
    Selling, general and administrative                                          52,885       42,719      36,633
    Research and development                                                      1,343        1,695       1,089
    Asset impairment, restructuring and other related charges (Note 10)          10,057           --       1,776
                                                                           ------------   ----------   ---------
Total operating expenses                                                         64,285       44,414      39,498
                                                                           ------------   ----------   ---------
Operating profit (loss)                                                         (28,889)     (22,383)    (24,408)

Interest expense                                                                 (2,766)      (1,334)       (296)
Interest income and other, net                                                      623        2,369         145
                                                                           ------------   ----------   ---------
Income (loss) before income taxes                                               (31,032)     (21,348)    (24,559)
Income tax expense (benefit) (Note 12)                                             (965)        (642)         --
                                                                           ------------   ----------   ---------

Net income (loss) from continuing operations                                    (30,067)     (20,706)    (24,559)
Discontinued operations (Note 9):
    Net income (loss) from discontinued operations, net of tax                  (12,471)         952       1,942
    Gain (loss) on disposal of discontinued operations, net of tax                   --           --       2,738
                                                                           ------------   ----------   ---------

Net income (loss)                                                               (42,538)     (19,754)    (19,879)
Comprehensive loss, net of tax:                                                    (307)      (1,409)        352
                                                                           ------------   ----------   ---------

Other comprehensive income (loss)                                          $    (42,845)  $  (21,163)  $ (19,527)
                                                                           ============   ==========   =========

Basic and diluted net income (loss) per share data:
    Continuing operations                                                  $      (1.08)  $    (0.68)  $   (0.79)
    Discontinued operations                                                       (0.45)         0.03       0.06
    Disposal of discontinued operations                                              --            --       0.09
                                                                           ------------   ----------   ---------
        Basic and diluted net loss per share                               $      (1.53)  $     (0.65) $   (0.64)
                                                                           ============   ==========   =========

    Weighted average number of basic and diluted shares outstanding              27,846        30,487     30,912
                                                                           ============   ==========   =========
</TABLE>


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

                                      F-4

<PAGE>
<TABLE>
<CAPTION>

                                                     ELCOM INTERNATIONAL, INC.
                                                         AND SUBSIDIARIES

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




                                              Common Stock                                               Accumulated
                                         ----------------------   Additional  Accumulated    Treasury       Other         Total
                                          Number      $.01 Par     Paid-in      Earnings       Stock,   Comprehensive  Stockholders'
                                         of Shares      Value      Capital     (Deficit)      At Cost    Income (Loss)    Equity
                                         ----------   ---------  -----------  ------------  -----------  -------------  ----------
<S>                                      <C>         <C>        <C>           <C>           <C>          <C>            <C>
BALANCE, DECEMBER 31, 1998               27,547,061  $      275 $    101,271  $    (16,192) $   (1,182)  $         845  $   85,017
    Exercise of common stock options      1,581,524          16        4,840            --          --              --       4,856
    Purchase of treasury stock                   --          --           --            --        (100)             --        (100)
    Net loss                                     --          --           --       (42,538)         --              --     (42,538)
    Cumulative translation adjustment            --          --           --            --          --            (307)       (307)
                                         ----------   ---------  -----------  ------------  -----------  -------------  ----------

BALANCE, DECEMBER 31, 1999               29,128,585   $     291 $    106,111  $    (58,730) $   (1,282)  $         538  $   46,928
    Exercise of common stock options      2,017,940          20        8,618            --          --              --       8,638
    Sale of common stock                     60,952           1          319            --          --              --         320
    Cost of capital                              --          --         (852)           --          --              --        (852)
    Purchase of treasury stock                   --          --           --            --      (3,270)             --      (3,270)
    Net loss                                     --          --           --       (19,754)         --              --     (19,754)
    Cumulative translation adjustment            --          --           --            --          --          (1,409)     (1,409)
                                         ----------   ---------  -----------  ------------  -----------  -------------  ----------

BALANCE, DECEMBER 31, 2000               31,207,477        $312 $    114,196  $    (78,484) $    (4,552) $        (871) $   30,601
    Exercise of common stock options        199,319           2          318            --           --             --         320
    Purchase of treasury stock                 (160          --           --            --           --             --        (160)
    Net loss                                     --          --           --       (19,879)          --             --     (19,879)
    Cumulative translation adjustment            --          --           --            --           --            352         352
                                         ----------   ---------  -----------  ------------  -----------  -------------  ----------
BALANCE, DECEMBER 31, 2001               31,406,796   $     314 $    114,514  $    (98,363) $    (4,712) $        (519) $   11,234
                                         ==========   ========= ============  ============  ===========  =============  ==========

</TABLE>

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

                                    F-5
<PAGE>

                           ELCOM INTERNATIONAL, INC.
                                AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                For the years ended December 31,
                                                                 1999          2000        2001
                                                              ----------    ---------    ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                           <C>           <C>          <C>
Net loss from continuing operations                           $  (30,067)   $ (20,706)   $ (24,559)
Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities --
    Depreciation and amortization                                 14,327        5,145        5,728
    Restructuring, impairment and other related charges           10,057           --        1,776
    Provision for (recovery of) doubtful accounts                  4,626          395       (1,369)
    Loss (gain) on sale of fixed assets                               --         (786)         121
  Changes in current assets and liabilities:
    Accounts receivable                                          103,668        6,783       26,150
    Inventory                                                     34,394         (607)       1,274
    Prepaids and other current assets                              1,888       (1,006)         600
    Accounts payable                                             (32,888)      (1,322)       1,104
    Accrued expenses and other current liabilities               (12,164)       1,422       (1,716)
    Decrease in other deferred liabilities                        (1,396)         523           --
                                                              ----------    ---------    ---------
        Net cash provided by (used in) continuing operations      92,445      (10,159)       9,109
                                                              ----------    ---------    ---------
        Net cash provided by discontinued operations               2,235        8,612        4,812
                                                              ----------    ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property, equipment and software                    (1,102)      (7,413)      (1,046)
  Proceeds from sale of assets                                        --          795           --
  Decrease in other assets and deferred costs                        194          365           27
      Net cash used in investing activities                         (908)      (6,253)      (1,019)
      Net cash used in discontinued operations                    (4,186)      (1,028)        (521)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net payments under lines of credit                             (70,948)      (1,684)     (22,141)
  Proceeds from issuance of short-term debt                           --        1,448           --
  Sale of common stock                                                --          320           --
  Repayment of capital lease obligations and debt                   (971)      (1,176)      (1,120)
  Exercise of common stock options                                 4,856        8,488          320
  Cost of equity line financing agreement                             --         (852)          --
  Purchase of treasury stock                                        (100)      (3,270)        (160)
                                                              ----------    ---------    ---------
      Net cash provided by (used in) financing activities        (67,163)       3,274      (23,101)
                                                              ----------    ---------    ---------
      Net cash provided by (used in) discontinued operations      (2,575)       5,677      (10,706)
                                                              ----------    ---------    ---------

FOREIGN EXCHANGE EFFECT ON CASH                                       (4)      (1,969)         (74)
                                                              ----------    ---------    ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              19,844       (1,846)     (21,500)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                    14,315       34,159       32,313
                                                              ----------    ---------    ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD                      $   34,159    $  32,313    $  10,813
                                                              ==========    =========    =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest paid                                               $    3,420    $   1,596    $     642
                                                              ==========    =========    =========
  Income taxes paid                                           $      258    $     165    $      82
                                                              ==========    =========    =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
  INVESTING AND FINANCING ACTIVITIES:
  Increase in capital lease obligations                       $      480    $   1,091    $      --
                                                              ==========    =========    =========

  Disposition of Assets:
     Cash proceeds from sale of assets in U.K.                $   18,805                 $       1
     U.K. net book value of assets sold                          (18,805)                   (3,039)
                                                              ----------                 ---------
                                                              $      --                  $  (3,038)
                                                              ==========                 =========

</TABLE>

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

                                      F-6
<PAGE>

                           ELCOM INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)  Business

          Overview

     On March 29, 2002, Elcom International, Inc. (the "Company") announced that
it was  divesting  itself of certain  assets  associated  with its United States
("U.S.")  computer-oriented  information technology products ("IT Products") and
services business to ePlus Technology,  Inc. ("ePlus"). See Note (16). This will
allow the  Company  to  transition  to a leading  provider  of  remotely-hosted,
electronic    procurement    ("eProcurement")    and   electronic    marketplace
("eMarketplace")  Internet  software  solutions  (collectively,  the "Technology
Business"). Because of this divestiture, and in conjunction with the sale of the
Company's United Kingdom ("U.K.") IT Products  business on December 31, 2001, as
described more fully in Note 9,  commencing with the second quarter of 2002, the
Company  will not record any  revenues  arising from the sale of IT Products and
associated services.  Subsequent to the sale to ePlus, the Company's sole source
of revenue will be from  eProcurement and eMarketplace  solutions and associated
professional  services.  As of December 31,  2001,  the  consolidated  financial
statements  present the U.K. IT Products  business as a discontinued  operation,
and since no decision  had been made to divest the U.S. IT Products and services
business at that time, that business is presented as a continuing operation.  As
provided by applicable  accounting  conventions,  future consolidated  financial
statements  will  present  all of the IT  Products  and  services  business as a
discontinued operation.

     As it  relates to the  Company's  principal  business  going  forward,  the
Company  will  continue  to develop and  license  remotely-hosted,  self-service
eProcurement and eMarketplace,  Internet and intranet-based  purchasing systems.
The Company intends to augment its core eProcurement  Marketplace solutions with
other  licensed  supply   chain-oriented   systems  to  enable  the  conduct  of
interactive  supply chain  automation  for  businesses.  The Company has already
licensed a dynamic trading system platform to provide auction,  reverse auction,
and other electronic negotiation functions.  Since its inception in 1992, elcom,
inc., the Company's eBusiness technology subsidiary, has developed its PECOS(TM)
(Professional Electronic Commerce Online System) technology.  This technology is
licensed  to  companies  to enable  them to  communicate,  market,  buy and sell
various goods and services  electronically  over the Internet or through private
networks and eMarketplaces.

     Historically,  the Company has purchased IT Products from  distributors and
directly from certain manufacturers and, as an authorized remarketer of those IT
Products,  resold them to commercial customers.  Since the Company took title to
those purchased IT Products,  and assumed the risks of ownership associated with
inventory and accounts  receivable,  the Company recorded gross revenues on each
sale  transaction.  In January 2001, the Company announced that it had signed an
agreement to outsource its IT Product fulfillment,  logistics, configuration and
distribution  in the U.S. to TD Fulfillment  Services,  L.L.C.,  a subsidiary of
Tech Data Corporation ("Tech Data"), one of the world's largest  distributors of
computer-oriented  IT Products.  This  allowed the Company to hold  virtually no
inventory and substantially  reduce its IT Product-related  accounts receivables
in the U.S. thereby  significantly  reducing inventory risks and working capital
requirements.   As  a  sales  agent  for  Tech  Data,   the   Company   received
transaction-oriented  fees,  which were related to the gross profit generated on
each sale transaction.  The first live orders processed through this outsourcing
arrangement  were recorded in February 2001 and the  transition was completed in
July 2001.  The U.K. IT Products  remarketer  business  was not affected by this
arrangement and continued to own inventory,  record gross revenues on IT Product
sales and collect customer receivables up until the time it was sold on December
31, 2001, as described more fully herein. See Note (9).

          Liquidity

     As of December 31, 2001,  the Company had  approximately  $10.8  million of
cash and cash equivalents and did not have any outstanding  debt.  However,  the
Company has incurred significant operating losses, has used cash

                                      F-7


<PAGE>

in operating activities and has an accumulated  deficit,  that raise substantial
doubt about the Company's  ability to continue as a going concern.  The ultimate
success  of  the  Company  is  dependent  on  developing  and  marketing  of its
Technology  Business solutions and securing adequate financing until the Company
is  operating  profitably.  The  Company  currently  anticipates  that  existing
resources  will  not be  sufficient  to  satisfy  contemplated  working  capital
requirements  for the next twelve  months.  To deal with liquidity  issues,  the
Company  plans  include the sale of  securities  and a reduction in workforce to
lower operating expenses.

     The Company's  ability to continue as a going concern is dependent upon its
ability to grow revenue,  attain further operating  efficiencies and attract new
sources of capital. The Company intends to seek additional capital,  which would
result in dilution for its shareholders.  However, the accompanying consolidated
financial  statements have been prepared assuming that the Company will continue
as a going concern and, as such, do not include any adjustments  that may result
from the outcome of these uncertainties.

(b)  Basis of Consolidation

     The accompanying  consolidated financial statements include the accounts of
the Company and its wholly owned  subsidiaries.  The  accounting  and  reporting
policies of the Company conform with accounting principles generally accepted in
the  United  States of  America.  All  material  intercompany  transactions  and
balances have been eliminated in consolidation. Certain amounts from prior years
have been restated to conform to the current presentation.

(c)  Cash and Cash Equivalents

     Cash and cash  equivalents  at December 31, 2000 consisted of $17.3 million
of deposits with banks and financial  institutions which were unrestricted as to
withdrawal or use and had original  maturities of three months or less, of which
$9.1 million are included in discontinued operations, together with a restricted
deposit of $15  million,  which  served as  collateral  for the letter of credit
issued to the Deutsche Financial Services Corporation. See Note 5. Cash and cash
equivalents  at December 31, 2001  consisted of $10.7  million of deposits  with
banks and financial  institutions which are unrestricted as to withdrawal or use
and have original  maturities  of three months,  together with $125,000 that was
pledged as collateral  for a letter of credit  issued in the ordinary  course of
business.  Interest  earned  on all cash and cash  equivalents  is  included  in
interest income and other, net in the Consolidated  Statements of Operations and
Other Comprehensive Income (Loss).

(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)  Use of Estimates

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  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.

     On an ongoing basis,  management  evaluates its estimates,  including those
related to the  allowance  for  doubtful  accounts,  the  income  tax  valuation
allowance  (See Note 1(l)),  and the  impairment of long-lived  assets (See Note
1(i)).  The Company  maintains  allowances  for doubtful  accounts for estimated
losses resulting from customers that fail to make required payments, however, an
additional  allowance may be required if actual results differ from  assumptions
made by  management.  In analyzing  the adequacy of the  allowance,  the Company
considers past experiences  with the customers and related payment history,  the
viability of the customers'  financial  condition,  and overall  historical loss
experience.  At a minimum , the Company  maintains  an  allowance  for  accounts
greater  than 90 days past due and an estimate for all other  accounts  based on
the results of the assumptions previously mentioned.

(f)  Prepaids and Other Current Assets

     The Company expenses the production costs of advertising the first time the
advertising  takes place. In 1999, a branding campaign was launched on behalf of
the  Company's  eProcurement  technology  product,  PECOS  Internet  Procurement
Manager.  Company  advertising  expenses  for 1999,  2000 and 2001  totaled $3.8
million, $1.9 million, and $0.7 million, respectively.

                                      F-8
<PAGE>


(g)  Property, Equipment and Software

     Equipment and software are  depreciated  and  amortized on a  straight-line
basis over the  estimated  useful  lives of the assets or lease term,  which are
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  useful life of the related  assets,
or related lease instrument.

     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 eighteen months to four years.

     In January 2000, the Emergency  Issues Task Force ("EITF") issued Issue No.
00-2,  "Accounting  for Web Site  Development  Costs."  Issue 00-2 requires that
planning  stage  costs  be  expensed  as  incurred,  costs to  develop  web site
application  and   infrastructure   and  graphics,   be  capitalized   once  the
capitalization  criteria of SOP 98-1 have been met and  operating  costs such as
training and  maintenance  be expensed as incurred.  The Company's  treatment of
such costs has historically  been consistent with SOP 98-1, with the capitalized
costs being  amortized  over the expected  useful life of the software,  ranging
from eighteen months to four years.

     Expenditures for the research and development of the Company's  products to
be marketed are expensed as incurred,  except for certain  software  development
costs. Specifically,  costs associated with the development of computer software
are expensed as incurred prior to the establishment of technological feasibility
(as defined by  Statement  of Financial  Accounting  Standards  ("SFAS") No. 86,
Accounting  for the Costs of Computer  Software to Be Sold,  Leased or Otherwise
Marketed).  Costs  incurred  subsequent to the  establishment  of  technological
feasibility  and prior to the general  release of the products are  capitalized.
The Company capitalized software development costs of $0, $470,000, and $422,000
during the years ended December 31, 1999, 2000 and 2001, respectively.

(h)  Goodwill and Other Intangibles

     The excess of the purchase price over the fair value of net assets acquired
in each  acquisition  accounted  for under the purchase  method of accounting is
classified as goodwill.  Goodwill was being amortized on a  straight-line  basis
over an estimated useful life of 15 years.  Other intangible  assets  associated
with the acquisitions  were assigned a five-year life.  Amortization of goodwill
and such other intangibles  amounted to $701,000 for the year ended December 31,
1999.

(i)  Impairment of Long Lived Assets

     On October 3, 2001, the FASB issued SFAS 144, Accounting for the Impairment
or  Disposal of Long- Lived  Assets  ("SFAS  144"),  which  addresses  financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes  FASB Statement  No.121,  Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. SFAS 144 retains many of the
fundamental  provisions of SFAS 121. SFAS 144 also supersedes the accounting and
reporting  provisions of Accounting  Principles  Board Opinion No. 30, Reporting
the Results of  Operations--Reporting  the Effects of Disposal of a Segment of a
Business,  and  Extraordinary,  Unusual and  Infrequently  Occurring  Events and
Transactions  ("ABP 30"), for the disposal of a segment of a business.  However,
it  retains  the  requirement  in  APB  30  to  report  separately  discontinued
operations  and extends  that  reporting to a component of an entity that either
has been disposed of (by sale,  abandonment,  or in a distribution to owners) or
is classified as held for sale. SFAS 144 is effective for fiscal years beginning
after  December 15, 2001 and interim  periods  within those  fiscal  years.  The
Company  has elected to  early-adopt  the  statement  as of January 1, 2001 and,
therefore,  has  presented  the  sale  of  the  U.K.  remarketer  business  as a
discontinued operation for all periods presented.

     The Company  evaluates for impairment its long-lived  assets to be held and
used or to be  disposed  of other  than by sale  whenever  events or  changes in
circumstances  indicate  that the  carrying  amount  of such  assets  may not be
recoverable.  Recoverability  of  assets  to be held and used is  measured  by a
comparison of the carrying amount of any asset to future  undiscounted  net cash
flows

                                      F-9

<PAGE>

expected to be generated by the asset.  The  Company's  cash flow  estimates are
made for the  remaining  useful  life of the assets and are based on  historical
results  adjusted to reflect the best  estimate of future  market and  operating
conditions.  If such assets are considered to be impaired,  the impairment to be
recognized is measured by the amount by which the carrying amounts of the assets
exceed the fair  value of the  assets.  The  Company's  estimates  of fair value
represent  the best  estimate  based on  industry  trends and  market  rates and
transactions.  Assets to be disposed of by sale are reported at the lower of the
carrying  amount or fair  value,  less  costs to sell and  depreciation  of such
assets ceases.

(j)  Revenue Recognition

     (i)  IT Product Sales The Company derives  substantially all of its revenue
          from sales of personal computer products,  peripherals and accessories
          (collectively "IT Products").  Revenue from IT Product sales where the
          Company  purchases the IT Product and sells  directly to a customer is
          recognized upon shipment to the customer,  provided the title and risk
          of loss have passed to the customer.  The Company records revenue from
          shipping in net sales and the associated  costs in cost of sales.  The
          Company  records  revenue on a gross  basis,  as the  Company  acts as
          principal in the transaction, takes title to the products, and has the
          risks  and  rewards  of  ownership,  such  as the  risk  of  loss  for
          collection,  delivery and returns.

     (ii) License Sales
          In  accordance  with the  provisions  of SOP  97-2,  Software  Revenue
          Recognition,  as amended by SOP 98-9, the Company recognizes  revenues
          from  software  product  licenses  when  (i)  a  signed  noncancelable
          software  license  exists,  (ii)  delivery  has  occurred,  (iii)  the
          Company's fee is fixed or  determinable,  and (iv)  collectibility  is
          probable.  However,  if the  license  agreement  contains  performance
          conditions,   the  revenue  is  recognized  upon  completion  of  such
          conditions.

          In the case of multiple-element software arrangements, vendor specific
          objective  evidence is used to allocate the total fees to all elements
          of the arrangement.  Vendor- specific  objective  evidence is based on
          the price charged when an element is sold  separately  or, in the case
          of an  element  not yet sold  separately,  the  price  established  by
          authorized  management,  if  it  is  probable  that  the  price,  once
          established,  will not change  before  market  introduction.  Elements
          included in  multiple-element  software  arrangements could consist of
          software products, maintenance, consulting and training services.

          The Company sells both an enterprise and non-enterprise (hosted) model
          of PECOS software.  In accordance with EITF Issue 00-03,  "Application
          of AICPA  Statement of Position 97-2,  Software  Revenue  Recognition,
          Arrangements  That Include the Right to Use Software Stored on Another
          Entity's  Hardware,"  in  order  for  revenue  to be  recognized,  the
          customer  must have the  contractual  right to take  possession of the
          software  at any time during the hosting  period  without  significant
          penalty  and it must be  feasible  for the  customer to either run the
          software on its own or contract  with another  party  unrelated to the
          vendor to host the  software.  The  Company's  treatment  of  software
          license  revenue  where the  software  is hosted  by the  Company  has
          historically been consistent with EITF Issue 00-03.

          In addition to license fees, the Company also recognizes user fees and
          maintenance fees from sales of its software  products.  These fees are
          recognized  ratably over the terms of the related service  period.  To
          date, license revenue has not been material to the Company's revenues.

     (iii) Transaction Fees

          For IT Product sold under the Tech Data  outsourcing  agreement,  Tech
          Data recognizes IT Product revenues and owns and manages inventory and
          customer  receivables  for  substantially  all of the  Company's  U.S.
          customers. The Company receives transaction fees based on a percentage
          of the gross profit generated as an agent on each sale and records the
          revenue when Tech Data ships the IT Product to the customer.

                                  F-10
<PAGE>

     (iv) Consulting
          Professional  services  are  rendered  pursuant to time and  materials
          based  contracts  and  revenue is  recognized  when the  services  are
          provided.  To date,  consulting  revenue has not been  material to the
          Company's  operations,  and  is  included  in  Product  Sales  in  the
          Statement of Operations.

(k)  Foreign Currency Translation

     The accounts of the Company's indirect U.K. subsidiaries and branch offices
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 and reported as part
of  other  comprehensive  income  in  the  statement  of  operations  and  other
comprehensive income (loss).

(l)  Income Taxes

     The Company  provides  for income  taxes in  accordance  with SFAS No. 109,
Accounting for Income Taxes.  Under the asset and liability  method specified by
SFAS No.  109, a deferred  tax asset or  liability  is  determined  based on the
difference  between the financial  statement carrying amounts of existing assets
and  liabilities  and their  respective  tax  bases.  Deferred  tax  assets  and
liabilities  are  measured  using the  enacted  tax rates in effect  when  these
differences  are  expected to be secured or settled.  The effect on the deferred
tax assets and  liabilities  of a change in tax rates is recognized in income in
the period that includes the enactment date.

     The Company records a valuation allowance to reduce its deferred tax assets
to the  amount  that  is more  likely  than  not to be  realized.  Based  on the
Company's  recent losses and belief that losses will continue  throughout  2002,
the Company has recorded a valuation allowance equal to 100% of its net deferred
tax assets.  In the event the Company were to determine that it would be able to
realize its deferred tax assets in the future,  an  adjustment  to the valuation
allowance would increase income in the period such determination was made.

(m)  Stock-Based Compensation

     The Company applies SFAS No. 123, Accounting for Stock-Based  Compensation,
which requires  entities o recognize as expense over the vesting period the fair
value of  stock-based  awards  on the date of grant  or  measurement  date.  For
employee stock-based awards,  however,  SFAS No. 123 allows entities to continue
to apply the provisions of Accounting  Principles  Board ("APB")  Opinion No. 25
and provide pro forma net earnings disclosures as if the fair-value-based method
defined in SFAS No. 123 had been  applied.  The Company has elected to apply the
provisions of APB Opinion No. 25 and provide the pro forma  disclosures  of SFAS
No. 123.

     The Company accounts for non-employee  stock-based awards in which goods or
services are the consideration  received for the equity instruments issued based
on the fair value of the consideration  received or the grant date fair value of
the equity instruments issued, whichever is more reliably measurable.

(n)  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.  Basic EPS
excludes  dilution and is computed by dividing income (loss) available to common
stockholders by the weighted average number of common shares  outstanding during
the period.  Diluted EPS gives effect to all potential common shares outstanding
during the period.  As the Company  was in a net loss  position  for all periods
presented,  diluted  EPS is the same as basic  EPS  because  the  effect  at any
potential common stock equivalents would be antidilutive.

(o)  Fair Value of Financial Instruments

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

                                      F-11

<PAGE>

(p)  Comprehensive Income

     SFAS No. 130, Reporting  Comprehensive  Income,  establishes  standards for
reporting and displaying comprehensive income and its components.  The Company's
comprehensive  income  consists  of  net  income  (loss)  and  foreign  currency
translation adjustments.

(q)  Segment Reporting

     The  Company  applies  SFAS  No.  131,  Disclosures  about  Segments  of an
Enterprise  and  Related  Information,   which  establishes  standards  for  the
reporting  of  information  about  operating  segments  in  annual  and  interim
financial  statements.  Operating  segments  are  defined  as  components  of an
enterprise  for  which  separate  financial  information  is  available  that is
evaluated  regularly by the chief operating decision maker(s) in deciding how to
allocate  resources  and in assessing  performance.  SFAS No. 131 also  requires
disclosures about products and services, geographic areas and major clients.

(r)  Recent Pronouncements

     On July 20, 2001, the Financial  Accounting Standards Board ("FASB") issued
Statements No. 141,  Business  Combinations,  ("SFAS 141") and No. 142, Goodwill
and Other  Intangible  Assets,  ("SFAS  142").  SFAS 141  requires  all business
combinations  initiated  after  June 30,  2001 to be  accounted  for  using  the
purchase method of accounting. Poolings of interest transactions initiated prior
to June 30, 2001 are grandfathered.  SFAS 141 also requires, among other things,
separate  recognition of intangible assets apart from goodwill only if they meet
certain criteria.

     SFAS 142  replaces  the  requirement  to  amortize  intangible  assets with
indefinite lives and goodwill with a requirement for an annual  impairment test.
Upon  adoption,  SFAS 142 also requires an  evaluation of intangible  assets and
their useful lives and a transitional  impairment  test for goodwill and certain
intangible  assets. A company must adopt SFAS 142 at the beginning of the fiscal
year. Thus, as a calendar year-end  company,  the Company must have adopted SFAS
142 no later than January 1, 2002. The adoption of SFAS 141 and 142 did not have
a material  impact on the results of  operations  or  financial  position of the
Company.

(2)  ACCOUNTS RECEIVABLE

     Other accounts  receivable  consists  primarily of receivables from vendors
and manufacturers relative to returned goods and manufacturers' rebates.

(3)  ACCRUED EXPENSES

     At December 31, 2000,  accrued  expenses  included $2.5 million  related to
salaries,  wages and employee  benefits.  At December 31, 2001, accrued expenses
included  $1.6  million  related to salary,  wages and  benefits,  $0.7  million
related to the cost of services  provided,  $0.6 million related to taxes,  $0.6
million  related to financial  consulting,  and $0.8  million for accrued  lease
facilities.

(4)  EMPLOYEE BENEFITS

     The Company  maintains  two defined  contribution  benefit  plans,  one for
eligible  employees in the U.S.  and one for eligible  employees in the U.K. The
plans  contain  provisions  allowing for  discretionary  Company  contributions.
Discretionary  Company  contributions to the U.K. defined  contribution plan, of
which participating  employees are 100% vested, for the years ended December 31,
1999,  2000,  and 2001 were  $56,000,  $25,000  and  $42,000,  respectively.  No
discretionary  Company  contributions were made to the U.S. defined contribution
plan for any of the periods presented.  The Company has no material  obligations
for post retirement benefits.

(5)  LINES OF CREDIT

     At December 31, 2001, the Company's principal sources of liquidity included
cash and cash equivalents of $10.8 million.  Cash and cash  equivalents  include
$125,000  that was pledged as  collateral  for a Letter of Credit  issued in the
ordinary  course of  business.  At December 31, 2000,  the  Company's  principal
sources of liquidity

                                      F-12

<PAGE>

included cash and cash equivalents of $32.3 million and accounts  receivable and
floor plan lines of credit from Deutsche Financial Services Corporation ("DFSC")
with outstanding borrowings of $33.2 million in the U.S. and U.K..

     The interest  rate on the U.S. DFSC facility at December 31, 2000 was prime
(9.5%)  plus  0.25%.  Availability  of  U.S.  borrowings  was  based  on  DFSC's
determination as to eligible accounts  receivable and inventory.  As of December
31, 2000,  the  Company's  borrowings  from DFSC on its U.S.  floor plan line of
credit were $22.1 million. The U.S. DFSC line of credit was secured primarily by
a $15 million letter of credit and by the Company's U.S.  inventory and accounts
receivable,  although  substantially all of the Company's other U.S. assets also
were pledged as collateral on the facility.  The letter of credit was secured by
a pledge of $15 million of cash and cash equivalents.

     In  January  2001,  the  Company  outsourced  its IT  Product  fulfillment,
distribution,  inventory,  logistics,  and product  configuration in the U.S. to
Tech  Data.  As a  result  of this  agreement,  the  Company's  working  capital
requirements   for   inventory   and  accounts   receivable  in  the  U.S.  were
substantially reduced.  Accordingly,  the Company notified DFSC of its intent to
terminate  its DFSC line of credit in the  U.S.,  and the  Company  paid off its
entire balance with DFSC. The Company's letter of credit of $15 million that was
secured  against a portion of the DFSC facility also expired,  and the pledge of
$15 million of cash became unrestricted.

     During  2001,  the Company  refinanced  its DFSC line of credit in the U.K.
with  Lloyds TBS  Commercial  Finance  Limited  ("Lloyds").  The  Lloyds  credit
facility  provided for  aggregate  borrowings of up to  (pound)10.0  million (or
approximately  $14.4  million) in the U.K.  Availability  was based upon Lloyd's
determination of eligibility based on accounts  receivable.  Amounts outstanding
bore interest at the base rate of Lloyds plus 1.5%.

     On December 31, 2001, the Company sold  substantially all of the assets and
liabilities  of the Company's  U.K.  information  technology  reseller  business
conducted by its  subsidiary,  Holdings,  to AJJP Limited,  a company  organized
under the laws of the U.K.,  pursuant to an agreement  between  Holdings,  Elcom
Information  Technology  Limited  ("EIT",  a subsidiary of the Company) and AJJP
Limited.  AJJP Limited has been recently formed by certain members of the former
management team of Holdings and changed its name to Elcom Information Technology
Limited ("EIT"). See Note 9. As a result of the sale, AJJP Limited assumed the
Lloyds credit facility. According to the terms of an agreement with Lloyds, AJJP
will be solely  entitled  to and solely  responsible  for the  discharge  of all
rights and  obligations  of EIT and Holdings  under the Lloyds credit  facility.
Lloyds  will  notify  the  Company  in  writing  as soon as all  debts  from any
obligations  arising prior to the sale have been  collected and all  obligations
referred to therein  discharged.  Since all  receivables  become  ineligible for
borrowing after 90 days, the Company anticipates receiving a notice of discharge
during the second quarter of 2002.

(6)  SHORT-TERM DEBT

     Short-term debt consisted of the following (in thousands):

                                                          December 31,
                                                       2000         2001
                                                    ----------   ----------
IBM Credit Corporation note for the purchase of
software at a rate of 13.8%, due August 30, 2001
monthly payments of $80 including interest          $      647   $        -
                                                    ==========   ==========

(7)  STOCKHOLDERS' EQUITY

(a)  Common Stock

     On December 19, 2001,  the Company's  stockholders  approved and adopted an
amendment to the Company's Second Restated Certificate of Incorporation in order
to increase the number of authorized  shares of the Company's  common stock, par
value $0.01 per share (the "Common Stock"),  from 50,000,000 to 100,000,000.  On
January 4, 2002, the Company filed a Certificate of Amendment to the Amended and
Restated  Certificate  of  Incorporation  amending the total number of shares of
authorized common stock to 100,000,000.


<PAGE>

                                      F-13
(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 seven stock option plans and
stockholders  have  approved  the  adoption of all such stock  option plans (the
"Option  Plans").  An eighth  stock  option  plan (the  "2002  Plan")  providing
1,800,000  options has been approved by the Board of Directors and will be voted
on by the stockholders at the 2002 Annual Meeting.  As of December 31, 2001, all
Option Plans  provided  that up to an aggregate of  18,600,000  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  on varying  dates,  as
determined by the  Compensation  Committee for each plan,  and have terms not to
exceed 10 years.  In  addition,  the 2001 Plan allows for the exercise of vested
options for a 180-day  period  commencing  on the date of employee  termination,
provided that the termination is without "cause".

     One of the Option Plans,  the 1995  Nonemployee  Director Stock Option Plan
(the "1995 Nonemployee  Director Plan") provides for up to 250,000  nonqualified
stock options to acquire the Company's  common stock to be 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 non-employee  directors are granted an additional  10,000  nonqualified
stock options  annually  thereafter,  while remaining on the Board of Directors.
The 1995  Nonemployee  Director  Plan  provides that options are granted at fair
market value on the date of grant, vest ratably over three years, and have terms
not to exceed 10 years.

     Information  relating to the Company  Option Plans  (including  convertible
shares  from the  elcom,  inc.  option  plan)  during  each of the  years in the
three-year period ended December 31, 2001 is as follows:

                                                   Weighted
                                    Number       Option Price      Average
                                   Of Shares        Per Share    Exercise Price
                                 ------------   ---------------  --------------
Outstanding, December 31, 1998      7,299,114   $   0.11 - 8.80   $        4.40
       Granted                      4,786,985      1.64 - 31.13            3.42
       Terminated                  (2,122,259)      1.28 - 7.69            4.30
       Exercised                   (1,581,524)      0.11 - 6.75            3.10
                                  ------------

Outstanding, December 31, 1999      8,382,316      0.11 - 31.13            4.08
       Granted                      5,152,147      1.17 - 24.06            3.72
       Terminated                    (960,120)     1.17 - 21.47            5.05
       Exercised                   (1,350,440)      0.11 - 8.00            4.06
                                 ------------

Outstanding, December 31, 2000     11,223,903      0.11 - 31.13            3.83
       Granted                      2,872,750       0.85 - 4.78            1.46
       Terminated                  (2,075,421)     1.13 - 31.13            3.71
       Exercised                     (199,319)      1.17 - 3.81            1.63
                                 ------------

Outstanding, December 31, 2001     11,821,913   $  0.11 - 24.06  $         3.32
                                 ============   ===============  ==============

Exercisable, December 31, 1999      3,640,392   $   0.11 - 8.80  $         4.60
                                 ============   ===============  ==============
Exercisable, December 31, 2000      3,759,034   $  0.11 - 31.13  $         4.17
                                 ============   ===============  ==============
Exercisable, December 31, 2001      6,878,007   $  0.11 - 24.06  $         3.19
                                 ============   ===============  ==============

                                      F-14

<PAGE>

     The following table summarizes  information about stock options  (including
convertible  options from the elcom,  inc. plan)  outstanding as of December 31,
2001:

<TABLE>
<CAPTION>
                                Options Outstanding                       Options Exercisable
                    ----------------------------------------------     ---------------------------
                                     Weighted           Weighted                       Weighted
                                      Average            Average                       Average
    Range of           Number        Remaining           Exercise        Number        Exercise
Exercise Prices     Outstanding   Contractual Life        Price        Exercisable      Price
-----------------   -----------   ----------------    ------------     -----------   ------------
<S> <C>              <C>                     <C>             <C>         <C>               <C>
$            0.11        76,169               1.15    $       0.11          76,169   $       0.11
             0.39        75,800               1.15            0.39          75,800           0.39
      0.85 - 1.23     2,605,160               9.02            1.06       1,976,010           1.12
      1.28 - 1.92     2,489,714               8.32            1.68       1,108,339           1.69
      1.95 - 2.76       126,800               6.62            2.46          18,575           2.27
      2.98 - 4.47     2,919,188               6.56            3.89       1,818,985           3.91
      4.50 - 6.75     3,067,942               7.40            5.15       1,477,592           5.27
      6.78 - 8.80       294,890               4.77            7.78         276,388           7.85
    12.63 - 15.63       140,250               8.02           13.13          46,249          12.97

    20.19 - 24.06        26,000               8.14           23.07           3,900          23.07
                    -----------                       ------------     -----------   ------------

                     11,821,913                       $       3.32       6,878,007   $       3.19
                    ===========                       ============     ===========   ============
</TABLE>


     As of  December  31,  2001,  14,100,759  shares of common  stock  have been
reserved for issuance under the Company's stock option plans.

     Had  compensation  cost  for  awards  under  the  Option  Plans  (including
convertible  shares from the elcom, inc. plan) been determined based on the fair
value method set forth in SFAS No. 123, the effect on the Company's net loss and
per share amounts would have been as follows:

                             1999            2000            2001
                         ------------    ------------    ------------
                             (in thousands, except per share data)
Net loss:
    As reported          $    (42,538)   $    (19,754)   $    (19,879)
    Pro forma            $    (45,530)   $    (24,626)   $    (25,139)
Net loss per share:
    As reported -
    basic and
    diluted              $      (1.53)   $      (0.65)   $      (0.64)
    Pro forma -
    basic and
    diluted              $      (1.64)   $      (0.81)   $      (0.81)

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

                              1999            2000           2001
                          ------------    ------------   ------------
Volatility                     113.71%         115.14%        118.67%
Risk-free interest rate          6.77%           4.98%          4.49%
Expected life of options       6 years         5 years        5 years
Expected dividend yield             0%              0%             0%

     The weighted  average fair value per share of options  granted during 1999,
2000 and 2001 were $2.92, $3.06 and $1.19, respectively.

     The  Company's  wholly-owned   technology  subsidiary,   elcom,  inc.  also
maintains a stock option plan (the  "elcom,  inc.  Plan")  pursuant to which two
million  shares of its common stock are reserved for issuance.  The elcom,  inc.
Plan has provisions  similar to the Option Plans discussed  above.  During 2000,
1,740,363  stock options were granted and 31,750 stock options were  terminated,
leaving a balance of 1,708,613  outstanding  at December 31, 2000.  During 2001,
106,000 stock  options were granted and 638,313  stock options were  terminated,
leaving a

                                      F-15
<PAGE>

balance of 1,176,300  outstanding  at December 31, 2001.  All stock options were
issued at $3.82 and none were  exercisable as of December 31, 2001. In addition,
for each elcom, inc. option granted,  the optionee receives 0.65 of an option of
the Company's common stock, all of which were included in the Company's SFAS 123
pro forma  calculation.  In the event the optionee  exercises this Company stock
option, the elcom, inc. stock options automatically terminate.

(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.  As of December 31, 2001,  82,500 of these warrants are  outstanding and
exercisable. The warrants expire in June 2005.

     On July 19, 1999,  the Company  announced  the  engagement of Wit Soundview
Group,  Inc. ("Wit  Soundview") as its investment bank and strategic advisor for
the purpose of assisting the Company in evaluating  strategic options for it and
for elcom, inc. The Company issued warrants to Wit Soundview to purchase 353,418
shares  of the  Company's  common  stock at $28.71  for each  common  share.  At
December 31, 2001, all of these warrants are  outstanding and  exercisable.  The
warrants  expire on December 30, 2002.  The fair market value of the warrants at
the date of the grant was $20.31 per share  based on the  volatility,  risk-free
rate and dividend yield noted above and an expected life of three years.

     On December 30, 1999, the Company signed a Structured  Equity Line Flexible
Financing  Agreement  (the "Equity  Line") with  Cripple  Creek  Securities,  an
investor  introduced to the Company by Wit  Soundview.  In September  2000,  the
Company sold 60,952  shares to Cripple Creek under the Equity Line for $320,000.
The Company  terminated  the Equity Line on November  29,  2001.  On December 3,
2001, the Company issued warrants to purchase 145,200 and 4,800 shares of Common
Stock to Cripple Creek. The warrants are exercisable,  have an exercise price of
$1.81 and $6.30,  respectively,  and expire on December 2, 2006. The fair market
value of the  warrants  at the date of the grant was $1.21 and $1.01 per  share,
respectively, based on the volatility, risk factor rate and dividend yield noted
above, and an expected life of five years.

(e)  Open Market Stock Purchases

     On September 17, 2001,  the Company  announced  that its Board of Directors
had  authorized  the  repurchase of up to 800,000 shares in the aggregate of the
Company's common stock.  During 2001, the Company  repurchased 121,100 shares of
its common stock on the open market at a cost of $160,000. Thereafter, purchases
may be made from  time to time in the open  market  or in  privately  negotiated
transactions  based  on  then-existing  market  conditions.   The  common  stock
purchased  will be used for  employee  stock option  grants and other  corporate
purposes.

(8)  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 $2,079,000  and  $1,545,000 and related  accumulated  amortization  of
$660,000  and  $732,000  as  of  December  31,  2000  and  2001,   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 6 months to twelve  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-16
<PAGE>


          Future minimum rental payments as of December 31, 2001 are as follows:

                                                        Capital      Operating
Year Ending December 31, (in thousands)                  Leases       Leases
--------------------------------------------------    ----------    ----------
2002 .............................................    $      567    $    1,999
2003 .............................................           327         1,768
2004 .............................................            --         1,331
2005 .............................................            --         1,259
2006 .............................................            --         1,017
Thereafter .......................................            --         1,422
Total minimum lease payments .....................           894         8,796
    Less - Amounts representing interest .........           (81)           --
    Less - minimum sublease income ...............            --        (2,896)
                                                      ----------    ----------
    Present value of net minimum lease
      Payments ...................................    $      813    $    5,900
                                                                    ==========
    Current portion ..............................          (502)
                                                      ----------
Long term portion ................................    $      311
                                                      ==========

     Rent expense for operating  leases for each year in the  three-year  period
ended December 31, 2001 amounted to approximately $1.9 million, $1.6 million and
$1.3 million, respectively.

     The Company has agreed to effectively  sublease certain U.K.  properties in
conjunction with the sale of the U.K. IT Products remarketing business.

(b)  Employment Contracts

     The Company has  employment  contracts with certain key  executives,  which
provide for annual salary, incentive payments, and 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 consolidated financial statements.

(9)  DISCONTINUED OPERATIONS

     On December 31, 2001, the Company sold  substantially all of the assets and
liabilities of the Company's United Kingdom  information  technology  remarketer
business conducted by its subsidiary,  Elcom Holdings Limited  ("Holdings"),  to
AJJP Limited,  a company  organized  under the laws of the U.K.,  pursuant to an
agreement between Holdings,  Elcom Information  Technology Limited (a subsidiary
of the  Company) and AJJP  Limited.  AJJP  Limited has been  recently  formed by
certain  members of the former  management  team of Holdings.  Immediately  upon
completion  of the sale,  AJJP  Limited  changed  its name to Elcom  Information
Technology Limited ("EIT") and the Company's subsidiaries changed their names.

     The assets acquired by EIT included  current assets,  fixed assets,  rights
under  certain  real  property  leases  (which were  assumed by EIT) and certain
contractual  rights  (collectively,  the  "Assets")  related  to the  resale  of
information technology products. EIT also assumed certain related liabilities of
Holdings,   including  a  bank  loan,  accounts  payable,  accrued  liabilities,
liabilities  related to employee  compensation  and  liabilities  under assigned
contracts  (collectively  with the Assets,  the  "Business").  In addition,  EIT
employed  substantially all of the former employees of Holdings.  The sale price
for the Business  consisted of the assumption of net  liabilities of Holdings by
EIT which,  as of December 31, 2001,  was  approximately  $3.0  million,  plus a
nominal payment to the Company,  made on December 31, 2001, of approximately one
dollar,  as a result  of which  the  Company  recorded  a  pre-tax  gain of $3.0
million. In addition, the Company may be entitled to further consideration based
on EIT's  performance in the first quarter of 2002,  which, if targets are fully
achieved,   could  result  in  additional   consideration   to  the  Company  of
approximately $550,000.

                                      F-17
<PAGE>


     In addition to the sale of the Business,  elcom,  inc.,  the Company's U.S.
technology company, sold to EIT the U.K. versions of PECOS.web and StarbuyerGold
software  technology  for use by EIT in the U.K. and Ireland in connection  with
the business.  elcom, inc. also licensed certain proprietary  software to EIT to
enable  EIT to  utilize  PECOS.web  and  StarbuyerGold.  As a  result  of  these
transactions,  EIT paid technology-related fees of approximately $2.9 million in
the  aggregate,  which have been recorded as license sales in the fourth quarter
of 2001. Other than as described  above,  and the  arrangements  described below
between  EIT  and  Elcom  Systems   Limited,   there  are  no  material  ongoing
relationships between the Company, EIT and Elcom Systems Limited.

     Elcom Systems  Limited,  an indirect U.K.  subsidiary of the Company,  will
continue to operate the Company's U.K. technology  business,  primarily focusing
on electronic  procurement in the commercial and government  sectors.  As of the
date of the sale,  Elcom Systems Limited entered into a services  agreement with
EIT in order to utilize space in one of EIT's  facilities,  have access to EIT's
IT network resources and outsource certain administrative functions to EIT.

     As  previously  discussed,  the Company  elected to  early-adopt  SFAS 144,
"Accounting  for the Impairment or Disposal of Long-Lived  Assets" as of January
1, 2001. The results of discontinued operations were as follows (in thousands):

                                                   1999       2000        2001
                                                ----------  ---------  ---------
Revenue                                         $   74,077  $  81,988  $  94,069
Net income (loss) from discontinued operations  $  (12,471) $     952  $   1,942
Gain on disposal of discontinued operations,
  net of tax provision of $0.3 million          $       --  $      --  $   2,738

     The assets and  liabilities  identified as part of the  disposition  of the
U.K.  remarketer  business  were  recorded  as  current  assets of  discontinued
operations,   non-current  assets  of  discontinued   operations,   and  current
liabilities  of  discontinued  operations;  the cash flows of this business were
reported as net cash  provided  by (used in)  discontinued  operations;  and the
results of operations  of this business were reported as loss from  discontinued
operations, net of tax.

     Current assets of  discontinued  operations  consisted of the following (in
thousands):

                                                                December 31,
                                                                    2000
                                                                 ----------
     Cash and cash equivalents                                   $    9,063
     Accounts receivable                                             14,866
     Inventory                                                          716
     Prepaids and other current assets                                  459
                                                                 $   25,104
                                                                 ==========

     Non-current  assets of discontinued  operations  consisted of the following
(in thousands):

                                                                December 31,
                                                                    2000
                                                                 ----------
     Property, plant and equipment                               $    2,109
                                                                 ==========

     Current liabilities of discontinued  operations  consisted of the following
(in thousands):

                                                                December 31,
                                                                    2000
                                                                 ----------
     Line of credit                                              $   11,100
     Accounts payable                                                17,263
     Accrued expenses and other current liabilities                   1,908
                                                                 ----------
                                                                 $   30,271
                                                                 ==========

                                      F-18


<PAGE>

(10) ASSET IMPAIRMENT, RESTRUCTURING AND OTHER RELATED CHARGES

     On July  31,  1999,  the  Company  completed  the  sale of the  substantial
majority  of its U.K.  remarketer  group  operations,  which  included  its U.K.
field-based  sales  operation,  its  professional  services  organization,   its
distribution  business,  and specified  inventory and fixed assets. The disposed
businesses  accounted for  approximately  75% of the Company's U.K. revenues and
67% of its U.K.  operating income in the seven-month  period ended July 31, 1999
(excluding the asset impairment  charge described  below).  The Company recorded
net sales related to its U.K. operations of $82 million in 2000 and $193 million
in 1999.  The Company  retained  its U.K.  telemarketing  group,  which  evolved
towards a business-to-business  Internet-based  storefront business,  similar to
Starbuyer.com,   the  U.S.-  based  Internet  business-to-business  IT  products
storefront  owned  and  operated  by elcom,  inc.,  the  Company's  wholly-owned
eBusiness subsidiary in the U.S. The Company sold this U.K. business on December
31, 2001. See Note 9.

     Based on the sale price of approximately $12 million  (excluding  inventory
sold of approximately  $6.8 million) and the Company's  estimates of incremental
liabilities associated with the sale transaction,  the Company recorded an asset
impairment  charge of $19.5 million in the second quarter of 1999 which included
a reduction of the carrying value of its U.K. assets to estimated net realizable
value and the accrual of approximately  $3.3 million  primarily related to lease
termination costs, severance and accounts receivable.  Additionally, expenses of
$3.1 million were recorded against gross profit to reflect  inventory  valuation
and returns  estimates.  The Company had $25.7 million of goodwill  reflected on
its balance sheet  associated with the  acquisitions of certain U.K.  businesses
which was impaired and  incorporated in the $19.5 million  charge.  In the third
and fourth quarters of 1999,  $2.2 million of costs  primarily  related to lease
termination, severance and accounts receivable were incurred and charged against
the $3.3 million accrual. During the first two quarters of 2000, $0.9 million of
the  remaining  accrual was  utilized  for costs  primarily  related to accounts
receivable.  The  remaining  balance of $0.2  million was utilized in the second
half of 2000 for costs  related to lease  termination.  As of December 31, 2000,
this accrual has been fully utilized as originally intended by the Company.

     The results of operations, cash flows, the asset impairment,  restructuring
and  other  charges  related  to the U.K.  remarketer  group  sold in 1999  were
included in continuing operations.

     Components of the restructuring charges recorded in 1999 and adjustments to
the charges were as follows (in thousands):

                              Balance      Amount                  Balance
                              December    Incurred   Adjustments   December
                              31, 1998      1999      to Charge    31, 1999
                             ----------  ----------  -----------  ----------
     Elcom Services Group
     Severance               $      720  $      557  $       163  $       --
     Goodwill                        --          --           --          --
     Other                          477         456           21          --
                             ----------  ----------  -----------  ----------
         Total               $    1,197  $    1,013  $       184  $       --
                             ==========  ==========  ===========  ==========

     elcom, inc
     Severance               $      764  $      764  $        --  $       --
     Intangible assets               --          --           --          --
     Other                          566         518           48          --
                             ----------  ----------  -----------  ----------
         Total               $    1,330  $    1,282  $        48  $       --
                             ----------  ----------  -----------  ----------
       Total                 $    2,527  $    2,295  $       232  $       --
                             ==========  ==========  ===========  ==========

        The excess accrual was reversed to the restructuring and other related
charges line on the statement of operations in 1999.

        In 2001, the Company recorded asset impairment charges of $1.8 million.
$1.6 million of this charge was related to the impairment of software acquired
to augment the Company's PECOS technology and software acquired to be used for
the IT Product business.

                                      F-19
<PAGE>


(11) BUSINESS SEGMENT INFORMATION

     The  Company's  operations  are  classified  into two  reportable  business
segments:  elcom,  inc.,  the Company's  eBusiness  technology  subsidiary  that
develops and licenses remotely-hosted, self-service, Internet and intranet-based
purchasing  systems,  and Elcom Services  Group,  which markets and sells IT and
related products to commercial clients. The accounting policies for the segments
are consistent  with those  described in the summary of  significant  accounting
policies.  The Company's  management  evaluates segment performance based on net
sales and gross profit.

On October 1, 1999, the ownership of the U.K. operations were transferred from
Elcom Services Group ("ESG") to elcom, inc. On October 1, 2001, all business
related product customers in elcom, inc. were transitioned to ESG. In accordance
with SFAS 131, prior year amounts have been restated to conform to current year
presentation. Discontinued operations was previously reported in the elcom, inc.
and U.K. segments. Segment results for 1999, 2000 and 2001 were as follows (in
thousands):

                                        1999         2000         2001
                                     ----------   ----------   ---------
Net Sales
     Elcom Services Group            $  410,886   $  234,885   $  57,944
     elcom, inc                             865        1,112       4,277
     elcom, inc. intercompany sales          14           --          --
     Elimination                            (14)          --          --
     Continuing operations              411,751      235,997      62,221
     Discontinued operations             74,077       81,988      94,069
                                     ----------   ----------   ---------
                                     $  485,828   $  317,985   $ 156,290
                                     ==========   ==========   =========

Gross Profit
    Elcom Services Group             $   34,531  $    20,931  $   12,027
    elcom, inc.                             865        1,100       3,063
    elcom, inc. intercompany sales           10           --          --
    Elimination                             (10)          --          --
    Continuing operations                35,396       22,031      15,090
    Discontinued operations               8,005        9,043      11,191
                                     ----------   ----------   ---------
                                     $   43,401   $   31,074   $  26,281
                                     ==========   ==========   =========

Identifiable Assets
     Elcom Services Group            $   21,332   $    9,532   $   4,219
     elcom, inc                          25,527       34,811       9,476
     Corporate                           31,027       23,648       7,857
     Discontinued operations             20,153       27,213          --
                                     ----------   ----------   ---------
                                     $   98,039   $   95,204   $  21,552
                                     ==========   ==========   =========

     Substantially all net sales and gross profit are related to the remarketing
of personal computer products and related services.

     The Company  operates both in the U.S. and U.K. and geographic  information
was as follows (in thousands):

                                        1999         2000         2001
                                     ----------   ----------   ---------
Net Sales
    U.S.                             $  292,507   $  235,900   $  62,070
    U.K.                                119,244           97         151
    Continuing operations               411,751      235,997      62,221
    Discontinued operations              74,077       81,988      94,069
                                     ----------   ----------   ---------
                                     $  485,828   $  317,985   $ 156,290
                                     ==========   ==========   =========

                                      F-20
<PAGE>

Gross Profit
    U.S                              $   25,496   $   21,969   $  14,950
    U.K                                   9,900           62         140
    Continuing operations                35,396       22,031      15,090
    Discontinued operations               8,005        9,043      11,191
                                     ----------   ----------   ---------
                                     $   43,401   $   31,074   $  26,281
                                     ==========   ==========   =========

Identifiable Assets
    U.S.                             $   77,651  $    67,698   $  21,281
    U.K.                                    235          293         271
    Discontinued operations              20,153       27,213          --
                                     ----------   ----------   ---------
                                     $   98,039   $   95,204   $  21,552
                                     ==========   ==========   =========

     For 1999 the Company did not have any client accounts that represented more
than 10% of net sales.  During  2000 and 2001,  the  Company had one client that
accounted for approximately 15% and 10%, respectively, of net sales.

(12) INCOME TAXES

The expense (benefit) for income taxes consisted of (in thousands):

                                        1999         2000         2001
                                     ----------   ----------   ---------
Continuing operations
    Current tax expense
        United States federal        $       25   $       --   $      --
        State                               742         (642)         --
        Foreign                          (1,732)          --          --
                                     ----------   ----------   ---------
            Total current tax
                expense (benefit)          (965)        (642)         --
                                     ----------   ----------   ---------

    Deferred tax expense (benefit)           --           --          --
                                     ----------   ----------   ---------
        Total tax expense (benefit)
            from continuing
                operations           $     (965)  $     (642)  $      --
                                     ==========   ==========   =========

Discontinued operations              $      642   $     (144)  $     300
                                     ==========   ==========   =========

     The following  table  summarizes the  significant  differences  between the
United States  federal  statutory tax rate and the Company's  effective tax rate
for financial statement purposes on continuing operations:

                                        1999         2000         2001
                                     ----------   ----------   ---------

Statutory tax rate                        34.0%        34.0%       34.0%
State taxes, net of United States
    federal tax benefit                   (1.6)         2.0          --
Foreign taxes (benefit)                    5.6           --          --
Valuation reserve provided against
    utilization of net operating
        loss carryforwards               (22.2)       (27.9)      (11.9)
Non deductible goodwill and other        (12.7)        (5.1)      (22.1)
                                     ----------   ----------   ---------
                                           3.1%         3.0%          --
                                     ==========   ==========   =========

                                      F-21
<PAGE>

     Deferred tax assets (liabilities) consisted of the following as of December
31 (in thousands):

                                        1999         2000         2001
                                     ----------   ----------   ---------
Deferred tax assets:
    Nondeductible reserves           $       --   $      272   $     374
    Capitalized inventory costs              24           13          --
    Accrued expenses                        297          232         198
    Other temporary differences             397        1,126         205
    Depreciation                          2,362        4,356       5,806
    Foreign net operating loss
        carryforwards                     1,871          942       3,469
    Net federal and state operating
        loss carryforwards               20,399       36,585      45,199
                                     ----------   ----------   ---------
                                         25,350       43,526      55,251
                                     ----------   ----------   ---------

Deferred tax liabilities:
    Other intangible assets                (791)      (1,871)     (2,796)
    Catalog costs                          (184)          --          --
    Other temporary differences            (337)          --          --
                                     ----------   ----------   ---------
                                         (1,312)      (1,871)     (2,796)
Valuation allowance                     (24,038)     (41,655)    (52,455)
                                     ----------   ----------   ---------
Net deferred tax liabilities         $       --   $       --   $      --
                                     ==========   ==========   =========

     At December  31,  2001,  the Company had U.S.  federal net  operating  loss
carryforwards  of  approximately  $102.4 million,  which are available to offset
future Federal taxable income. These losses expire during the years 2010 through
2021.

     Section  382  of the  Internal  Revenue  Code  of  1986  and  the  Treasury
Regulations  promulgated thereunder subjects the prospective  utilization of the
net operating losses and certain other tax attributes,  such as tax credits,  to
an annual  limitation in the event of an ownership  change.  An ownership change
under Sec 382  generally  occurs  when the  ownership  percentage  of  5-percent
shareholders,  in  aggregate,  change by more than 50  percentage  points over a
three-year  period.  Some of the Company's net operating  losses and tax credits
are subject to limitations under Section 382.

     The  Company's  ability  to  utilize  its net  operating  loss and  general
business  tax credit  carryforwards  may be limited in the future if the Company
experiences an ownership change as a result of future transactions.

     At  December  31,  2001,   the  Company  had  state  net   operating   loss
carryforwards  of  approximately  $109.4 million,  which are available to offset
future state taxable  income.  These losses expire during the years 2002 through
2021.

     At  December  31,  2001,   the  Company  had  foreign  net  operating  loss
carryforwards  of  approximately  $3.5  million,  which are  available to offset
future foreign  taxable income.  Generally,  these losses may be carried forward
indefinitely.

     The valuation allowance increased by $17.6 million and $10.8 million during
the years ended December 31, 2000 and 2001,  respectively.  The Company believes
that it is more likely  than not that the  deferred  tax assets at December  31,
2001 will not be realized in the future. The valuation  allowance as of December
31, 2001 includes a tax effect of  approximately  $12.5 million  attributable to
deductions  associated  with employee  stock option plans,  the benefit of which
will be recorded as an increase to paid in capital when realized or recognized.

(13) RELATED PARTY TRANSACTIONS

     On  September  30,  1997,  the  Company  sold  options to acquire an equity
ownership  interest  in  ShopLink.com,  inc.  The Company  received  $418,000 in
payment for the options, which could have been exercised through March 31, 1999,
and was recorded as other income.  ShopLink.com,  Inc. ceased operations in late
2000.

                                      F-22
<PAGE>


(14) NET INCOME (LOSS) PER SHARE

     Basic and diluted net income  (loss) per share were  calculated  as follows
(in thousands, except per share data):

                                        1999         2000         2001
                                     ----------   ----------   ---------

Net loss from continuing operations  $  (30,067)  $  (20,706)  $ (24,559)
                                     ==========   ==========   =========
Weighted average shares outstanding      27,846       30,487      30,912
                                     ==========   ==========   =========
Net loss per share from continuing
  operations                         $    (1.08)  $    (0.68)  $   (0.79)
                                     ==========   ==========   =========

     Diluted  net loss per  share in 1999,  2000 and 2001 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 1999,  2000,  and 2001,  the following  are the number of  potentially
dilutive securities:

                                       Potentially Dilutive Securities
                                       -------------------------------
                             Number                         Range
                          Of Dilutive                    Of Exercise
Year ending December 31,   Securities     Number            Price
------------------------  -----------  -----------  ------------------
       1999                 2,788,000    1,780,000  $     5.56 - 31.13
       2000                 4,945,000      602,000  $    10.81 - 31.13
       2001                 1,289,000    7,675,000  $     1.95 - 24.06

                                      F-23
<PAGE>

(15) QUARTERLY FINANCIAL DATA (UNAUDITED)

     Certain amounts from prior quarters have been  reclassified  (in thousands,
except per share data):
<TABLE>
<CAPTION>

                                                       First      Second      Third      Fourth
                                                      Quarter     Quarter    Quarter     Quarter      Year
                                                     ---------   ---------   ---------   ---------   ---------
Year Ended December 31, 2000
<S>                                                  <C>         <C>         <C>         <C>         <C>
Net sales                                            $  63,285   $  65,922   $  54,660   $  52,130   $ 235,997
Gross profit                                         $   4,438   $   5,730   $   5,517   $   6,346   $  22,031
Operating income (loss)                              $  (7,652)  $  (4,598)  $  (5,792)  $  (4,341)  $ (22,383)
Net income (loss) from continuing
  operations                                         $  (7,486)  $  (4,385)  $  (4,514)  $  (4,321)  $ (20,706)
Net income (loss) from discontinued
  operations, net of tax                             $      81   $      58   $     721   $     254   $     952
Net income (loss) from total operations              $  (7,567)  $  (4,327)  $  (3,793)  $  (4,067)  $ (19,754)

Basic and diluted net income (loss) per share data:
Loss from continuing operations                      $   (0.25)  $   (0.14)  $   (0.15)  $   (0.14)  $   (0.68)
Net income from discontinued
  operations                                              0.00        0.00        0.02        0.01        0.03
                                                     ---------   ---------   ---------   ---------   ---------
Basic and diluted net loss per share                 $   (0.25)  $   (0.14)  $   (0.12)  $   (0.13)  $   (0.65)

Basic and diluted weighted average
  shares outstanding                                    29,711      30,707      30,727      30,797      30,487
                                                     =========   =========   =========   =========   =========

Year Ended December 31, 2001
Net sales                                            $   36,374  $  11,921   $   5,479   $   8,447   $  62,221
Gross profit                                         $    3,957  $   3,532   $   2,714   $   4,887   $  15,090
Operating income (loss)                              $   (7,742) $  (6,572)  $  (7,195)  $  (2,899)  $ (24,408)
Net income (loss) from continuing
  operations                                         $   (7,715) $  (6,621)  $  (7,208)  $  (3,015)  $ (24,559)
Net income (loss) from discontinued
  operations                                         $      888  $     688   $     462   $     (96)  $   1,942
Gain on disposal of discontinued
  operations                                         $       --  $      --   $      --   $   2,738   $   2,738
Net income (loss) from total operations              $   (6,827) $  (5,933)  $  (6,746)  $    (373)  $ (19,879)

Basic and diluted net income (loss) per share data:
Loss from continuing operations                      $   (0.25)  $   (0.21)  $   (0.23)  $   (0.10)  $   (0.79)
Income from discontinued operations,
  net of tax                                              0.03        0.02        0.01        0.00        0.06
Income from disposal of discontinued
  operations, net of tax                                  0.00        0.00        0.00        0.09        0.09
                                                     ---------   ---------   ---------   ---------   ---------

Basic and diluted net loss per share                 $   (0.22)  $   (0.19)  $   (0.22)  $   (0.01)  $   (0.64)
                                                     =========   =========   =========   =========   =========

Basic and diluted weighted average
  shares outstanding                                    31,214      30,935      30,967      30,874      30,912
                                                     =========   =========   =========   =========   =========
</TABLE>


(16) SUBSEQENT EVENT

     On March 29, 2002,  the Company  sold certain  assets that were used in the
Company's U.S. IT Products and services activities to ePlus for $2.15 million of
cash.  The principal  assets sold were  customer  lists,  customer  contacts and
certain  fixed  assets,  including  software.  In  addition,  ePlus  acquired  a
perpetual  license for certain of the Company's  software and assumed one of the
Company's  property leases. The Company also issued warrants to purchase 300,000
shares of the  Company's  common stock to ePlus.  The  warrants are  exercisable
after  September 29, 2002,  have an exercise  price of $1.03 and expire on March
27, 2009.

                                      F-24