##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
    2003                                             
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-27376



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Elcom International, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 04-3175156                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    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:

|                             |  |                                     
|---------------------------- |  | ------------------------------------
|Title of Each Class          |  | Name of Exchange on Which Registered
|                             |  |                                     
|Common Stock, $.01 par value |  | N/A                                 

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 þ          No o

Indicate
by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of 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.     o

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

The
aggregate market value of the common stock held by
non-affiliates of the registrant based on the price at which
such stock was last sold on the Over The Counter Bulletin Board
(the OTCBB) on March 22, 2004, was
approximately $5,444,000. 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 approximately
30,902,000 shares of Common Stock, $.01 par value,
outstanding as of March 22, 2004.



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TABLE OF CONTENTS



|                                                                            |  |  |  |  |  |  |  | 
|--------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                                     
|PART II                                                                    
|STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT               
|PART III                                                                   
|PART IV                                                                    
|SIGNATURES                                                                 
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                 
|INDEPENDENT AUDITORS REPORT                                               
|INDEPENDENT AUDITORS REPORT                                               
|CONSOLIDATED BALANCE SHEETS                                                
|CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)                  
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                 
|2003 ANNUAL REPORT ON THE FORM 10-K INDEX TO SCHEDULE                      
|INDEPENDENT AUDITORS REPORT                                               
|INDEPENDENT AUDITORS REPORT                                               
|VALUATION AND QUALIFYING ACCOUNTS                                          
|EXHIBIT INDEX                                                              
|EX-4.17 FORM OF 10% CONVERTIBLE SENIOR DEBENTURE                           
|EX-10.19 FORM OF REGISTRATION AGREEMENT                                    
|EX-10.20 FORM OF COLLATERAL AGENCY & SECURITY AGRE                         
|EX-10.21 AMEND TO AMENDED & RESTATED EMPLOY AGREE                          
|EX-10.22 AMENDMENT TO EMPLOYMENT AGREEMENT                                 
|EX-23.1 CONSENT OF VITALE, CATURANO & COMPANY PC                           
|EX-23.2 CONSENT OF KPMG LLP                                                
|EX-31.1 RULE 13a-14(a) CERTIFICATION OF C.E.O.                             
|EX-31.2 RULE 13a-14(a) CERTIFICATION OF C.F.O.                             
|EX-32.1 SECTION 1350 CERTIFICATION OF C.E.O.                               
|EX-32.2 SECTION 1350 CERTIFICATION OF C.F.O.                               



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##### Table of Contents






PART I



|        |         
|------- | --------
|Item 1. | Business

Introduction

Elcom International, Inc. (Elcom
or the Company), a corporation formed under the laws
of Delaware in December 1992, is a leading provider of Internet
and web-based remotely-hosted, integrated eProcurement and
eMarketplace solutions and services (ePurchasing).
The Companys PECOSTM ePurchasing solution is
remotely-hosted by Elcom providing rapid deployment and single
point responsibility for clients. In total, over 100
organizations are using or accessing Elcoms solution under
these licenses. Elcom became publicly-held and quoted on NASDAQ
in 1995 and now trades on the OTCBB:ELCO. Elcom has a seasoned
management team in place with substantial experience in
eBusiness technologies. The Company operates in the U.S. and
U.K. with the majority of current revenues and projected future
growth expected to be generated from U.K. clients. Although
Elcoms ePurchasing system is generic and can be used in
any industry, Elcom has a growing presence in the utilities and
public sector marketplaces.

Overview

Prior to the divestiture of the IT products
business in the U.K. and U.S., the Company had previously
marketed over 130,000 IT products to commercial, educational and
governmental accounts via several electronic methodologies.
During 2001, economic activity in the U.S. began to slow
and capital and discretionary spending by the Companys
customer base began to decrease. Demand for IT products was
further materially impacted by the terrorist attacks in the
U.S. on September 11, 2001 and the subsequent effect
on the U.S. economy. Even though the demand for IT products
was weak throughout 2001, after one year of planning and
implementation with Tech Data Corporation (Tech
Data), the Company launched a new initiative and
demonstrated significant success in acquiring incremental
customers beginning in August of 2001. This initiative offered
an eMarketplace version of PECOS to new customers at no charge
in return for a portion of their IT products being ordered
through the PECOS system. These orders were fulfilled and
executed by Tech Data, the second largest distributor of IT
products in the world, who assumed responsibility for all
operational functions. Each order placed through the PECOS
system generated transaction-oriented fees of approximately 6%
(six percent) to the Company as a sales agent of Tech Data.
However, subsequent to the September 11, 2001 terrorist
attacks, the material decline in demand from the Companys
(then) existing IT products customers (who were not using
PECOS) and the uncertainty surrounding the overall economy,
caused the Company to carefully review its business operations.
In order to reduce operational and financial risks and properly
align the Companys operations with the slowing economic
environment, the Company decided to divest its IT products and
services businesses to reduce costs and allow the Company to
focus exclusively on its core Internet-based, ePurchasing
technology.

On December 31, 2001, the Company divested
itself of its U.K. IT products business and on March 29,
2002, the Company divested itself of its U.S. IT products
and services business. As a result of these divestitures,
commencing in the second quarter of 2002, the Company no longer
recorded any revenues arising from the sale of IT products and
associated services. Commencing during the second quarter of
2002, the Companys sole source of revenue has been the
implementation of ePurchasing solutions and associated
professional services and monthly license and maintenance fees.
As provided by applicable accounting conventions, the
U.S. IT products and services business and the U.K. IT
products business have been presented as discontinued operations
for all applicable periods presented.

During 2003, the economic environment in the
U.S. was very weak. In the U.K., the Companys
contract with Cap Gemini Ernst & Young
(CGEY) associated with the Scottish Executive
(Executive Department of the Government of Scotland), began to
see an increase in business activity towards the end of the
third quarter. This increase in activity, which accelerated
during the fourth quarter, was due, in part, to the National
Health Service of Scotland (NHSS) agreeing during
2003 to join the eProcurement Scotland program (which uses
Elcoms PECOS ePurchasing system), with this group of NHSS
hospital trusts to begin implementation in the first quarter of
2004. The NHSS has approximately 17 hospital trusts within
its

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organizations, three (3) of which were
already in the eProcurement Scotland program up to the end of
the fourth quarter of 2003. Two (2) additional NHSS hospital
trusts have signed on to the eProcurement Scotland program, one
during the fourth quarter of 2003 and one during the first
quarter of 2004. The remainder are expected to be implemented
during 2004 and the first half of 2005. After the NHSS agreed to
join the eProcurement Scotland program, the Companys U.K.
business began to see additional activity in other
agencies/councils/ NHSS trusts (Public Entities) in
Scotland. The eProcurement Scotland program currently has
thirteen (13) Public Entities in the program with others in
the process of joining. There are approximately 47 total Public
Entities which can join the eProcurement Scotland program. The
Company receives implementation fees and monthly hosting,
license and maintenance fees for each Public Entity which joins
the eProcurement Scotland program. In addition, the Company has
teamed with Capita Group Plc, a U.K.-based consulting firm with
approximately £1.2 billion in revenues, to offer an
integrated solution to central and local government authorities,
councils and other government municipalities in England (not in
Scotland). The Company signed its first agreement in England
with Stockport Metropolitan Borough Council in December 2003.
The Company believes there will be steady growth in the
eProcurement Scotland program and in the offerings being made to
the municipalities in England with Capita Group Plc.


The Companys customer base has remained
stable. The Company lost one client during 2003, ostensibly due
to its weak balance sheet. This customer generated less than
$34,000 in annual revenues to the Company.

The Company intends to agree to issue and sell
common shares to investors in the U.K. in early April 2004,
subject to the AIM Listing. The new Elcom shares of common stock
would be issued in reliance on the exemption from registration
under Regulation S under the Securities Act of 1933 for
offshore private or public placements. Under Regulation S,
the new shares would not be able to be resold to
U.S. persons or to other persons located in the U.S., but
may otherwise be traded in the U.K. and offshore without other
restrictions. Further, the Company intends to subsequently list
those shares on the Alternative Investment Market
(AIM) of the London Stock Exchange (the AIM
Listing). The AIM Listing would occur approximately ten
(10) business days (U.K.) after the Companys
nominated advisor in the U.K. submits a Schedule 1 document
to the AIM exchange. The Schedule 1 is expected to be filed
one or two days after the filing of this Form 10-K. The
funds to be derived from such proposed sale of common shares
would be used to support the Companys working capital
requirements until the Company achieves positive cash flow,
which management expects to occur in 2005. The Company is
seeking to raise approximately £1.6 to £2.0
(approximately $2.9 million to $3.6 million) via this
issuance and sale of common shares. See Intention to Issue
and Sell Common Shares under Regulation S in the U.K. and
List Those Shares on the London Alternative Investment
Market and Risk Factors Relating to Liquidity.

Product Overview

The Companys ePurchasing solution combines
robust integrated eProcurement and eMarketplace capabilities and
is remotely-hosted via the Companys data center.
Management believes that the combination of eProcurement and
eMarketplace functionality capabilities in a single code base
gives Elcom a strong low-cost offering and importantly, can be
offered to potential clients from either functional viewpoint.

Since its inception in 1992, the Company has
developed its PECOSTM (Professional Electronic
Commerce Online System) system, which automates many supply
chain and financial settlement functions associated with
procurement. The Company intends to augment its core ePurchasing
solutions with other supply chain and supplier-oriented systems
to enable the conduct of interactive procurement, supplier
relationship management, and financial settlement. The Company
has licensed a dynamic trading system platform to provide
auction, reverse auction, and other electronic negotiation (or
eNegotiation) functions and has also marketed an asset
management system, both from third parties, which modules are
offered as optional functionality to clients. The Companys
PECOSTM solution 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.

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Procurement and Sourcing Overview

AMR Research estimates that the procurement and
sourcing market will grow from $1.7 billion in 2002 to
$2.8 billion in 2007. AMR also estimated the professional
services market for procurement and sourcing consulting services
was approximately $3 billion in 2002. Due to cost
containment policies, the Company has not paid any
affiliate fees to any industry research companies
and, to managements knowledge, has not been mentioned
and/or discussed in any significant industry research reports
during most of 2002 and all of 2003.

Products and Pricing

Products.The
Company develops and licenses its PECOSTM
remotely-hosted, self-service, Internet and web-based
automated purchasing and marketplace systems, as described
above. The Company also offers a dynamic trading system and has
offered an asset management system, each from third party
companies.

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

Professional Services

The Companys professional service offerings
include various consulting and supplier services to its clients.
These services range from implementation of PECOS and initial
training and consulting, to interfacing data from PECOS into any
back-end computer systems, including Enterprise Resource
Planning (ERP) systems such as Oracle, SAP,
PeopleSoft, Lawson, etc. Suppliers are also offered services
associated with catalog content and categorization, loading
procedures and automated data update methodologies.

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 receives data from its chartered accountants
in the U.K., to manage and monitor the Companys U.K.
operations.

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. To protect the Companys data and provide service
if the Companys data center were to become inoperative,
the Company has a disaster-recovery system in place.

Sales and Marketing

As of December 31, 2003, the Companys
sales and marketing and support personnel in the U.S. and U.K.
were comprised of three marketing and/or relationship management
personnel, and 8 customer support personnel, including two
(2) of the Companys software developers. The Company
markets and sells its ePurchasing solutions primarily through
its channel partners.

Customer Service and Support

The Company believes that customer satisfaction
is essential for its long-term success and offers comprehensive
customer assistance programs. The Companys technical
support provides response to and resolution of customer
technical inquiries and is available to clients by telephone,
over the web or by electronic mail. The Company uses a customer
service automation system to track each customer inquiry until
it is resolved.

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Competition

The market for ePurchasing solutions is
relatively new and evolving rapidly. The Company expects
competition in this market to intensify in the future. Among
other factors, before investing in 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., Perfect Commerce, which acquired eScout (based
on the Commerce One platform), Ketera (based on Ariba, hosted)
and Epsilon (Ariba). The Company anticipates future competition
from other emerging and established companies, including Oracle,
PeopleSoft, and SAP, all of which have announced products or
alliances to offer Internet-based eCommerce, including
eProcurement modules which function as part of their ERP
system(s). The Company does not typically engage potential
clients which have a major ERP system in place. 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 their solution(s) or respond
more quickly to new or 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.

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 PECOSTM 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 commerce on the
Internet. However, due to the increasing popularity and use of
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

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


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, 2003, the Company had a
total of 22 full time and 7 part time personnel in the U.S. and
6 full time personnel in the U.K. 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. The Company has relied heavily on incentive and
other stock options to motivate and incentivize its personnel.
As of March 22, 2004, the Company employed 22 full
time and 7 part time personnel in the U.S. and 6 full time
personnel in the U.K.

Company Trade Names and Trademarks

Elcom and PECOS are tradenames and/or trademarks
of the Company. The Company has referred to a variety of other
entities and products in this 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, 2003, the Company leased
the property set forth below. The facility lease expires in July
2006. See Note (7) to the consolidated financial
statements, included elsewhere in this Form 10-K.

|                       |  |             |  |                       
|---------------------- |  | ----------- |  | ----------------------
|                       |  | Approximate |  |                       
|                       |  | Square      |  |                       
|Location               |  | Footage     |  | Use                   
|                       |  |             |  |                       
|Norwood, Massachusetts |  | 36,000      |  | Corporate Headquarters

The Companys U.K. personnel work either at
customer sites or from home offices which are equipped with the
necessary office infrastructure to conduct business, including
high-speed Internet access.



|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

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



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

No matters were submitted during the fourth
quarter of the fiscal year covered by this report to a vote of
security holders.

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PART II



|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Price Range of Common Stock

From August 11, 2002 to January 15,
2003, the Companys Common Stock was listed on the Nasdaq
SmallCap Market. Since January 16, 2003, the Companys
Common Stock commenced trading on the Over The Counter Bulletin
Board, (OTCBB) under the symbol ELCO. As of
December 31, 2003, there were approximately 392
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 11,500 as of December 31, 2003. The high
and low closing sales prices reported by the Nasdaq SmallCap
Market or OTCBB (bid quotations beginning January 16, 2003)
for each of the quarters in the two year period ended
December 31, 2003 are set forth in the table below. For the
period from January 1, 2004 to March 22, 2004, such
high and low bid quotations were $0.25 and $0.175, respectively.
The over-the-counter market bid quotations reflect inter-dealer
prices, without retail mark-up, mark-downs, or commissions and
may not represent actual transactions.

|              |  |      |       |      |  |      |       |     |  |   |       |  |  |   |       | 
|------------- |  | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- |  |  | - | ----- | 
|              |  |      |       |     
|              |  | 2003 |       | 2002
|              |  |      |       |     
|Quarter Ended |  | High |       | Low  |  | High |       | Low
|              |  |      |       |      |  |      |       |    
|March 31,     |  | $    | 0.240 |      |  | $    | 0.070 |     |  | $ | 1.680 |  |  | $ | 0.870 | 
|June 30,      |  | $    | 0.410 |      |  | $    | 0.150 |     |  | $ | 0.850 |  |  | $ | 0.370 | 
|September 30, |  | $    | 0.370 |      |  | $    | 0.190 |     |  | $ | 0.690 |  |  | $ | 0.180 | 
|December 31,  |  | $    | 0.260 |      |  | $    | 0.175 |     |  | $ | 0.440 |  |  | $ | 0.160 | 

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  Convertible Debentures

On April 25, 2003, the Company held a first
closing (the First Closing) on a private placement
to accredited investors (the Private Placement) of
ten-year 10% Senior Convertible Debentures (the
Debentures), generating gross proceeds of $949,000
and net cash to the Company of $702,000. Robert J. Crowell, the
Chairman and CEO invested $300,000, John E. Halnen, the
President and COO invested $60,000, William W. Smith, the
Companys Vice Chairman and Director invested $300,000,
Andres Escallon, the Chief Technology Officer invested $50,000
(collectively, the Inside Investors). The Company
paid Robert J. Crowell $187,000 and John E. Halnen $60,000 in
repayment of a portion of their salaries which they had
voluntarily suspended during 2002 in order to assist the Company
in its efforts to retain cash. Robert J. Crowell and John E.
Halnen immediately reinvested these proceeds into their purchase
of the Debentures. In addition, Smith and Williamson LLC (U.K.)
and other Elcom stockholders in the U.K. invested $239,000.
Inside Investors are considered related parties and invested a
total of $710,00 in the Company via purchases of Debentures in
the First Closing.

On October 16, 2003, the Company closed a
second round of the private placement of its Debentures (the
Second Closing), generating cash proceeds of
$315,000. Robert J. Crowell, the Chairman and CEO invested
$150,000, William W. Smith, the Vice Chairman and Director
invested $50,000 (both, the Inside Investors) and
Smith & Williamson LLC (U.K.) and another Elcom
stockholder invested $115,000. Inside Investors are considered
related parties and invested a total of $200,000 in the Company
via purchases of Debentures in the Second Closing.

As of December 31, 2003, Inside
Investors have invested an aggregate of $910,000 of the
$1,264,000 invested in the Company via the purchases of
Debentures.

6



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##### Table of Contents



The Debentures carry a 10% interest rate, which
is payable in cash or payment in-kind. Interest is due annually,
in arrears, commencing April 25, 2004 and October 16,
2004. The principal amount is due at maturity on April 25,
2013. The Company has accrued $72,000 in interest expense for
these Debentures as of December 31, 2003.

The Debentures are collateralized by a security
interest in substantially all of the Companys assets for a
two-year period ending April 25, 2005. They are convertible
by the owner (Holder) into common stock of the
Company at a conversion price of $0.1246 per share, subject
to anti-dilution clauses. The Debentures are convertible at the
election of the Holder at any time commencing on April 25,
2005 through April 25, 2013. However, if the Company has
two sequential quarters of profitability with respect to
continuing operations, the Holder may convert the Debentures at
his option. The Holders also have certain registration rights
upon conversion. The Company has the right to convert the
Debentures upon the occurrence of a change of control, as
defined in the agreement, or at the Companys option as of
April 23, 2007 or subsequent thereto upon written notice to
the investor. The Company recorded a discount on the issuance of
the Debentures (the Debenture discount) of
$1,069,000 in conjunction with the issuance of these Debentures.
This Debenture discount is being amortized as interest expense
over the ten-year term of the Debentures. At December 31,
2003, the Company has amortized $59,000 of this Debenture
discount. At December 31, 2003, the Debentures are
convertible into 10,144,462 shares of common stock.

The Debentures are not registered under the
Securities Act of 1933, as amended, or applicable state
securities laws and may not be offered or sold in the United
States absent registration under the Securities Act of 1933, and
applicable state securities laws or available exemptions from
the appropriate registration requirements. This Private
Placement has been extended to May 17, 2004 and will
terminate on that date unless otherwise extended or earlier
terminated by the Company. Exemption from registration with
respect to the sale of Debentures is claimed pursuant to
Section 4(a) of the Securities Act of 1933, as amended.

Intention to Issue and Sell Common Shares
under Regulation S in the U.K. and List Those Shares on the
London Alternative Investment Market

The Company intends to agree to issue and sell
common shares to investors in the U.K. during early April 2004,
subject to the AIM Listing. The new Elcom shares of common stock
would be issued in reliance on the exemption from registration
under Regulation S under the Securities Act of 1933 for
offshore private or public placements. Under Regulation S,
the new shares would not be able to be resold to
U.S. persons or to other persons located in the U.S., but
may otherwise be traded in the United Kingdom and offshore
without other restrictions. Further, the Company intends to
subsequently list those shares on the Alternative Investment
Market (AIM) of the London Stock Exchange (the
AIM Listing). This listing would occur approximately
ten (10) days after the Companys nominated advisor in
the U.K. submits a Schedule 1 document to the AIM exchange.
The Schedule 1 is expected to be filed within one or two
days after the filing of this Form 10-K. The shares
proposed to be traded on the AIM exchange will not commingle
with the Companys stock traded on the OTCBB until and
unless the Company registers the shares listed on the AIM in the
U.K., via an S-1 Registration Statement with the SEC. The funds
to be derived from such proposed sale of common shares would be
used to support the Companys working capital requirements
until the Company achieves positive cash flow, which management
expects to occur in 2005. The Company is seeking to raise
approximately £1.6 million to £2.0 million
(approximately $2.9 million to $3.6 million) via this
issuance and sale of common shares in the U.K. As of this date,
the Companys nominated advisor in the U.K. has received
written indications of interest for the sale of its common
shares in the U.K. of over £1.7 million (approximately
$3.1 million), which is above the minimum range desired by
the Company, at a price equal to the conversion rate of the
Companys recent placement(s) of Convertible Debentures of
$0.1246 per share. See Recent Sales of Unregistered
Securities  Convertible Debentures. The
agreement to purchase and pricing of this sale of common shares
occurs several days prior to the AIM Listing and the pricing
thereof is not necessarily indicative of the price at which the
shares will trade on the AIM. There can be no assurance that the
sale of any common shares in the U.K. or the AIM Listing
associated therewith, will be consummated. In the event common
shares are not sold and/or the AIM Listing is not consummated,
the Company would be forced to seek other alternative financing.
There can no assurance that any such financing

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could be realized by the Company, if at all, and
on what terms. The Company expects certain Elcom stockholders,
which may include the Chairman and CEO and Vice Chairman and
Director, to provide bridge loans to the Company for the
necessary funds during the period leading up to the proposed AIM
Listing. If the Company is unable to consummate any financing or
receive loaned monies to provide sufficient working capital, the
Company would be forced to seek protection under bankruptcy laws.




| |                                                                                                                                                                                                                                                                                             | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | THE ABOVE REFERENCED SHARES OF COMMON STOCK OF
    ELCOM HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
    AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES (OR TO A
    U.S. PERSON) ABSENT REGISTRATION OR AN APPLICABLE EXEMPTION
    FROM THE REGISTRATION REQUIREMENTS. | 

8



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|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following table sets forth selected
consolidated financial data for the Company for each of the
years ended December 31, 1999 through December 31,
2003 and at the end of each of those years. The historical
financial data for the years ended 1999 through 2002 is derived
from the Consolidated Financial Statements of the Company that
were audited by KPMG LLP. The 2003 financial data is derived
from Consolidated Financial Statements audited by Vitale,
Caturano & Company, PC. 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 Form 10-K. As discussed more fully
herein, for appropriate periods presented, the results of
operations of the U.K. IT products business, which was divested
in December 2001 and the U.S. IT products and services
business, which was divested in March 2002, have been accounted
for as discontinued operations. The results of operations from
the U.K. IT products business sold in July 1999 are included in
continuing operations for all applicable periods presented.

|                                                            |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|----------------------------------------------------------- |  | ------------------------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------ | -
|                                                            |  |                                     
|                                                            |  | Years Ended December 31,            
|                                                            |  |                                     
|                                                            |  | 1999                                 |         | 2000 |  | 2001 |         | 2002 |  | 2003
|                                                            |  |                                      |         |      |  |      |         |      |  |     
|                                                            |  |                                     
|                                                            |  | (In thousands except per share data)
|STATEMENT OF OPERATIONS DATA:                               |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Net sales                                                   |  | $                                    | 119,858 |      |  | $    | 908     |      |  | $    | 4,163   |   |  | $ | 4,773   |   |  | $ | 3,028  |  
|                                                            |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Gross profit                                                |  | $                                    | 10,517  |      |  | $    | 860     |      |  | $    | 2,908   |   |  | $ | 3,721   |   |  | $ | 2,586  |  
|                                                            |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Selling, general and administrative expenses                |  | $                                    | 29,325  |      |  | $    | 25,694  |      |  | $    | 23,621  |   |  | $ | 12,967  |   |  | $ | 8,031  |  
|                                                            |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Research and development expenses                           |  | $                                    | 1,343   |      |  | $    | 1,695   |      |  | $    | 1,089   |   |  | $ | 863     |   |  | $ | 241    |  
|                                                            |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Asset impairment charges                                    |  | $                                    | 10,057  |      |  | $    |        |      |  | $    | 1,626   |   |  | $ | 338     |   |  | $ |       |  
|                                                            |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Operating loss                                              |  | $                                    | (30,208 | )    |  | $    | (26,529 | )    |  | $    | (23,428 | ) |  | $ | (10,447 | ) |  | $ | (5,686 | )
|Interest and other income (expense), net                    |  |                                      | (595    | )    |  |      | 2,032   |      |  |      | (34     | ) |  |   | 578     |   |  |   | (282   | )
|                                                            |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Loss before income taxes                                    |  |                                      | (30,803 | )    |  |      | (24,497 | )    |  |      | (23,462 | ) |  |   | (9,869  | ) |  |   | (5,968 | )
|Income tax benefit                                          |  |                                      | (969    | )    |  |      |        |      |  |      |        |   |  |   |        |   |  |   | (558   | )
|                                                            |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Net loss from continuing operations                         |  |                                      | (29,834 | )    |  |      | (24,497 | )    |  |      | (23,462 | ) |  |   | (9,869  | ) |  |   | (5,410 | )
|Net income (loss) from discontinued operations,
    U.K.    |  |                                      | (12,471 | )    |  |      | 1,594   |      |  |      | 1,942   |   |  |   |        |   |  |   |        |  
|Net income (loss) from discontinued operations,
    U.S.    |  |                                      | (233    | )    |  |      | 3,149   |      |  |      | (1,097  | ) |  |   | (788    | ) |  |   | (41    | )
|Gain on disposal of discontinued operations, net
    of tax |  |                                      |        |      |  |      |        |      |  |      | 2,738   |   |  |   | 1,100   |   |  |   |       |  
|                                                            |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Net loss                                                    |  | $                                    | (42,538 | )    |  | $    | (19,754 | )    |  | $    | (19,879 | ) |  | $ | (9,557  | ) |  | $ | (5,451 | )
|                                                            |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Basic and diluted net income (loss) per share data          |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Continuing operations                                       |  | $                                    | (1.07   | )    |  | $    | (0.80   | )    |  | $    | (0.76   | ) |  | $ | (0.32   | ) |  | $ | (0.18  | )
|Discontinued operations, U.K.                               |  |                                      | (0.45   | )    |  |      | 0.05    |      |  |      | 0.06    |   |  |   |        |   |  |   |       |  
|Discontinued operations, U.S.                               |  |                                      | (0.01   | )    |  |      | 0.10    |      |  |      | (0.03   | ) |  |   | (0.03   | ) |  |   |       |  
|Disposal of discontinued operations                         |  |                                      |        |      |  |      |        |      |  |      | 0.09    |   |  |   | 0.04    |   |  |   |       |  
|                                                            |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Basic and diluted net loss per share                        |  | $                                    | (1.53   | )    |  | $    | (0.65   | )    |  | $    | (0.64   | ) |  | $ | (0.31   | ) |  | $ | (0.18  | )
|                                                            |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|Basic weighted average shares outstanding                   |  |                                      | 27,846  |      |  |      | 30,487  |      |  |      | 30,912  |   |  |   | 30,901  |   |  |   | 30,902 |  
|                                                            |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  

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|                                                              |  |                |        |      |  |      |        |      |  |      |        |  |  |   |       |  |  |   |        |  
|------------------------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ----- |  |  | - | ------ | -
|                                                              |  |               
|                                                              |  | December 31,  
|                                                              |  |               
|                                                              |  | 1999           |        | 2000 |  | 2001 |        | 2002 |  | 2003
|                                                              |  |                |        |      |  |      |        |      |  |     
|                                                              |  |               
|                                                              |  | (In thousands)
|CONSOLIDATED BALANCE SHEET DATA
    OF CONTINUING OPERATIONS: |  |                |        |      |  |      |        |      |  |      |        |  |  |   |       |  |  |   |        |  
|Current assets                                                |  | $              | 31,982 |      |  | $    | 24,781 |      |  | $    | 11,606 |  |  | $ | 2,827 |  |  | $ | 1,585  |  
|                                                              |  |                |        |      |  |      |        |      |  |      |        |  |  |   |       |  |  |   |        |  
|Total assets                                                  |  | $              | 39,161 |      |  | $    | 35,687 |      |  | $    | 17,445 |  |  | $ | 4,786 |  |  | $ | 2,383  |  
|                                                              |  |                |        |      |  |      |        |      |  |      |        |  |  |   |       |  |  |   |        |  
|Current liabilities                                           |  | $              | 5,054  |      |  | $    | 5,544  |      |  | $    | 6,252  |  |  | $ | 3,491 |  |  | $ | 4,487  |  
|                                                              |  |                |        |      |  |      |        |      |  |      |        |  |  |   |       |  |  |   |        |  
|Long-term liabilities, net of current portion                 |  | $              | 260    |      |  | $    | 726    |      |  | $    | 274    |  |  | $ |      |  |  | $ | 254    |  
|                                                              |  |                |        |      |  |      |        |      |  |      |        |  |  |   |       |  |  |   |        |  
|Stockholders equity (deficit)                                |  | $              | 46,668 |      |  | $    | 30,954 |      |  | $    | 11,319 |  |  | $ | 1,598 |  |  | $ | (2,722 | )
|                                                              |  |                |        |      |  |      |        |      |  |      |        |  |  |   |       |  |  |   |        |  
|Total liabilities and stockholders equity                    |  | $              | 51,982 |      |  | $    | 37,224 |      |  | $    | 17,845 |  |  | $ | 5,089 |  |  | $ | 2,019  |  
|                                                              |  |                |        |      |  |      |        |      |  |      |        |  |  |   |       |  |  |   |        |  



|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Conditions and Results of Operations

Introduction

This introduction is intended to provide context
and better understanding of the Managements Discussion and
Analysis of Financial Conditions and Results of Operations
(MD&A) which follows. Under the Interpretive
Release promulgated in December 23, 2003 by the SEC, Elcom
intends to endeavor, as much as possible, to explain to its
shareholders its comparative financial data contained in the
MD&A section in such a way as to make the information more
understandable to the reader. The Company intends to emphasize
important historical and current events or other information
that it believes are appropriate or necessary to an
understanding of the Companys financial comparisons.

Historical Overview

As discussed elsewhere herein, after the
September 11, 2001 terrorist attacks and because of the
immediate and subsequent material decline in demand for IT
products, on December 31, 2001 the Company divested itself
of its U.K. IT products business and on March 29, 2002, the
Company divested itself of its U.S. IT products and
services business. The Company then transitioned to a pure
software solutions company with its PECOS eProcurement and
eMarketplace system as its primary platform. The Company
received far less than anticipated for the U.S. business,
which caused Elcoms auditors to issue a going
concern audit opinion in March 2002.

As a result of these divestitures, commencing in
the second quarter of 2002, the Company did 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 has been the implementation of
ePurchasing solutions, associated professional services and
monthly license, hosting and maintenance fees. As provided by
applicable accounting conventions, the U.S. IT products and
services business and the U.K. IT products business have been
presented as discontinued operations for all applicable periods
presented.

After the divestitures of the Companys IT
products businesses in the U.S. and U.K. subsequent to the
September 11, 2001 terrorist attacks, the overall economy
slowed substantially in the U.S. and the Companys business
became generally static in the U.S. The Company did not
consummate any new customer agreements in the U.S. during
2003. Management believes that generating new clients was
effectively precluded due to the Companys weak balance
sheet and going concern audit opinion, which was first issued in
March 2002. Further, most of the Companys channel partners
were unwilling to expand existing initiatives until the Company
was properly funded and the Companys going concern audit
opinion was resolved. The Company has been operating under
severe cash limitations for several quarters, including
voluntary cash salary suspensions from many employees. During
the fourth quarter of 2003, the Company recorded the lowest
expenses of any quarter in the last five years. The Company
implemented multiple redundancies in its U.K. and
U.S. software solutions businesses during 2002 and 2003. In
March 2004, the Company began hiring

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several staff in the U.K. and U.S. (support
services) in order to service the expanding demand in the
municipal market in the U.K. and in anticipation of the AIM
Listing. See Intention to Issue and Sell Common Shares
under Regulation S in the U.K. and List Those Shares on the
London Alternative Investment Market.


Since its inception in 1992, the Company has
developed its PECOSTM system, which automates many
supply chain and financial settlement functions associated with
procurement. The Company also offers a dynamic trading system
licensed from a third party, which includes request for
proposal, reverse auctioning and other features. In addition,
the Company has offered an asset management system and is in
discussions with several other software firms to offer their
software solutions as augmentations to the PECOS system.

Sales to CGEY associated with the Scottish
Executive Executive Department of the Government of Scotland
(the Scottish Executive), comprised 46%, and 73%, of
net sales for the years ended December 31, 2003 and 2002
respectively. A one-time sale of proprietary software to AJJP
Limited, the acquiror of the Companys UK IT products
business, was 69% of net sales for the year ended
December 31, 2001.

The Company intends to raise working capital via
the issuance and sale of common shares in the U.K. under
Regulation S of the Securities Act of 1933. See
Intention to Issue and Sell Common Shares under
Regulation S in the U.K. and List Those Shares on the
London Alternative Investment Market. Failure to
consummate the AIM Listing or other near-term financing would
likely force the Company to seek protection under bankruptcy
laws.

Results of Operations

The following table sets forth various items of
net sales for each of the years in the three-year period ended
December 31, 2003 (in thousands):

|                                                |  |      |         |      |  |      |         |   |  |   |        |  
|----------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                |  | 2001 |         | 2002 |  | 2003
|                                                |  |      |         |      |  |     
|Net sales                                       |  | $    | 4,163   |      |  | $    | 4,773   |   |  | $ | 3,028  |  
|Gross profit                                    |  |      | 2,908   |      |  |      | 3,721   |   |  |   | 2,586  |  
|Selling, general and administrative expenses    |  |      | 23,621  |      |  |      | 12,967  |   |  |   | 8,031  |  
|Research and development expenses               |  |      | 1,089   |      |  |      | 863     |   |  |   | 241    |  
|Asset impairment charges                        |  |      | 1,626   |      |  |      | 338     |   |  |   |       |  
|Operating (loss) from continuing operations     |  |      | (23,428 | )    |  |      | (10,447 | ) |  |   | (5,686 | )
|Interest expense                                |  |      | 144     |      |  |      | 69      |   |  |   | 188    |  
|Income tax benefit                              |  |      |        |      |  |      |        |   |  |   | 558    |  
|Interest and other income (expense), net        |  |      | 110     |      |  |      | 647     |   |  |   | (94    | )
|Net loss from continuing operations             |  |      | (23,462 | )    |  |      | (9,869  | ) |  |   | (5,410 | )
|Net income (loss) from discontinued operations  |  |      | 845     |      |  |      | (788    | ) |  |   | (41    | )
|Net gain on disposal of discontinued operations |  |      | 2,738   |      |  |      | 1,100   |   |  |   |       |  
|Net loss from total operations                  |  | $    | (19,879 | )    |  | $    | (9,557  | ) |  | $ | (5,451 | )



| |                                                                              
| | -----------------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared
    to the Year Ended December 31, 2002

Net Sales.Net sales
for the year ended December 31, 2003 were $3,028,000
compared to $4,773,000 for the year ended December 31,
2002, a decrease of $1,745,000 or 37%. The reduction in license
and professional services fees was due primarily to the
Companys receiving substantially larger fees in 2002 under
the Companys contract with CGEY associated with the
Scottish Executive ($3.3 million in 2002 versus
$1.4 million in 2003) and the revenue recognition of the
amounts thereof, and to fewer implementations of PECOS than
anticipated under the Companys contract with CGEY for the
year ended December 31, 2003. Though business activity
connected with CGEY associated with the Scottish Executive
increased towards the end of the third quarter of 2003 and
accelerated into the fourth quarter, the Company did not earn
the fourth, and final, lump-sum payment from CGEY of
£625,000 (originally $983,000 and subsequently adjusted to

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$1,113,000 as of December 31, 2003 to
account for changes in the pound to dollar conversion rate)
until the first quarter of 2004, when it will be recognized as
revenue and offset the loan amount due CGEY as discussed further
herein. Also contributing to the decrease in sales in 2003 was
the inability of the Company to generate new clients in the
U.S. due primarily to the Companys financial
position, combined with the overall slowness in economic
activity in the U.S. During the fourth quarter of 2003, the
Company received an unanticipated license fee payment of
£466,981 (approximately $784,000) representing license fees
in arrears, due to the termination of a license originally
signed in September 1998, by a U.K.-based licensee.


Gross Profit.The
Company recorded a gross profit of $2,586,000 for the year ended
December 31, 2003, compared to a gross profit of $3,721,000
for the year ended December 31, 2002, a decrease of
$1,135,000 or 31%, due to lower net sales as described above.
The gross profit percentage of net sales was 85% for the year
ended December 31, 2003, an improvement from the gross
profit percentage of net sales of 78% for the year ended
December 31, 2002.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses (SG&A) for the year
ended December 31, 2003 decreased to $8,031,000 from
$12,967,000 for the year ended December 31, 2002, a
reduction of $4,936,000 or 38%. Throughout 2003, the Company has
continued to implement cost containment measures designed to
align its SG&A costs with lower than anticipated revenues.
Those measures included personnel reductions throughout most
areas and cash salary suspensions by many of Elcoms
employees. As of December 31, 2003, the Company recorded
$394,000 as accrued salaries payable. This amount is anticipated
to be repaid by the Company when, and if, the Company achieves
positive cash flow. Additionally, the Company reversed a
franchise tax accrual of $506,000 during 2003, since payment was
no longer considered probable. Further, the Company received a
state franchise tax refund of $284,000 during 2003, which was
offset to SG&A. During the year ended December 31,
2003, depreciation and amortization expense was $1,397,000
compared to $3,066,000 in 2002, a decrease of $1,669,000, due to
more assets being fully depreciated/amortized. Management
believes its expenses during the fourth quarter, even including
amounts offset, were lower than any quarter during the last five
years.

Research and Development
Expenses.Research and development
expenses for the year ended December 31, 2003 and 2002 were
$241,000 and $863,000, respectively. This reduction was due
primarily to the implementation of various cost containment
measures.

Asset Impairment
Charges.For the years ended
December 31, 2003 and 2002, the Company recorded asset
impairment charges of $0 and $338,000, respectively. The asset
impairment charges in 2002 related to software initially
purchased to augment the Companys PECOS technology, which
was deemed to have no further value.

Operating Loss From Continuing
Operations.The Company reported an
operating loss from continuing operations of $5,686,000 for the
year ended December 31, 2003 compared to $10,447,000
reported for the year ended December 31, 2002, an
improvement of $4,761,000 or 46%. The lower operating loss from
continuing operations in 2003 was due primarily to reductions in
SG&A (via cost containment measures), a state franchise tax
refund of $284,000, a reversal of a franchise tax accrual of
$506,000 and a reduction in depreciation and amortization
expense of approximately $1,669,000, partially offset by a
reduction in gross profit.

Interest Expense.Interest expense for the year ended December 31, 2003 was
$188,000 compared to $69,000 for the year ended
December 31, 2002. The increase in interest expense is due
primarily to interest of $72,000 accrued on the Companys
ten-year 10% Senior Convertible Debentures and amortization
of the Debenture discount of $59,000.

Interest and Other Income (Expense),
Net.Interest and other income
(expense), net, for the year ended December 31, 2003
decreased to an expense of $94,000, (which includes $96,000 of
interest income on the state franchise tax refund), from income
of $647,000 for the year ended December 31, 2002. The
income in 2002 was due primarily to the Companys
recognition in 2002 of $650,000 paid to it via a settlement with
a software vendor where the product did not perform as
represented.

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Income Tax Benefit.The Company recorded an income tax benefit of $558,000
reflecting the reversal of income tax accruals as payment was no
longer deemed probable.

Loss from Continuing
Operations.The Company generated a
net loss from continuing operations for the year ended
December 31, 2003 of $5,410,000, versus a net loss of
$9,869,000 for the year ended December 31, 2002, an
improvement of $4,459,000 or 45%, as a result of the factors
described herein.

Net Loss From Discontinued
Operations.Net loss from discontinued
operations for the year ended December 31, 2003 was
$41,000, compared to a net loss from discontinued operations for
the year ended December 31, 2002 of $788,000.

Net Gain From Disposal of Discontinued
Operations.The net gain for the year
ended December 31, 2002 relating to the divestiture on
March 29, 2002 of the Companys IT products and
services business in the U.S. was $1,100,000. There was no
gain or loss during 2003.

Net Loss from Total
Operations.The net loss from total
operations (including both discontinued and continuing
operations) for the year ended December 31, 2003 was
$5,451,000 compared to $9,557,000 for the year ended
December 31, 2002, for the reasons cited above. Basic and
diluted net loss from total operations per share for the year
ended December 31, 2003 were ($0.18), compared with a basic
and diluted net loss from total operations per share of ($0.31)
for the year ended December 31, 2002.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared
    to the Year Ended December 31, 2001

Net Sales.Net sales
for the year ended December 31, 2002, which represented
license and professional services fees, were $4.8 million
compared to $4.2 million in the year ended
December 31, 2001, an increase of $0.6 million or 14%.
Net sales in the 2002 fiscal year included $2.8 million in
license and $0.5 million in professional service fees
related to the Companys contract with CGEY relating to the
Scottish Executive. The agreement with CGEY associated with the
Scottish Executive (the CGEY/SE Agreement) was signed in
November 2001 and did not impact 2001 financial results. At
December 31, 2002, the Company had recorded
$0.3 million of deferred revenue related to the CGEY/SE
Agreement. The Company recognized this deferred revenue in 2003.
Net sales in 2001 included $2.9 million arising from a
one-time sale of proprietary software to AJJP Limited, an
unrelated company that acquired the U.K. IT products
reseller business.

Gross Profit.The
Company recorded gross profit of $3.7 million in the year
ended December 31, 2002, compared to gross profit of
$2.9 million in the year ended December 31, 2001, an
increase of $0.8 million, or 28%. Cost of sales in the 2002
annual period included $423,000 of amortized software costs and
maintenance-related expenses, together with $131,000 of
salary-related expenses, which were incurred in various PECOS
implementations. In the comparable 2001 annual period, amortized
software costs and maintenance-related expenses amounted to
$446,000.

Selling, General and Administrative
Expenses.Total selling, general and
administrative (SG&A) expenses for the year
ended December 31, 2002 decreased to $13.0 million
from $23.6 million in 2001, a decrease of
$10.6 million, or 45%. Since mid-2001 and specifically
after the September 11, 2001 terrorist attacks, the Company
has implemented numerous cost containment measures designed to
better align its SG&A costs with lower than anticipated
revenues. The principal reductions in SG&A expenses in 2002
compared to 2001 were comprised of reductions in personnel and
depreciation expenses of approximately $7 million.

Research and Development
Expense.Research and development
expense for the years ended December 31, 2002 and 2001 were
$0.9 million and $1.1 million, respectively, a
decrease of $0.2 million or 18%. The expenditures reflect
the on-going product development of the PECOSTM
technology prior to reaching technological feasibility of each
new version. The reduction in research and development
expenditures in 2002 compared to 2001 primarily relates to a
reduction in the number of personnel.

Asset Impairment
Charges.For the years ended
December 31, 2002 and 2001 the Company recorded asset
impairment charges of $0.3 million and $1.6 million,
respectively. The charges relate to previously capitalized
software costs that were acquired to augment the Companys
PECOSTM technology. The related

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software did not perform as anticipated and was
never put into production. The Company recorded the charge in
the period it was determined the Company was going to abandon
the use of the software.


Interest Expense.Interest expense for the year ended December 31, 2002
remained consistent at $0.1 million. Interest expense
relates to interest paid on capital leases since the Company had
no other borrowings.

Interest Income and Other,
Net.Interest income and other, net,
for the year ended December 31, 2002 increased to
$0.6 million from $0.1 million in 2001. The 2002
income primarily relates to the receipt of a $650,000 settlement
from a claim the Company had made against one of its software
vendors.

Net Income (Loss) From Discontinued
Operations.The net loss from
discontinued operations for the year ended December 31,
2002 was $0.8 million compared to net income from
discontinued operation for the year ended December 31, 2001
of $0.8 million. The net income from discontinued
operations in 2001 related to the Companys divested U.K.
IT products business, which recorded $1.9 million of
net income. In the 2002 fiscal year, all of the net loss from
discontinued operations was derived from the Companys
U.S. IT products discontinued operations.

Gain (Loss) From Disposal of Discontinued
Operations, net of Tax.The gain from
the disposal of discontinued operations (net of tax) for the
year ended December 31, 2002 was $1.1 million compared
to a gain of $2.7 million for the year ended
December 31, 2001. The 2001 gain of $2.7 resulted from the
sale of the U.K. IT products reseller business. The 2002
gain of $1.1 resulted from the sale of the Companys
U.S. IT products and service business.

Liquidity and Capital Resources

Net cash used in operating activities from
continuing operations for the year ended December 31, 2003
was $4.4 million, resulting primarily from a net loss from
continuing operations of $5.4 million offset by
depreciation of $1.4 million.

On April 25, 2003, and October 16,
2003, the Company closed private placements to accredited
investors of ten-year 10% Senior Convertible Debentures,
generating gross proceeds of $1,264,000 and net cash to the
Company of $1,017,000 (See Item 5 herein).

On April 3, 2003, the Company signed an
agreement whereby CGEY agreed to advance £625,000
(approximately $1,113,000) to the Company, representing an
advance of a lump-sum payment expected (at the time) to be paid
to the Company by the end of 2003 or during the first quarter of
2004, under its contract with CGEY related to the Scottish
Executive. This loan was contingent upon the Company providing
assistance to CGEY to set up a back-up system in Toronto, Canada
in order for CGEY to provide Disaster Recovery and Business
Continuity Services (Services) for Elcoms
clients, primarily for the Scottish Executive. These
contingencies have all been met. These Services are expected to
be made available to Elcoms clients for a fee during 2004
and would provide a back-up system to allow CGEY to provide
Business Continuity Services (e.g. to host, operate and manage),
Elcoms ePurchasing system, if Elcom were unable to do so
for any reason. This lump-sum payment has become due and payable
during the first quarter of 2004, and will offset the advance.
This amount advanced has been accounted for as a Loan payable as
of December 31, 2003 and will be recognized as revenue
during the first quarter of 2004.

Together, the Debentures and the CGEY advance
provided net cash proceeds of approximately $2,000,000 which was
used to fund operations in 2003.

At December 31, 2003, the Companys
principal sources of liquidity were cash and cash equivalents of
$515,000 and accounts receivable of $1,027,000 and currently has
funds to operate until April 2004. During fiscal 2003, the
Company reduced its workforce and implemented salary reductions
and cash salary suspensions to better align its operating
expenses and cash disbursements with its revenue levels. The
Company continues to explore ways to eliminate or reduce ongoing
expenditures until such time as the Company can increase its
cash sources. (See Risk Factors Related to
Liquidity, below). The Company intends to raise working
capital via the issuance and sale of common shares in the U.K.
under Regulation S of

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##### Table of Contents



the Securities Act of 1933. See Intention
to Issue and Sell Common Shares under Regulation S in the
U.K. and List Those Shares on the London Alternative Investment
Market.


The Companys other principal commitments
consist of leases on its headquarters office facility. Although
the Company may require ongoing investments in property,
equipment and software, the Company does not expect these
amounts to be material in fiscal 2004. Failure to consummate
such financing or other near-term financing would likely force
the Company to seek protection under bankruptcy laws.

Risk Factors Relating to Liquidity

The Companys consolidated financial
statements as of December 31, 2003 have been prepared under
the assumption that the Company will continue as a going concern
for the year ending December 31, 2004. The Companys
independent accountants, Vitale, Caturano & Company,
P.C., have issued a report dated March 26, 2004 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 past April
2004 (See Note (1)), 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, attract new sources of capital,
issue debt, and/or issue and sell shares on the AIM/London Stock
Exchange. See Intention to Issue and Sell Common Shares
under Regulation S in the U.K. and List Those Shares on the
London Alternative Investment Market. Any such additional
capital would result in dilution, possibly substantial, for the
Companys stockholders. There can be no assurance that the
AIM Listing, or the sale of any common shares associated
therewith, will be consummated. In the event common shares are
not sold and/or the AIM Listing is not consummated, the Company
would be forced to seek other alternative financing. There can
no assurance that any such financing could be realized by the
Company, if at all, and on what terms. The Company expects
certain Elcom stockholders, which may include the Chairman and
CEO and Vice Chairman and Director, to provide bridge loans to
the Company for the necessary funds during the period leading up
to the proposed AIM Listing. If the Company is unable to
consummate any financing or receive loaned monies to provide
sufficient working capital, the Company would be forced to seek
protection under bankruptcy laws. The consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.

As of December 31, 2003, the Company had
approximately $515,000 of cash and cash equivalents and had
outstanding debt of approximately $2.4 million. The
Companys debt is comprised of a loan payable to CGEY of
$1,113,000 (originally £625,000 or $983,000 and
subsequently adjusted to $1,113,000 to account for changes in
the pound to dollar conversation rate), and long term debt of
convertible subordinated debentures of $1.264 million. This
net long term debt was recorded on the Companys
December 31, 2003 balance sheet as a net long term debt
amount of $254,000 (initial investment of $1.264 million
offset by approximately $1.0 million discount resulting
from a beneficial conversion feature). See footnote 6(d) of
the Consolidated Financial Statements. The loan from CGEY will
be offset, during the first quarter of 2004, against the
£625,000 ($1,113,000) due from CGEY in the first quarter of
2004 representing the fourth and final lump-sum payment under
the contract with CGEY associated with the Scottish Executive.
The Company has incurred $35.2 million of cumulative net
losses for the three-year period ended December 31, 2003.
Total stockholders equity decreased from $1.6 million
at December 31, 2002 to a deficit of $2.7 million at
December 31, 2003. Although the Company has recorded better
quarterly operating profits from continuing operations through
fiscal 2003, the Company does not necessarily expect this trend
to continue throughout fiscal 2004. The sequential quarterly
increases in revenue generated by the license with CGEY
associated with the Scottish Executive are expected to be at
their highest point during the first quarter of 2004. The
Company believes it has sufficient liquidity to fund operations
into April 2004 without raising additional working capital.

The Companys lease obligation payable is as
follows (in thousands):

|                 |  |                        |       |           |  |           |     |           |  |         |     |  |  |   |   |  |  |   |   | 
|---------------- |  | ---------------------- | ----- | --------- |  | --------- | --- | --------- |  | ------- | --- |  |  | - | - |  |  | - | - | 
|                 |  |                       
|                 |  | Payments Due by Period
|                 |  |                       
|                 |  |                        |       | Less Than |  |           |     | After    
|                 |  | Total                  |       | 1 Year    |  | 1-3 Years |     | 4-5 Years |  | 5 Years
|                 |  |                        |       |           |  |           |     |           |  |        
|Operating leases |  | $                      | 1,266 |           |  | $         | 419 |           |  | $       | 847 |  |  | $ |  |  |  | $ |  | 
|                 |  |                        |       |           |  |           |     |           |  |         |     |  |  |   |   |  |  |   |   | 

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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 income taxes, impairment
of long-lived assets, and revenue recognition. 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:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) 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 2004 will result in
    an overall loss, the Company has recorded a valuation allowance
    to reduce its deferred tax assets to zero. 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 deferred
    tax asset valuation allowance, it would increase income in the
    period such determination was made.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | (ii) 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 net 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 a
    good faith estimate based on industry trends and reference to
    market rates and transactions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (iii) Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | Revenue consists principally of fees for
    implementation and related professional services and a monthly,
    maintenance, hosting, and licensing fee. As part of the revenue
    recognition process significant management judgments and
    estimates must be made and used to determine the revenue
    recognized in any accounting period. Material differences may
    result in the amount and timing of our revenue for any period if
    we made different judgments or utilized different estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | We recognize revenue using the residual method in
    accordance with Statement of Position
    (SOP) 97-2, Software Revenue Recognition, as
    amended by SOP 98-9, Modification of SOP 97-2,
    Software Revenue Recognition, with Respect to Certain
    Transactions. Under the residual method, revenue is recognized
    in a multiple element arrangement in which Company-specific
    objective evidence of fair value exists for all of the
    undelivered elements in the arrangement, but does not exist for
    one or more of the delivered elements in the arrangement.
    Company-specific objective evidence of fair value of maintenance
    and other services is based on our customary pricing for such
    maintenance and/or services when sold separately. We sell our
    professional services separately on a time-and-materials basis
    and at times without a software license, and we have established
    Company-specific objective evidence on this basis.
    Company-specific objective evidence for maintenance is
    determined based upon the either the renewal rates when
    maintenance is sold separately or the option price for annual
    maintenance renewals included in the underlying customer
    contract. At the outset of the arrangement with the customer, we
    defer revenue for the fair value of its undelivered elements
    (e.g., maintenance, consulting, and training) and recognize
    revenue for the remainder of the arrangement fee attributable to
    the elements initially delivered in the arrangement (i.e.,
    software product) when the basic criteria in SOP 97-2 have
    been met. If such evidence of fair value for each element of the
    arrangement does not exist, all revenue from the arrangement is
    deferred until such time that evidence of fair value does exist
    or until all elements of the arrangement are delivered. If
    evidence of fair-value does not exist for maintenance and/or
    hosting and

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | there are no other undelivered elements, all
    revenue is recognized ratably over the maintenance period or
    hosting term. Changes to the elements of a software arrangement,
    the ability to identify which company-specific objective
    evidence and the fair value of the respective elements could
    materially impact the amount of earned and deferred revenue.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Under SOP 97-2, revenue attributable to an
    element in a customer arrangement is recognized when persuasive
    evidence of an arrangement exists, delivery has occurred, the
    fee is fixed or determinable, collection of the resulting
    receivable is probable, and the arrangement does not require
    services that are essential to the functionality of the
    software. Our ability to estimate if the collection of the
    resulting receivable is probable could materially impact the
    amount of revenue we record.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | The Company sells both an enterprise and
    non-enterprise (hosted) model of PECOS software. In
    accordance with EITF 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 00-03.                                                                                                                                                                                                                           
|
| | Our arrangements do not generally include
    acceptance clauses. However, if an arrangement includes an
    acceptance provision, acceptance occurs upon the earlier of
    receipt of a written customer acceptance or expiration of the
    acceptance period. Our arrangements do not generally provide for
    a right of return, and historically product returns have not
    been significant. We provide for sales return allowances on an
    estimated basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Deferred revenue includes amounts received from
    customers for which revenue has not been recognized that
    generally result from deferred maintenance and support, hosting,
    consulting or training services not yet rendered and license
    revenue deferred until all requirements under SOP 97-2 are
    met. Deferred revenue is recognized upon delivery of our
    product, as services are rendered, or as other requirements
    requiring deferral under SOP 97-2 are satisfied.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (iv) Software Development Costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | We account for software development costs in
    accordance with Statement of Financial Accounting Standards
    (SFAS) No. 86, Accounting for the Costs of
    Computer Software to Be Sold, Leased, or Otherwise Marketed.
    SFAS No. 86 specifies that costs incurred internally
    in creating a computer software product should be charged to
    expense when incurred as research and development costs until
    technological feasibility has been established for the product.
    Once technological feasibility is established, all development
    costs should be capitalized until the product is available for
    general release to customers. For new versions of our products
    we typically achieve technological feasibility far enough in
    advance of general release to warrant the capitalization of
    subsequent development costs. Judgment is required in
    determining when the technological feasibility of a product is
    established and in estimating the life of the product for which
    the capitalized costs will be amortized.

Off-Balance Sheet Financings

The Company does not have any off-balance sheet
financings. The Company has no majority-owned subsidiaries that
are not included in the financial statements, nor does it have
any interests in or relationships with any special purpose
entities.

Factors Affecting Future Performance

A significant portion of the Companys
revenues from continuing operations are from license fees
derivable from CGEY under an arrangement that CGEY has with the
Scottish Executive executed in November 2001. Future revenue
under this arrangement is contingent on the following
significant factors: the rate of adoption of the Companys
ePurchasing solution by Public Entities within the Scottish
Executive,

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##### Table of Contents



renewal by Public Entities within the Scottish
Executive of their rights to use the ePurchasing solution, the
procurement of additional services from the Company by Public
Entities within the Scottish Executive, CGEYs relationship
with the Scottish Executive, and their compliance with the terms
and conditions of their agreement with the Scottish Executive
and the ability of the Company to perform under its agreement
with CGEY.


If further business fails to develop under the
CGEY agreement, or if the Company is unable to perform under
this agreement, it would have a material adverse affect on the
Companys future financial results. The Company anticipates
that its revenues for the first quarter of 2004 may be higher
than subsequent quarters due to the recognition of the fourth
and final, lump-sum license payment under its contract with CGEY
related to the Scottish Executive (See Liquidity and
Capital Resources).

Outlook

As evidenced by the continued reduction in
SG&A expenditures in 2003, especially during the second half
of the year, the Companys implementation of cost
containment programs has significantly reduced its expenses and
cash requirements from previous levels. Although the Company has
been able to reduce its operating expenses going forward, the
Company expects that its operating loss from continuing
operations may continue in 2004. Improvements in revenues and
operating results from continuing operations in future periods
will not occur without the Company being able to raise
additional working capital in the near future. See Risk
Factors Relating to Liquidity and Intention to Issue
and Sell Common Shares under Regulation S in the U.K. and
List Those Shares on the London Alternative Investment
Market above.




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 statements or
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:
(i) availability and terms of appropriate working capital
and/or other financing to keep the Company operating,
particularly in light of the audit opinion from the
Companys independent accountants in this Annual Report on
Form 10-K as to the Companys necessity to raise
capital to continue as a going concern past April 2004, the
Companys $515,000 in cash and cash equivalents at
December 31, 2003 and its history of ongoing operating
losses; (ii) the overall marketplace and clients
acceptance and usage of eCommerce software systems, including
corporate demand therefor, the impact of competitive
technologies, products and pricing, particularly given the
subsequently larger size and scale of certain competitors and
potential competitors, and control of expenses, revenue growth,
corporate demand for eProcurement and eMarketplace solutions;
(iii) the consequent results of operations given the
aforementioned factors; and (iv) the necessity of the
Company to raise additional working capital to fund operations
during April 2004 and the availability of any such funding to
the Company and other risks detailed from time to time in this
Annual Report on Form 10-K and in its other SEC reports and
statements, including particularly the Companys Risk
Factors contained in the prospectus included as part of
the Companys Registration Statement on Form S-3 filed
on June 21, 2002. In the event the Company is unable to
raise additional working capital from additional implementation,
professional services fees, and monthly license and other fees,
or by the sale of assets or by other means, including the
proposed AIM Listing, the Company would be forced to seek
protection under U.S. bankruptcy laws. The Company assumes
no obligation to update any of the information contained or
referenced in this Annual Report on Form 10-K.

18



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|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7a. | Quantitative and Qualitative Disclosures
    About Market Risk

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

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 loss of $839,000. Currency
fluctuation could become more material in the future due to
revenues generated in pounds under the Scottish Government
License.



|        |                                                
|------- | -----------------------------------------------
|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 12 and 13, respectively, of the Notes to
Consolidated Financial Statements.



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

Effective October 24, 2003, KPMG LLP
(KPMG) resigned as the independent public
accountants of the Company. The Company had previously solicited
Vitale, Caturano & Company PC (VCC) and
retained them as its independent public accountants effective
October 27, 2003. The engagement of VCC was approved by the
Audit Committee of the Companys Board of Directors and
affirmed by the entire Board of Directors.

The audit reports of KPMG on the Companys
consolidated financial statements as of and for the years ended
December 31, 2001 and 2002, did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope, or accounting
principles, except as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | KPMGs report on the consolidated financial
    statements of the Company as of and for the years ended
    December 31, 2001 and 2002, contained a separate paragraph
    stating 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 regards to these matters are also
    described in Note 1. The consolidated financial statements
    do not include any adjustments that might result from the
    outcome of this uncertainty. | 

In connection with the audits of the
Companys consolidated financial statements for the two
fiscal years ended December 31, 2001 and 2002, and through
October 24, 2003, the Company and KPMG had no disagreements
on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of KPMG, would
have caused KPMG to make reference thereto in its report on the
financial statements of the Company for such years.
Additionally, during the Companys fiscal year ended
December 31, 2003 there were no reportable events (as
defined in Regulation S-K Item 304(a)(1)(v)).

In September 2003, the Audit Committee of the
Board of Directors of the Company solicited a proposal for its
September 30, 2003 Quarterly Review and the year-end audit
of its calendar 2003 consolidated financial statements from VCC.
The Audit Committee took this action to replace KPMG, as the
Company was aware of KPMGs intention to resign.

During September and October 2003, the Company
met with and provided appropriate information to VCC in order to
allow for VCCs smooth transition into the role of the
Companys independent accounts. On October 14, 2003
the Audit Committee decided it would engage VCC to act as the
Companys independent accountants for calendar year 2003.
The Company subsequently informed KPMG of this decision.

During the two most recent fiscal years and
through the date of this report, the Company has not consulted
with VCC on items that were or should have been subject to
Auditing Standard 50 or concerned the subject matter of a
disagreement or reportable event with KPMG, the former
independent accountants of the Company, as described in
Regulation S-K Item 304(a)(2).

19



---



##### Table of Contents





|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

The Companys management, including the
Companys Chief Executive Officer and Chief Accounting
Officer, has evaluated the effectiveness of the Companys
disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934) as of the end of the period covered by this Annual
Report on Form 10-K. Based upon that evaluation, the
Companys Chief Executive Officer and Chief Accounting
Officer have concluded that the disclosure controls and
procedures were effective as of the end of the period covered by
this Annual Report on Form 10-K.

There were no changes in the Companys
internal control over financial reporting that occurred during
the Companys fourth quarter of 2003 that has materially
affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.

In the fourth quarter of 2003, the Company
discovered check fraud in the amount of approximately $167,000.
The employee was arrested and terminated by the Company the same
day. In January 2004, the Company was reimbursed $140,000 by the
Companys insurer, which amount represented the total
involved, less a $25,000 deductible, and approximately $2,000
representing the amount of one check that was not verifiable.

The Company subsequently modified its internal
review procedures and check generation controls to include
physical signatures on all checks issued by the Company.




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 2004 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

Convertible Debentures

On April 25, 2003, the Company held a first
closing (the First Closing) on a private placement
to accredited investors (the Private Placement) of
ten-year 10% Senior Convertible Debentures (the
Debentures), generating gross proceeds of $949,000
and net cash to the Company of $702,000. Robert J. Crowell, the
Chairman and CEO invested $300,000, John E. Halnen, the
President and COO invested $60,000, William W. Smith, the
Companys Vice Chairman and Director invested $300,000,
Andres Escallon, the Chief Technology Officer invested $50,000
(collectively, the Inside Investors). The Company
paid Robert J. Crowell $187,000 and John E. Halnen $60,000 in
repayment of a portion of their salaries which they had
voluntarily suspended during 2002 in order to assist the Company
in its efforts to retain cash. Robert J. Crowell and John E.
Halnen immediately reinvested these proceeds into their purchase
of the Debentures. In

20



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##### Table of Contents



addition, Smith and Williamson LLC (U.K.) and
other Elcom stockholders in the U.K. invested $239,000. Inside
Investors are considered related parties and invested a total of
$710,000 in the Company via purchases of Debentures in the First
Closing.


On October 16, 2003, the Company closed a
second round of the private placement of its Debentures (the
Second Closing), generating cash proceeds of
$315,000. Robert J. Crowell, the Chairman and CEO invested
$150,000, William W. Smith, the Vice Chairman and Director
invested $50,000 (both, the Inside Investors) and
Smith & Williamson LLC (U.K.) and one other Elcom
stockholder invested $115,000. Inside Investors are considered
related parties and invested a total of $200,000 in the Company
via purchases of Debentures in the Second Closing.

As of December 31, 2003, Inside
Investors have invested an aggregate $910,000 of the $1,264,000
invested in the Company via the purchases of Debentures.



|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

The information concerning principal accounting
fees and services is set forth in the definitive Proxy Statement
under the headings Audit Fees, Audit Related
Fees, and Tax Fees, which information is
incorporated herein by reference.




PART IV



|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | 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, 2003:

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

During the quarter ended December 31, 2003,
the Company filed the following Current Reports on Form 8-K:



| |                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Current Reports on Form 8-K, dated
    October 22, 2003, furnishing a press release under
    Item 9;                                                                                                                                                                                                                   
|
| | 2. Current Report on Form 8-K, dated
    October 30, 2003 and Current Report on Form 8-K/ A,
    dated November 14, 2003, disclosing under Item 4 the
    resignation of KPMG LLP as the Companys independent
    auditors; and the engagement of Vitale, Caturano &
    Company PC as the Companys independent auditors.
|
| | 3. Current Report on Form 8-K, dated
    November 17, 2003, furnishing a press release under
    Item 12.                                                                                                                                                                                                                  

21



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##### Table of Contents



(c) Exhibits:

See Index to Exhibits beginning on page E-1.

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

22



---



##### Table of Contents






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)             



| |     |                      
| | --- | ---------------------
| | By: | /s/ ROBERT J. CROWELL

| |                                     
| | ------------------------------------
| |                                     
| | Robert J. Crowell                   
| | Chairman and Chief Executive Officer

Date: March 26, 2004

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. CROWELLRobert J. Crowell           |  | Chairman of the Board of Directors and Chief
    Executive Officer
    (Principal Executive Officer) |  | March 26, 2004
|                                                
|/s/ KATHRYN A. MONACOKathryn A. Monaco           |  | Chief Accounting Officer
    (Principal Financial Officer)                                           |  | March 26, 2004
|                                                
|/s/ JOHN E. HALNENJohn E. Halnen                 |  | President, Chief Operating Officer
    and Director                                                  |  | March 26, 2004
|                                                
|/s/ WILLIAM W. SMITHWilliam W. Smith             |  | Vice Chairman and Director                                                                           |  | March 26, 2004
|                                                
|/s/ RICHARD J. HARRIES JR.Richard J. Harries Jr. |  | Director                                                                                             |  | March 26, 2004
|                                                
|/s/ JOHN W. ORTIZJohn W. Ortiz                   |  | Director                                                                                             |  | March 26, 2004

23



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##### Table of Contents



CONSOLIDATED FINANCIAL STATEMENTS

ELCOM INTERNATIONAL, INC. AND
SUBSIDIARIES






INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS


December 31, 2003

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

|                                                                                                                                         |  |      |             | 
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | 
|                                                                                                                                         |  | Page
|                                                                                                                                         |  |     
|Independent Auditors Reports                                                                                                            |  |      | F-2 and F-3 | 
|Consolidated Balance Sheets as of
    December 31, 2002 and 2003                                                                         |  |      | F-4         | 
|Consolidated Statements of Operations and Other
    Comprehensive Income (Loss) for the years ended
    December 31, 2001, 2002 and 2003 |  |      | F-5         | 
|Consolidated Statements of Stockholders
    Equity (Deficit) for the years ended December 31, 2001,
    2002 and 2003                   |  |      | F-6         | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2001, 2002 and 2003                                           |  |      | F-7         | 
|Notes to Consolidated Financial Statements                                                                                               |  |      | F-8 to F-27 | 

F-1



---



##### Table of Contents






INDEPENDENT AUDITORS REPORT

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

We have audited the accompanying consolidated
balance sheet of Elcom International, Inc. and subsidiaries
as of December 31, 2003, and the related consolidated
statements of operations and other comprehensive income (loss),
stockholders equity (deficit) and cash flows for the year
then ended. 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 audit.

We conducted our audit 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 consolidated 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 audit provides 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, 2003 and the consolidated results of its
operations and its cash flows for the year then ended 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 to the
consolidated financial statements, the Company has suffered
recurring losses from operations and has an accumulated deficit
that raise substantial doubt about the entitys ability to
continue as a going concern. Managements plans in regard
to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.



| |                                     
| | ------------------------------------
| | /s/ VITALE, CATURANO & COMPANY, P.C.
| |                                     
| | VITALE, CATURANO & COMPANY, P.C.    

Boston, Massachusetts

March 26, 2004


F-2



---



##### Table of Contents






INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders Elcom
International, Inc.:

We have audited the accompanying consolidated
balance sheet of Elcom International, Inc. and subsidiaries
as of December 31, 2002, and the related consolidated
statements of operations and other comprehensive income (loss),
stockholders equity, and cash flows for each of the years
in the two-year period then ended. 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, 2002, and the results of their operations and
their cash flows for each of the years in the two-year period
then ended, 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 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. The consolidated
financial statements do not include any adjustments that might
result from the outcome of this uncertainty.



| |             
| | ------------
| | /s/ KPMG LLP

Boston, Massachusetts

March 7, 2003


F-3



---



##### Table of Contents



ELCOM INTERNATIONAL, INC.

AND SUBSIDIARIES







CONSOLIDATED BALANCE SHEETS


|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |          |        |       | 
|--------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | -------------------------------------- | ------------------------ | -------- | ----- | --- | ------ | -------- | ------ | ----- | 
|                                                                                                    |                                                                                                         |                                       
|                                                                                                    |                                                                                                         | December 31,                          
|                                                                                                    |                                                                                                         |                                       
|                                                                                                    |                                                                                                         | 2002                                   |                          | 2003    
|                                                                                                    |                                                                                                         |                                        |                          |         
|                                                                                                    |                                                                                                         |                                       
|                                                                                                    |                                                                                                         | (In thousands, except share           
|                                                                                                    |                                                                                                         | and per share data)                   
|ASSETS                                                                                             
|CURRENT ASSETS:                                                                                     |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    | Cash and cash equivalents                                                                               |                                        | $                        | 2,302    |       |     | $      | 515      |       
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    | Accounts receivable:                                                                                    |                                        |                          |          |       |     |        |          |       
|                                                                                                    |                                                                                                         | Trade                                  |                          |          | 239   |     |        |          | 938    |      
|                                                                                                    |                                                                                                         | Other                                  |                          |          | 109   |     |        |          | 140    |      
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    |                                                                                                         |                                        | 348                      |          |       |     | 1,078  |         
|                                                                                                    |                                                                                                         | Less  Allowance for doubtful accounts |                          |          | 28    |     |        |          | 51     |      
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    |                                                                                                         |                                        | Accounts receivable, net |          |       | 320 |        |          |        | 1,027 | 
|                                                                                                    | Prepaids and other current assets                                                                       |                                        |                          | 205      |       |     |        | 43       |       
|                                                                                                    | Current assets of discontinued operations                                                               |                                        |                          | 238      |       |     |        |         |       
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    |                                                                                                         | Total current assets                   |                          |          | 3,065 |     |        |          | 1,585  |      
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         
|PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:                                                          |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    | Computer hardware and software                                                                          |                                        |                          | 17,741   |       |     |        | 18,016   |       
|                                                                                                    | Land, buildings and leasehold improvements                                                              |                                        |                          | 1,333    |       |     |        | 1,333    |       
|                                                                                                    | Furniture, fixtures and equipment                                                                       |                                        |                          | 3,544    |       |     |        | 3,544    |       
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    |                                                                                                         |                                        | 22,618                   |          |       |     | 22,893 |         
|                                                                                                    | Less  Accumulated depreciation and
    amortization                                                    |                                        |                          | 20,772   |       |     |        | 22,110   |       
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    |                                                                                                         |                                        | 1,846                    |          |       |     | 783    |         
|OTHER ASSETS                                                                                        |                                                                                                         |                                        | 113                      |          |       |     | 15     |         
|NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS                                                       |                                                                                                         |                                        | 106                      |          |       |     | 80     |         
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    |                                                                                                         | $                                      | 5,130                    |          |       | $   | 2,463  |         
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                   
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)                                                 
|CURRENT LIABILITIES:                                                                                |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    | Current portion of capital lease obligations                                                            |                                        | $                        | 275      |       |     | $      |         |       
|                                                                                                    | Loan payable                                                                                            |                                        |                          |         |       |     |        | 1,113    |       
|                                                                                                    | Accounts payable                                                                                        |                                        |                          | 335      |       |     |        | 681      |       
|                                                                                                    | Deferred revenue                                                                                        |                                        |                          | 405      |       |     |        | 733      |       
|                                                                                                    | Accrued expenses and other current liabilities                                                          |                                        |                          | 2,476    |       |     |        | 1,960    |       
|                                                                                                    | Current liabilities of discontinued operations                                                          |                                        |                          | 41       |       |     |        | 444      |       
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    |                                                                                                         | Total current liabilities              |                          |          | 3,532 |     |        |          | 4,931  |      
|CONVERTIBLE DEBENTURES, net of discount                                                             |                                                                                                         |                                        |                         |          |       |     | 254    |         
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    |                                                                                                         | Total liabilities                      |                          |          | 3,532 |     |        |          | 5,185  |      
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         
|COMMITMENTS AND CONTINGENCIES
    (Note 7)                                                          |                                                                                                         |                                        |                          |          |       |     |        |         
|STOCKHOLDERS EQUITY (DEFICIT):                                                                     |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    | Preferred stock, $.01 par value;
    Authorized  10,000,000 shares  Issued
    and outstanding  none |                                        |                          |         |       |     |        |         |       
|Common stock, $.01 par value;
    Authorized  100,000,000 shares  
    issued  31,432,546 shares |                                                                                                         |                                        | 314                      |          |       |     | 314    |         
|                                                                                                    | Additional paid-in capital                                                                              |                                        |                          | 114,817  |       |     |        | 115,886  |       
|                                                                                                    | Accumulated deficit                                                                                     |                                        |                          | (107,920 | )     |     |        | (113,371 | )     
|                                                                                                    | Treasury stock, at cost 
    530,709 shares                                                            |                                        |                          | (4,712   | )     |     |        | (4,712   | )     
|                                                                                                    | Accumulated other comprehensive loss                                                                    |                                        |                          | (901     | )     |     |        | (839     | )     
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    |                                                                                                         | Total stockholders equity (deficit)   |                          |          | 1,598 |     |        |          | (2,722 | )    
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         
|                                                                                                    |                                                                                                         | $                                      | 5,130                    |          |       | $   | 2,463  |         
|                                                                                                    |                                                                                                         |                                        |                          |          |       |     |        |         

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

F-4



---



##### Table of Contents



ELCOM INTERNATIONAL, INC.

AND SUBSIDIARIES







CONSOLIDATED STATEMENTS OF
OPERATIONS


AND OTHER COMPREHENSIVE INCOME
(LOSS)


|                                                        |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |        |       |     |  
|------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------------------- | ----------------------------- | ------ | ------ | ----- | ------- | ------ | ----- | --- | ------ | ------ | ----- | --- | -
|                                                        |                                                                     |                                                  
|                                                        |                                                                     | For the Years Ended December 31,                 
|                                                        |                                                                     |                                                  
|                                                        |                                                                     | 2001                                              |                               | 2002   |        | 2003 
|                                                        |                                                                     |                                                   |                               |        |        |      
|                                                        |                                                                     |                                                  
|                                                        |                                                                     | (In thousands, except per share data)            
|Net sales:                                              |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|                                                        | License fees                                                        |                                                   | $                             | 4,002  |        |       | $       | 3,927  |       |     | $      | 2,256  |      
|                                                        | Professional services                                               |                                                   |                               | 161    |        |       |         | 846    |       |     |        | 772    |      
|                                                        |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|                                                        |                                                                     |                                                   | 4,163                         |        |        |       | 4,773   |        |       |     | 3,028  |       
|Cost of sales                                           |                                                                     |                                                   | 1,255                         |        |        |       | 1,052   |        |       |     | 442    |       
|                                                        |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|Gross profit                                            |                                                                     |                                                   | 2,908                         |        |        |       | 3,721   |        |       |     | 2,586  |       
|Operating Expenses:                                     |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|                                                        | Selling, general and administrative                                 |                                                   |                               | 23,621 |        |       |         | 12,967 |       |     |        | 8,031  |      
|                                                        | Research and development                                            |                                                   |                               | 1,089  |        |       |         | 863    |       |     |        | 241    |      
|                                                        | Asset impairment charges                                            |                                                   |                               | 1,626  |        |       |         | 338    |       |     |        |       |      
|                                                        |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|Total operating expenses                                |                                                                     |                                                   | 26,336                        |        |        |       | 14,168  |        |       |     | 8,272  |       
|                                                        |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|Operating loss                                          |                                                                     |                                                   | (23,428                       | )      |        |       | (10,447 | )      |       |     | (5,686 | )     
|Interest expense                                        |                                                                     |                                                   | (144                          | )      |        |       | (69     | )      |       |     | (188   | )     
|Interest and other income (expense), net                |                                                                     |                                                   | 110                           |        |        |       | 647     |        |       |     | (94    | )     
|                                                        |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|Income (loss) before income taxes                       |                                                                     |                                                   | (23,462                       | )      |        |       | (9,869  | )      |       |     | (5,968 | )     
|Income tax benefit                                      |                                                                     |                                                   |                              |        |        |       |        |        |       |     | 558    |       
|                                                        |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|Loss from continuing operations                         |                                                                     |                                                   | (23,462                       | )      |        |       | (9,869  | )      |       |     | (5,410 | )     
|Discontinued operations, net of tax:                    |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|                                                        |                                                                     | Net income from discontinued operations,
    U.K. |                               |        | 1,942  |       |         |        |      |     |        |        |      |    
|                                                        |                                                                     | Net loss from discontinued operations,
    U.S.   |                               |        | (1,097 | )     |         |        | (788  | )   |        |        | (41   | )  
|                                                        |                                                                     | Gain on disposal of discontinued operations       |                               |        | 2,738  |       |         |        | 1,100 |     |        |        |      |    
|                                                        |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|                                                        |                                                                     |                                                   | Total discontinued operations |        |        | 3,583 |         |        |       | 312 |        |        |       | (41 | )
|                                                        |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|Net loss                                                |                                                                     |                                                   | (19,879                       | )      |        |       | (9,557  | )      |       |     | (5,451 | )     
|Comprehensive income (loss), net of tax:                |                                                                     |                                                   | 83                            |        |        |       | (467    | )      |       |     | 62     |       
|                                                        |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|Comprehensive income (loss)                             |                                                                     | $                                                 | (19,796                       | )      |        | $     | (10,024 | )      |       | $   | (5,389 | )     
|                                                        |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|Basic and diluted net income (loss) per share
    data: |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|                                                        | Continuing operations                                               |                                                   | $                             | (0.76  | )      |       | $       | (0.32  | )     |     | $      | (0.18  | )    
|                                                        | Discontinued operations, U.K.                                       |                                                   |                               | 0.06   |        |       |         |       |       |     |        |       |      
|                                                        | Discontinued operations, U.S.                                       |                                                   |                               | (0.03  | )      |       |         | (0.03  | )     |     |        |       |      
|                                                        | Disposal of discontinued operations                                 |                                                   |                               | 0.09   |        |       |         | 0.04   |       |     |        |       |      
|                                                        |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|                                                        |                                                                     | Basic and diluted net loss per share              |                               | $      | (0.64  | )     |         | $      | (0.31 | )   |        | $      | (0.18 | )  
|                                                        |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       
|                                                        | Weighted average number of basic and diluted
    shares outstanding |                                                   |                               | 30,912 |        |       |         | 30,901 |       |     |        | 30,902 |      
|                                                        |                                                                     |                                                   |                               |        |        |       |         |        |       |     |        |       

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

F-5



---



##### Table of Contents



ELCOM INTERNATIONAL, INC.

AND SUBSIDIARIES







CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)


|                           |                                                             |                                         |            |            |  |         |     |             |  |             |         |               |  |           |          |         |   |   |        |      |   |   |      |      |   |   |        |         |  
|-------------------------- | ----------------------------------------------------------- | --------------------------------------- | ---------- | ---------- |  | ------- | --- | ----------- |  | ----------- | ------- | ------------- |  | --------- | -------- | ------- | - | - | ------ | ---- | - | - | ---- | ---- | - | - | ------ | ------- | -
|                           |                                                             |                                         |            |            |  |         |     |             |  |             |         |              
|                           |                                                             | Common Stock                            |            |            |  |         |     |             |  | Accumulated |         | Total        
|                           |                                                             |                                         |            | Additional |  |         |     | Treasury    |  | Other       |         | Stockholders
|                           |                                                             | Number of                               |            | $.01 Par   |  | Paid-in |     | Accumulated |  | Stock,      |         | Comprehensive |  | Equity   
|                           |                                                             | Shares                                  |            | Value      |  | Capital |     | Deficit     |  | At Cost     |         | Income (Loss) |  | (Deficit)
|                           |                                                             |                                         |            |            |  |         |     |             |  |             |         |               |  |          
|                           |                                                             |                                        
|                           |                                                             | (In thousands, except number of shares)
|BALANCE, DECEMBER 31, 2000 |                                                             |                                         | 31,207,477 |            |  | $       | 312 |             |  | $           | 114,196 |               |  | $         | (78,484  | )       |   | $ | (4,552 | )    |   | $ | (517 | )    |   | $ | 30,955 |        
|                           | 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                           |                                         |            |           |  |         |     |            |  |             |         |              |  |           |          |        |   |   |        |     |   |   |      | 83   |   |   |        | 83      |  
|                           |                                                             |                                         |            |            |  |         |     |             |  |             |         |               |  |           |          |         |   |   |        |      |   |   |      |      |   |   |        |        
|BALANCE, DECEMBER 31, 2001 |                                                             |                                         | 31,406,796 |            |  | $       | 314 |             |  | $           | 114,514 |               |  | $         | (98,363  | )       |   | $ | (4,712 | )    |   | $ | (434 | )    |   | $ | 11,319 |        
|                           | Exercise of common stock options                            |                                         |            | 25,750     |  |         |     |            |  |             |         | 30            |  |           |          |        |   |   |        |     |   |   |      |     |   |   |        | 30      |  
|                           | Warrants issued in conjunction with asset sale              |                                         |            |           |  |         |     |            |  |             |         | 273           |  |           |          |        |   |   |        |     |   |   |      |     |   |   |        | 273     |  
|                           | Net loss                                                    |                                         |            |           |  |         |     |            |  |             |         |              |  |           |          | (9,557  | ) |   |        |     |   |   |      |     |   |   |        | (9,557  | )
|                           | Cumulative translation adjustment                           |                                         |            |           |  |         |     |            |  |             |         |              |  |           |          |        |   |   |        |     |   |   |      | (467 | ) |   |        | (467    | )
|                           |                                                             |                                         |            |            |  |         |     |             |  |             |         |               |  |           |          |         |   |   |        |      |   |   |      |      |   |   |        |        
|BALANCE, DECEMBER 31, 2002 |                                                             |                                         | 31,432,546 |            |  | $       | 314 |             |  | $           | 114,817 |               |  | $         | (107,920 | )       |   | $ | (4,712 | )    |   | $ | (901 | )    |   | $ | 1,598  |        
|                           | Beneficial conversion feature of Convertible
    Debentures |                                         |            |           |  |         |     |            |  |             |         | 1,069         |  |           |          |        |   |   |        |     |   |   |      |     |   |   |        | 1,069   |  
|                           | Net loss                                                    |                                         |            |           |  |         |     |            |  |             |         |              |  |           |          | (5,451  | ) |   |        |     |   |   |      |     |   |   |        | (5,451  | )
|                           | Cumulative translation adjustment                           |                                         |            |           |  |         |     |            |  |             |         |              |  |           |          |        |   |   |        |     |   |   |      | 62   |   |   |        | 62      |  
|                           |                                                             |                                         |            |            |  |         |     |             |  |             |         |               |  |           |          |         |   |   |        |      |   |   |      |      |   |   |        |        
|BALANCE, DECEMBER 31, 2003 |                                                             |                                         | 31,432,546 |            |  | $       | 314 |             |  | $           | 115,886 |               |  | $         | (113,371 | )       |   | $ | (4,712 | )    |   | $ | (839 | )    |   | $ | (2,722 | )      
|                           |                                                             |                                         |            |            |  |         |     |             |  |             |         |               |  |           |          |         |   |   |        |      |   |   |      |      |   |   |        |        

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

F-6



---



##### Table of Contents



ELCOM INTERNATIONAL, INC.

AND SUBSIDIARIES







CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |        |       |        |  
|-------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------------------------- | ------- | ------- | ------- | ------ | ------ | ------ | ------ | ------ | ------ | ----- | ------ | -
|                                                                           |                                                                                                |                                                                 
|                                                                           |                                                                                                | For the Years Ended                                             
|                                                                           |                                                                                                | December 31,                                                    
|                                                                           |                                                                                                |                                                                 
|                                                                           |                                                                                                | 2001                                                             |                                                                  | 2002    |         | 2003   
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |        
|                                                                           |                                                                                                |                                                                 
|                                                                           |                                                                                                | (In thousands)                                                  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                      |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           | Net loss from continuing operations                                                            |                                                                  | $                                                                | (23,462 | )       |         | $      | (9,869 | )      |        | $      | (5,410 | )    
|                                                                           | Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities  |                                                                  |                                                                  |         |         |         |        |        |        |        |        |        |      
|                                                                           |                                                                                                | Depreciation and amortization                                    |                                                                  |         | 4,903   |         |        |        | 3,066  |        |        |        | 1,397 |       
|                                                                           |                                                                                                | Asset impairment                                                 |                                                                  |         | 1,626   |         |        |        | 338    |        |        |        |      |       
|                                                                           | Changes in current assets and liabilities:                                                     |                                                                  |                                                                  |         |         |         |        |        |        |        |        |        |      
|                                                                           |                                                                                                | Accounts receivable                                              |                                                                  |         | (487    | )       |        |        | 170    |        |        |        | (707  | )     
|                                                                           |                                                                                                | Prepaids and other current assets                                |                                                                  |         | 359     |         |        |        | 98     |        |        |        | 162   |       
|                                                                           |                                                                                                | Accounts payable                                                 |                                                                  |         | 152     |         |        |        | (1,148 | )      |        |        | 346   |       
|                                                                           |                                                                                                | Deferred revenue                                                 |                                                                  |         | 95      |         |        |        | 202    |        |        |        | 328   |       
|                                                                           |                                                                                                | Accrued expenses and other current liabilities                   |                                                                  |         | 439     |         |        |        | (1,125 | )      |        |        | (516  | )     
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           |                                                                                                |                                                                  | Net cash used in continuing operations                           |         |         | (16,375 | )      |        |        | (8,268 | )      |        |       | (4,400 | )
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           |                                                                                                |                                                                  | Net cash provided by discontinued operations,
    U.K.           |         |         | 4,812   |        |        |        |       |        |        |       |       |  
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           |                                                                                                |                                                                  | Net cash provided by (used in) discontinued
    operations, U.S. |         |         | 25,327  |        |        |        | (1,028 | )      |        |       | 600    |  
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                      |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           | Purchase of property, equipment and software                                                   |                                                                  |                                                                  | (596    | )       |         |        | (13    | )      |        |        | (275   | )    
|                                                                           | Increase (decrease) in other assets and deferred
    costs                                     |                                                                  |                                                                  |        |         |         |        | (25    | )      |        |        | 98     |      
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           |                                                                                                | Net cash used in investing activities                            |                                                                  |         | (596    | )       |        |        | (38    | )      |        |        | (177  | )     
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           |                                                                                                | Net cash used in discontinued operations,
    U.K.               |                                                                  |         | (521    | )       |        |        |       |        |        |        |      |       
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           |                                                                                                | Net cash provided by (used in) discontinued
    operations, U.S. |                                                                  |         | (423    | )       |        |        | 1,650  |        |        |        | 26    |       
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                      |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           | Reduction of capital lease obligations                                                         |                                                                  |                                                                  | (429    | )       |         |        | (450   | )      |        |        | (275   | )    
|                                                                           | Proceeds from loan payable                                                                     |                                                                  |                                                                  |        |         |         |        |       |        |        |        | 1,113  |      
|                                                                           | Proceeds from issuance of Convertible Debentures                                               |                                                                  |                                                                  |        |         |         |        |       |        |        |        | 1,264  |      
|                                                                           | Exercise of common stock options                                                               |                                                                  |                                                                  | 320     |         |         |        | 30     |        |        |        |       |      
|                                                                           | Issuance of warrants on asset sale                                                             |                                                                  |                                                                  |        |         |         |        | 273    |        |        |        |       |      
|                                                                           | Purchase of treasury stock                                                                     |                                                                  |                                                                  | (160    | )       |         |        |       |        |        |        |       |      
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           |                                                                                                | Net cash provided by (used in) financing
    activities          |                                                                  |         | (269    | )       |        |        | (147   | )      |        |        | 2,102 |       
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           |                                                                                                | Net cash provided by (used in) discontinued
    operations, U.K. |                                                                  |         | (10,706 | )       |        |        |       |        |        |        |      |       
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           |                                                                                                | Net cash used in discontinued operations,
    U.S.               |                                                                  |         | (22,832 | )       |        |        | (213   | )      |        |        |      |       
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|FOREIGN EXCHANGE EFFECT ON CASH                                            |                                                                                                |                                                                  | 83                                                               |         |         |         | (467   | )      |        |        | 62     |       
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                  |                                                                                                |                                                                  | (21,500                                                          | )       |         |         | (8,511 | )      |        |        | (1,787 | )     
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                             |                                                                                                |                                                                  | 32,313                                                           |         |         |         | 10,813 |        |        |        | 2,302  |       
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                   |                                                                                                | $                                                                | 10,813                                                           |         |         | $       | 2,302  |        |        | $      | 515    |       
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                          |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           | Interest paid                                                                                  |                                                                  | $                                                                | 642     |         |         | $      | 59     |        |        | $      | 15     |      
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           | Income taxes paid                                                                              |                                                                  | $                                                                | 82      |         |         | $      | 15     |        |        | $      |       |      
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
    FINANCING ACTIVITIES: |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           | Discount on issuance of Convertible Debentures
    related to beneficial conversion feature    |                                                                  | $                                                                |        |         |         | $      |       |        |        | $      | (1,069 | )    
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           | Disposition of Assets:                                                                         |                                                                  |                                                                  |         |         |         |        |        |        |        |        |        |      
|                                                                           |                                                                                                | Cash proceeds from sale of assets                                |                                                                  | $       | 1       |         |        | $      | 2,142  |        |        | $      |      |       
|                                                                           |                                                                                                | Net book value of assets sold                                    |                                                                  |         | 3,039   |         |        |        | 1,042  |        |        |        |      |       
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       
|                                                                           |                                                                                                |                                                                  | Gain on sale                                                     |         | $       | 3,038   |        |        | $      | 1,100  |        |        | $     |       |  
|                                                                           |                                                                                                |                                                                  |                                                                  |         |         |         |        |        |        |        |        |       

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

F-7



---



##### Table of Contents



ELCOM INTERNATIONAL, INC.

AND SUBSIDIARIES







NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




|    |                     
|--- | --------------------
|(1) | Nature of Operations

On March 29, 2002, Elcom
International, Inc. (the Company) divested
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 (8). This allowed the Company to transition to a
leading provider of remotely-hosted, electronic procurement and
electronic marketplace Internet software solutions
(collectively, ePurchasing). 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 (8), commencing with the second quarter of 2002, the
Company did not record any revenues arising from the sale of IT
products and associated services. Subsequent to the sales, the
Companys sole source of revenue was from ePurchasing
solutions and associated professional services. As provided by
applicable accounting conventions, the consolidated financial
statements present all of the IT products and services
business as a discontinued operation for all periods presented.

The Companys ePurchasing solution combines
robust integrated eProcurement and eMarketplace capabilities and
is remotely-hosted via the Companys data center.
Management believes the combination of eProcurement and
eMarketplace functionality capabilities in a single code base
gives Elcom a strong low-cost offering and importantly, can be
offered to potential clients from either functional viewpoint.

Since its inception in 1992, the Company has
developed its PECOSTM (Professional Electronic
Commerce Online System) system, which automates many supply
chain and financial settlement functions associated with
procurement. The Company intends to augment its core ePurchasing
solutions with other supply chain and supplier-oriented systems
to enable the conduct of interactive procurement, supplier
relationship management, and financial settlement. The Company
has licensed a dynamic trading system platform to provide
auction, reverse auction, and other electronic negotiation, or
eNegotiation, functions and has also marketed an asset
management system, both from third parties, which modules are
offered as optional functionality to clients. The Companys
PECOSTM solution 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.

As of December 31, 2003, the Company had
approximately $.5 million of cash and cash equivalents and
current assets of approximately $1.6 million and had
current liabilities of approximately $4.9 million. The
Company has incurred significant operating losses, has used cash
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 securing adequate financing and developing and
marketing its ePurchasing solutions until the Company is
operating profitably. The Companys ability to continue as
a going concern is dependent upon its ability to attract new
sources of capital, grow revenue and attain further operating
efficiencies. The Company intends to seek additional capital,
which would result in dilution for its shareholders. The Company
intends to issue and sell common shares to investors in the U.K.
during April 2004, subject to the Alternative Investment Market
(AIM) of the London Stock Exchange (the AIM
Listing). The funds to be derived from such proposed sale
of common shares would be used to support the Companys
working capital requirements until the Company achieves positive
cash flow. There can be no assurance that any such financing can
be realized by the Company. 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.



|    |                                               
|--- | ----------------------------------------------
|(2) | Summary of Significant Accounting
    Policies



| |                               
| | ------------------------------
| | (a) Basis of
    Consolidation

The accompanying consolidated financial
statements include the accounts of the Company and its wholly
owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolida-

F-8



---



##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

tion. The Company has no material interests in
variable interest entities and therefore, none which require
consolidation.



| |                     
| | --------------------
| | (b) Reclassification

Certain amounts from prior years have been
reclassified to conform to the current year presentation (in
particular the reclassification of the Companys IT
products and services businesses as discontinued operations).



| |                     
| | --------------------
| | (c) 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 of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and revenue and expenses
during the period reported in the consolidated financial
statements and accompanying notes. Actual results may differ
from such estimates.



| |                                  
| | ---------------------------------
| | (d) Cash and Cash
    Equivalents

Cash and cash equivalents at December 31,
2002 and 2003 consisted of $2.3 million and $515,000,
respectively, of deposits with banks and financial institutions
which were unrestricted as to withdrawal or use and had original
maturities of less than three months. Cash and cash equivalents
are stated at cost, which approximates market value.



| |                        
| | -----------------------
| | (e) Accounts Receivable

Accounts receivable are stated at the amount
management expects to collect from outstanding balances. An
allowance for doubtful accounts is provided for those accounts
receivable considered to be uncollectible based upon historical
experience and managements evaluation of outstanding
accounts receivable at the end of the year. Bad debts are
written off against the allowance when identified. At
December 31, 2002 and 2003, the allowance for doubtful
accounts was $28,000 and $51,000, respectively.

At December 31, 2003, accounts receivable,
other, reflected the insurance amount due related to check fraud
committed by a former employee. This amount was collected in
January 2004.



| |                                         
| | ----------------------------------------
| | (f) Property, Equipment and
    Software

Property, equipment and software are stated at
cost. Additions and improvements are capitalized and ordinary
repairs and maintenance are expensed as incurred. 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 life of the lease.

In March 1998, the American Institute of
Certified Public Accountants (AICPA) issued
Statement of Position (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 one and a half to four years.

F-9



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During the year ended December 31, 2001, the
Company capitalized approximately $0.4 million, under
SOP 98-1, which were amortized over the estimated useful
life of the software developed, generally three years. During
2002 and 2003 the Company did not capitalize any software
development costs under SOP 98-1. During 2002,
$0.3 million of software costs previously capitalized under
SOP 98-1 were written off when the Company determined that
it was no longer probable that the development of a project
would be completed. These products were never put into
production (see Note 9). There were no previously
capitalized software development costs written off in 2003.

In January 2000, the Emerging Issues Task Force
(EITF) issued Issue No. 00-02, Accounting
for Web Site Development Costs. EITF 00-02 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
EITF 00-02, with the capitalized costs being amortized over
the expected useful life of the software, ranging from eighteen
months to four years.



| |                                        
| | ---------------------------------------
| | (g) Impairment of Long Lived
    Assets

In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, 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 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.



| |                        
| | -----------------------
| | (h) Revenue Recognition

Revenue consists principally of implementation,
consulting and training fees for implementations of the
Companys software solutions, and maintenance, licensing
and hosting. The Companys agreements provide for an
initial implementation fee for installation of the
Companys software products and monthly fees thereafter.
The Companys licenses its software in multiple element
arrangements in which the customer pays a monthly fee for a
combination of maintenance, licensing and hosting. The Company
recognizes revenue using the residual method in accordance with
SOP 97-2, Software Revenue Recognition, as amended
by SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain
Transactions. Under the residual method, revenue is
recognized in a multiple element arrangement in which
Company-specific objective evidence of fair value exists for all
of the undelivered elements in the arrangement, but does not
exist for one or more of the delivered elements in the
arrangement. At the outset of the arrangement with the customer,
the Company defers revenue until the basic criteria in
SOP 97-2 have been met. If such evidence of fair value for
each element of the arrangement does not exist, all revenue from
the arrangement is deferred until such time that evidence of
fair value does exist or until all elements of the arrangement
are delivered. If evidence of fair-value does not exist for
maintenance and/or hosting and there are no other undelivered
elements, all revenue is recognized ratably over the maintenance
period or hosting term.

F-10



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under SOP 97-2, revenue attributable to an
element in a customer arrangement is recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the
fee is fixed or determinable, collection of the resulting
receivable is probable, and the arrangement does not require
services that are essential to the functionality of the software.

The Companys specific policies for
recognition of license revenues and services revenues are as
follows:

License Revenue.The
Company recognizes revenue from software licenses to end users
upon persuasive evidence of an arrangement, delivery of the
software to a customer, determination that collection of a fixed
or determinable license fee is considered probable, and
determination that no undelivered services are essential to the
functionality of the software.

Service Revenue.Maintenance and hosting contracts generally call for the Company
to provide technical support and software updates and upgrades
to customers. Maintenance revenue is recognized monthly or
ratably over the term of the maintenance contract, generally on
a straight-line basis when all revenue recognition requirements
are met. Other service revenue, primarily implementation,
training and consulting, is generally recognized at the time the
service is performed and it is determined that the Company has
fulfilled its obligations resulting from the services contract.

The Company sells both an enterprise and a
non-enterprise (hosted) version of its PECOS solution. In
accordance with EITF 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 00-03.

Deferred Revenue.Revenue on software transactions in which there are outstanding
obligations is deferred and recognized once such obligations are
fulfilled. Included in deferred revenue at December 31,
2002 and 2003 was deferred revenue associated with the Cap
Gemini Ernst and Young UK Plc (CGEY) agreement of
$300,000 and $233,000, respectively.



| |                
| | ---------------
| | (i) Advertising

The Company expenses advertising costs as
incurred. Company advertising expenses, which relate to the
Companys ePurchasing technology product for 2001, 2002,
and 2003 totaled approximately $700,000, $300,000, and $60,000,
respectively.



| |                                 
| | --------------------------------
| | (j) Research and
    Development

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 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 $422,000 during the
year ended December 31, 2001. There were no software
development costs capitalized during 2002 and 2003. As of
December 31, 2002 and 2003 gross capitalized software
costs were $892,000, and related accumulated amortization was
$892,000. All software costs are amortized as a cost of software
distribution either on a straight-line basis, or on the basis of
each products projected revenues, whichever results in
greater amortization, over the remaining estimated economic life
of the product, which is generally estimated to be

F-11



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

eighteen months. The Company assesses the
recoverability of capitalized software costs by comparing the
cost capitalized for each product, to the net of estimated
future gross revenues less the estimated future cost of
completing, maintaining, supporting and disposing of the
product. No impairment charges were booked in 2001, 2002 or 2003
in conjunction with the Companys recoverability
assessments.



| |                                     
| | ------------------------------------
| | (k) Foreign Currency
    Translation

The accounts of the Companys foreign
subsidiaries are translated in accordance with
SFAS No. 52, Foreign Currency Translation.
Accordingly, assets and liabilities of these 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 (loss) 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, net of valuation allowances, 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.



| |                                 
| | --------------------------------
| | (m) Stock-Based
    Compensation

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). As of December 31, 2003, all Option Plans
provided that up to an aggregate of 13,658,514 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 and at 110% for shareholders
who own more than 10% of the outstanding shares. 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,
two of the Companys Option Plans allow for the exercise of
vested options for a 180-day period commencing on the date of
employee termination, provided that such termination is without
cause. Under all other Stock Option Plans, upon an
optionees termination without cause, unless an option
agreement contains differing terms with respect to vesting and
exercisability which supercedes the provisions of the applicable
plan, all unexercisable portions of the optionees options
vest and the optionee may exercise his or her options for up to
90 days following the date of termination.

One of the Option Plans, the 1995 Non-employee
Director Stock Option Plan (the 1995 Non-employee 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 non-employee director is
automatically granted 5,000 nonqualified stock options. All
non-employee directors are granted up to an additional 15,000
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.

F-12



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Information relating to the Companys Option
Plans (including convertible shares from the elcom, inc.option plan) during each of the years in the three-year
period ended December 31, 2003 is as follows:

|                               |            |           |            |              |   |                |              |              |  |   |      |      | 
|------------------------------ | ---------- | --------- | ---------- | ------------ | - | -------------- | ------------ | ------------ |  | - | ---- | ---- | 
|                               |            |           |            |              |   | Weighted      
|                               |            | Number of |            | Option Price |   | Average       
|                               |            | Shares    |            | Per Share    |   | Exercise Price
|                               |            |           |            |              |   |               
|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 |     
|                               | Granted    |           |            | 4,615,850    |   |                |              | 0.20  1.50  |  |   |      | 0.40 | 
|                               | Terminated |           |            | (4,168,489   | ) |                |              | 0.20  24.06 |  |   |      | 3.04 | 
|                               | Exercised  |           |            | (25,750      | ) |                |              | 1.23  1.63  |  |   |      | 1.51 | 
|                               |            |           |            |              |   |                |              |              |  |   |      |     
|Outstanding, December 31, 2002 |            |           | 12,243,524 |              |   | $              | 0.11  24.06 |              |  | $ | 2.32 |     
|                               | Granted    |           |            | 4,070,000    |   |                |              | 0.08  0.30  |  |   |      | 0.15 | 
|                               | Terminated |           |            | (5,015,697   | ) |                |              | 0.08  24.06 |  |   |      | 1.52 | 
|                               | Exercised  |           |            |             |   |                |              |             |  |   |      |     | 
|                               |            |           |            |              |   |                |              |              |  |   |      |     
|Outstanding, December 31, 2003 |            |           | 11,297,827 |              |   | $              | 0.08  22.50 |              |  | $ | 1.89 |     
|                               |            |           |            |              |   |                |              |              |  |   |      |     
|Exercisable, December 31, 2001 |            |           | 6,878,007  |              |   | $              | 0.11  24.06 |              |  | $ | 3.19 |     
|                               |            |           |            |              |   |                |              |              |  |   |      |     
|Exercisable, December 31, 2002 |            |           | 7,838,033  |              |   | $              | 0.11  24.06 |              |  | $ | 2.66 |     
|                               |            |           |            |              |   |                |              |              |  |   |      |     
|Exercisable, December 31, 2003 |            |           | 6,982,400  |              |   | $              | 0.20  22.50 |              |  | $ | 2.75 |     
|                               |            |           |            |              |   |                |              |              |  |   |      |     

The following table summarizes information about
stock options (including convertible options from the elcom,
inc. plan) outstanding as of December 31, 2003:

|                         |             |                     |            |                     |  |          |      |             |  |          |       |      |  |  |           |           |  |   |       |      | 
|------------------------ | ----------- | ------------------- | ---------- | ------------------- |  | -------- | ---- | ----------- |  | -------- | ----- | ---- |  |  | --------- | --------- |  | - | ----- | ---- | 
|                         |             |                     |            |                    
|                         |             | Options Outstanding |            | Options Exercisable
|                         |             |                     |            |                    
|                         |             |                     |            | Weighted            |  | Weighted |      |             |  | Weighted
|                         |             |                     |            | Average             |  | Average  |      |             |  | Average 
|                         |             | Number              |            | Remaining           |  | Exercise |      | Number      |  | Exercise
|Range of Exercise Prices |             | Outstanding         |            | Contractual Life    |  | Price    |      | Exercisable |  | Price   
|                         |             |                     |            |                     |  |          |      |             |  |         
|$ 0.08  0.19            |             |                     | 1,705,000  |                     |  |          | 9.24 |             |  | $        | 0.08  |      |  |  |          |           |  | $ |      |     
|                         | 0.20  0.30 |                     |            | 2,117,000           |  |          |      | 8.96        |  |          |       | 0.24 |  |  |           | 369,950   |  |   |       | 0.21 | 
|                         | 0.45  0.49 |                     |            | 1,919,250           |  |          |      | 7.76        |  |          |       | 0.45 |  |  |           | 1,354,236 |  |   |       | 0.45 | 
|                         | 0.60  0.94 |                     |            | 449,000             |  |          |      | 6.43        |  |          |       | 0.85 |  |  |           | 426,250   |  |   |       | 0.87 | 
|                         | 1.00  1.69 |                     |            | 1,472,614           |  |          |      | 6.58        |  |          |       | 1.47 |  |  |           | 1,449,864 |  |   |       | 1.47 | 
|                         | 1.77  3.00 |                     |            | 250,962             |  |          |      | 2.95        |  |          |       | 2.14 |  |  |           | 236,412   |  |   |       | 2.14 | 
|                         | 3.59  4.00 |                     |            | 1,136,600           |  |          |      | 3.28        |  |          |       | 3.90 |  |  |           | 1,123,475 |  |   |       | 3.90 | 
|                         | 4.06  4.81 |                     |            | 1,058,130           |  |          |      | 5.78        |  |          |       | 4.43 |  |  |           | 912,078   |  |   |       | 4.40 | 
|                         | 5.02  5.88 |                     |            | 718,078             |  |          |      | 3.95        |  |          |       | 5.36 |  |  |           | 642,442   |  |   |       | 5.31 | 
|                         | 6.00  8.00 |                     |            | 421,193             |  |          |      | 3.11        |  |          |       | 7.29 |  |  |           | 421,193   |  |   |       | 7.29 | 
|12.63                    |             |                     | 40,000     |                     |  |          | 5.98 |             |  |          | 12.63 |      |  |  | 40,000    |           |  |   | 12.63 |     
|22.50                    |             |                     | 10,000     |                     |  |          | 6.13 |             |  |          | 22.50 |      |  |  | 6,500     |           |  |   | 22.50 |     
|                         |             |                     |            |                     |  |          |      |             |  |          |       |      |  |  |           |           |  |   |       |     
|                         |             |                     | 11,297,827 |                     |  |          |      |             |  |          |       |      |  |  | 6,982,400 |           |  |   |       |     
|                         |             |                     |            |                     |  |          |      |             |  |          |       |      |  |  |           |           |  |   |       |     

F-13



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of December 31, 2003,
13,658,514 shares of common stock have been reserved for
issuance under the Companys stock option plans.

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 2001, 106,000 stock options were granted and
638,313 stock options were terminated, leaving a balance of
1,176,300 outstanding at December 31, 2001. During 2002,
458,050 stock options were terminated, leaving a balance of
718,250 outstanding at December 31, 2002. During 2003,
330,500 stock options were terminated leaving a balance of
387,750 outstanding at December 31, 2003. All stock options
under this plan were issued at $3.82 and 246,037 were
exercisable as of December 31, 2003. In addition, for each
elcom, inc. option granted, the optionee received 0.65 of an
option of the Companys common stock, all of which were
included in the Companys SFAS 148 pro forma
calculation. In the event the optionee exercises this Company
stock option, the elcom, inc. stock options automatically
terminate.

The Company applies SFAS No. 123,
Accounting for Stock-Based Compensation, as amended by
SFAS No. 148, Accounting for Stock Based
Compensation Transition and Disclosure, an Amendment to FASB
Statement No. 123, which requires entities to 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, 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 disclosure only provisions of
SFAS No. 123 and No. 148 to employee stock-based
awards.

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. Had compensation cost for awards under the Option
Plans (including 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:

|          |                                 |                                       |   |         |   |      |   |         |   |  |   |        |  
|--------- | ------------------------------- | ------------------------------------- | - | ------- | - | ---- | - | ------- | - |  | - | ------ | -
|          |                                 | 2001                                  |   | 2002    |   | 2003
|          |                                 |                                       |   |         |   |     
|          |                                 |                                      
|          |                                 | (In thousands, except per share data)
|Net loss: |                                 |                                       |   |         |   |      |   |         |   |  |   |       
|          | As reported                     |                                       | $ | (19,879 | ) |      | $ | (9,557  | ) |  | $ | (5,451 | )
|          | Pro forma                       |                                       | $ | (25,139 | ) |      | $ | (13,357 | ) |  | $ | (5,978 | )
|          | Net loss per share:             |                                       |   |         |   |      |   |         |   |  |   |        |  
|          | As reported  basic and diluted |                                       | $ | (0.64   | ) |      | $ | (0.31   | ) |  | $ | (0.18  | )
|          | Pro forma  basic and diluted   |                                       | $ | (0.81   | ) |      | $ | (0.43   | ) |  | $ | (0.19  | )

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:

|                         |  |      |          |      |  |      |            |   |  |  |          |  
|------------------------ |  | ---- | -------- | ---- |  | ---- | ---------- | - |  |  | -------- | -
|                         |  | 2001 |          | 2002 |  | 2003
|                         |  |      |          |      |  |     
|Volatility               |  |      | 118.67   | %    |  |      | 119.00     | % |  |  | 142.7    | %
|Risk-free interest rate  |  |      | 4.49     | %    |  |      | 3.03       | % |  |  | 2.67     | %
|Expected life of options |  |      | 5  years |      |  |      | 4.5  years |   |  |  | 5  years |  
|Expected dividend yield  |  |      | 0        | %    |  |      | 0          | % |  |  | 0        | %

F-14



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The weighted average fair value of options
granted during 2001, 2002, and 2003 was $1.19, $0.32 and $0.13,
respectively.



| |                       
| | ----------------------
| | (n) Net Loss Per Share

Net 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 earnings per share (EPS) is computed by
dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding during the
periods. 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 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.



| |                                    
| | -----------------------------------
| | (p) Comprehensive Income
    (Loss)

The Company follows SFAS No. 130,
Reporting Comprehensive Income, which requires
presentation of the components of comprehensive earnings. The
difference between comprehensive loss and net loss represents
the foreign currency translation adjustments for the period.



| |                      
| | ---------------------
| | (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. The Company has determined
that for all periods presented, there is one operating segment
and there are two geographical areas.



| |                                                               
| | --------------------------------------------------------------
| | (r) Concentration of Credit Risk and
    Significant Customers

Statement of Financial Accounting Standards
No. 105, Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk, requires
disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet
concentrations such as foreign exchange contracts, option
contracts or other foreign hedging arrangements. The Company
maintains the majority of its cash and cash equivalent balances
with one financial institution.

The principal financial instrument that
potentially subjects the Company to concentrations of credit
risk is accounts receivable. The majority of the Companys
revenues are from municipalities or relatively large companies
who are not required to provide collateral for amounts owed to
the Company. The Companys customers are dispersed over a
wide-geographic area and are subject to periodic review under
the Companys credit policies. The Company does not believe
that it is subject to any unusual credit risks, other than the
normal level of risk attendant to operating its business.

F-15



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Concentration of credit risk with respect to
accounts receivable is limited to certain customers to whom the
Company makes substantial sales. To reduce its credit risk, the
Company routinely assesses the financial strength of its
customers. The Company maintains an allowance for potential
credit losses, but historically has not experienced any losses
in excess of the loss allowance related to individual customers
or groups of customers in any particular industry or geographic
area.

One customer represented 69% of net sales from
continuing operations in 2001, 73% in 2002 and 46% in 2003,
respectively. As of December 31, 2002 and 2003, one
customer individually accounted for 15% and 29% of trade
accounts receivable, respectively.



| |                              
| | -----------------------------
| | (s) Recent
    Pronouncements

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. This statement addresses
financial accounting and reporting for costs associated with
exit or disposal activities and nullifies EITF 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred.
EITF 94-3 allowed for an exit cost liability to be
recognized at the date of an entitys commitment to an exit
plan. SFAS No. 146 also requires that liabilities
recorded in connection with exit plans be initially measured at
fair value. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated
after December 31, 2002. The adoption of
SFAS No. 146 did not have a material impact on the
Companys financial position, results of operations or cash
flows.

In November 2002, the FASB issued Interpretation
(FIN) No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which
addresses the disclosure to be made by a guarantor in its
interim and annual financial statements about its obligations
under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees.
FIN 45 requires the guarantor to recognize a liability for
the non-contingent component of the guarantee, this is the
obligation to stand ready to perform in the event that specified
triggering events or conditions occur. The initial measurement
of this liability is the fair value of the guarantee at
inception. The recognition of the liability is required even it
is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment
or as part of a transaction with multiple elements.

The Company adopted the disclosure requirements
of FIN 45 during 2003 and applied the recognition and
measurement provisions for all guarantees entered into or
modified after December 31, 2002. The Company did not enter
into any guarantees covered by FIN 45 during 2003.

In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities(VIEs),
and a revision to FIN 46 in December 2003
(FIN 46 R), which requires identification
of the Companys participation in VIEs. VIEs
are defined as entities with a level of invested equity that is
not sufficient to fund future activities to permit them to
operate on a stand-alone basis, or whose equity holders lack
certain characteristics of a controlling financial interest. For
entities identified as VIEs, FIN 46 sets forth a
model to evaluate potential consolidation based on the
assessment of which party to a VIE, if any, bears a majority of
the risk of the VIEs expected losses, or stands to gain
from a majority of the VIEs expected returns. FIN 46
also sets forth certain disclosures regarding interest in
VIEs that are deemed significant, even if consolidation is
not required. FIN 46 is effective for all VIEs
created after January 31, 2003. The Company adopted
FIN 46 R during 2003 and the adoption of this
interpretation did not have an impact on the Companys
consolidated financial statements.

F-16



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity. SFAS No. 150 establishes standards for how
an issuer classifies and measures certain financial instruments
with characteristics of both liabilities and equity. It requires
that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances).
Many of those instruments were previously classified as equity.
SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003. The Company
adopted this standard during 2003 and the adoption did not have
an impact on the Companys consolidated financial
statements.



|    |             
|--- | ------------
|(3) | Loan Payable

On April 3, 2003, the Company signed an
agreement whereby Cap Gemini Ernst and Young UK Plc
(CGEY) agreed to advance £625,000 ($983,000 as
of April 3, 2003 and subsequently adjusted to $1,113,000 as
of December 31, 2003 to account for changes in the pound to
dollar conversion rate) to the Company representing an advance
of a lump-sum payment which was earned by the Company during
February 2004. This loan was contingent upon the Company
providing assistance to CGEY to set up a back-up system in
Toronto, Canada in order for CGEY to provide Disaster Recovery
and Business Continuity Services for Elcoms clients,
primarily for the Scottish Executive. These contingencies were
all met during 2003 and the loan was advanced. These Services
are expected to be made available to Elcoms clients during
2004 for a fee and would provide a back-up system to allow CGEY
to provide Business Continuity Services (e.g. to host, operate
and manage), Elcoms ePurchasing system, if Elcom were
unable to do so for any reason.



|    |                                                   
|--- | --------------------------------------------------
|(4) | Accrued Expenses and Other Current
    Liabilities

|                                      |  |                 |       |      |  |   |       | 
|------------------------------------- |  | --------------- | ----- | ---- |  | - | ----- | 
|                                      |  |                
|                                      |  | At December 31,
|                                      |  |                
|                                      |  | 2002            |       | 2003
|                                      |  |                 |       |     
|                                      |  |                
|                                      |  | (In thousands) 
|Salary, wages and benefits            |  | $               | 500   |      |  | $ | 626   | 
|Taxes, including U.K. Value Added Tax |  |                 | 1,000 |      |  |   | 276   | 
|Financial consulting                  |  |                 | 580   |      |  |   | 580   | 
|Legal and audit fees                  |  |                 | 200   |      |  |   | 138   | 
|Other accruals                        |  |                 | 196   |      |  |   | 340   | 
|                                      |  |                 |       |      |  |   |       | 
|                                      |  | $               | 2,476 |      |  | $ | 1,960 | 
|                                      |  |                 |       |      |  |   |       | 



|    |                  
|--- | -----------------
|(5) | 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, 2001, 2002, and 2003 were $42,000,
$46,000, and $33,000, 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.



|    |                     
|--- | --------------------
|(6) | 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

F-17



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.



| |                    
| | -------------------
| | (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) 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 in the U.K. As of December 31, 2003, 82,500 of these
warrants are outstanding and exercisable. The warrants expire in
June 2005.

On December 30, 1999, the Company signed a
Structured Equity Line Flexible Financing Agreement (the
Equity Line) with Cripple Creek Securities. 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, as included in
Note 2(m), and a contractual life of five years. At
December 31, 2003, all of these warrants are outstanding
and exercisable.

On March 29, 2002, the Company issued
warrants to purchase 300,000 shares of the Companys
common stock to the company that acquired the Companys
U.S. IT products business (Note 8). The warrants are
exercisable after September 29, 2002, have an exercise
price of $1.03 and expire on March 29, 2009. The fair
market value of the warrants at the date of grant was $0.91
based on the volatility, risk factor rate, dividend yield, as
included in footnote 2(m), and the contractual life of
seven years.



| |                               
| | ------------------------------
| | (d) Convertible
    Debentures

On April 25, 2003, the Company closed a
private placement to accredited investors (the Private
Placement) of ten-year 10% Senior Convertible
Debentures (the Debentures), generating gross
proceeds of $949,000 and net cash to the Company of $702,000.
Robert J. Crowell, the Chairman and CEO invested $300,000, John
E. Halnen, the President and COO invested $60,000, William W.
Smith, the Companys Vice Chairman and Director invested
$300,000, Andres Escallon, the Chief Technology Officer invested
$50,000 (collectively, the Inside Investors). The
Company paid Robert J. Crowell $187,000 and John E.
Halnen $60,000 in repayment of a portion of their salaries which
they had voluntarily suspended during 2002 in order to assist
the Company in its efforts to retain cash. Robert J.
Crowell and John E. Halnen immediately reinvested these
proceeds into their purchase of the Debentures. In addition,
Smith and Williamson LLC (U.K.) and other Elcom stockholders in
the U.K. invested $239,000. Inside Investors are considered
related parties and invested a total of $710,00 in the Company
via purchases of Debentures.

On October 16, 2003, the Company closed a
second round of the private placement of its Debentures (the
Second Closing), generating cash proceeds of
$315,000. Robert J. Crowell, the Chairman and CEO invested
$150,000, William W. Smith, the Vice Chairman and Director
invested $50,000 (both the Inside Investors) and
Smith & Williamson LLC (U.K.) and another Elcom
stockholder invested $115,000. Inside

F-18



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Investors are considered related parties and
invested a total of $200,000 in the Company via purchases of
Debentures in the Second Closing.

As of December 31, 2003, Inside
Investors have invested an aggregate of $910,000 of the
$1,264,000 invested in the Company via the purchases of
Debentures.

The Debentures carry a 10% interest rate, which
is payable in cash or payment in-kind. Interest is due annually,
in arrears, commencing April 25, 2004 and October 16,
2004. The principal amount is due at maturity on April 25,
2013. The Company has accrued $72,000 in interest expense for
these Debentures as of December 31, 2003.

The Debentures are collateralized by a security
interest in substantially all of the Companys assets for a
two-year period ending April 25, 2005. They are convertible
into common stock of the Company at a conversion price of
$0.1246 per share, subject to anti-dilution clauses. The
Debentures are convertible at the election of the holder at any
time commencing on April 25, 2005 through April 25,
2013. However, if the Company has two sequential quarters of
profitability with respect to continuing operations, the Holder
may convert the Debentures at his option. The Holders also have
certain registration rights upon conversion. The Company has the
right to convert the Debentures upon the occurrence of a change
of control, as defined in the agreement, or at the
Companys option, as of April 23, 2007, or subsequent
thereto upon written notice to the investors.

In accordance with EITF 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios, and
EITF 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, the Company recorded a
discount on the issuance of the Debentures (the Debenture
discount) of $1,069,000. The Debenture discount is being
amortized over the ten-year term of the Debentures. At
December 31, 2003, the Company has amortized $59,000 of the
Debenture discount and has included this amount in interest
expense in the accompanying statements of operations. At
December 31, 2003, the Debentures are convertible into
10,144,462 shares of common stock.

The Debentures are not registered under the
Securities Act of 1933, as amended, or applicable state
securities laws and may not be offered or sold in the United
States absent registration under the Securities Act of 1933, and
applicable state securities laws or available exemptions from
the registration requirements. This Private Placement has been
extended to May 17, 2004 and will terminate on that date
unless otherwise extended or earlier terminated by the Company.
Exemption from registration with respect to the sale of
Debentures is claimed pursuant to Section 4(a) of the
Securities Act of 1933, as amended.



| |                                    
| | -----------------------------------
| | (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. Additional purchases may be made from time to
time in the open market or in privately negotiated transactions
based on then-existing market conditions. There were no open
market stock repurchases during 2002 and 2003.

(7) Commitments and
Contingencies



| |           
| | ----------
| | (a) Leases

The Company has entered into capital leases for
various software, furniture, computer, telephone and other
equipment. The lease terms ranged from three to four years and,
upon expiration, all leases provided purchase options at a
nominal price. All capital leases have expired as of
December 31, 2003. Property,

F-19



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

equipment and software includes assets acquired
under capital leases was $1,106,000 at December 31, 2002
and 2003. Related accumulated amortization was $934,000 and
$1,106,000 as of December 31, 2002 and 2003, respectively.
Amortization of leased assets is included in depreciation
expense.

The Company has entered into a non-cancelable
operating lease for office space. The period covered by the
lease is five years ending in July 2006. The office lease
requires payment by the Company of all related operating
expenses of the building, including real estate taxes and
utilities.

Future minimum rental payments under
non-cancelable operating leases as of December 31, 2003 are
as follows:

|                                        |  |           |       | 
|--------------------------------------- |  | --------- | ----- | 
|                                        |  | Operating
|Year Ending December 31, (in thousands) |  | Leases   
|                                        |  |          
|2004                                    |  | $         | 419   | 
|2005                                    |  |           | 535   | 
|2006                                    |  |           | 312   | 
|                                        |  |           |       | 
|Total minimum lease payments            |  | $         | 1,266 | 
|                                        |  |           |       | 

Rent expense for operating leases amounted to
approximately $1,300,000, $700,000, and $376,000, for the years
ended December 31, 2001, 2002 and 2003, respectively.



| |                                                    
| | ---------------------------------------------------
| | (b) Employment Contracts and Personnel
    Expenses

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

During 2002 and 2003, certain employees elected
to receive lower salaries and/or salary suspensions while the
Company implemented its cost containment programs. The effect of
these reductions was to reduce the Companys operating cash
outflow in 2002 and 2003 by $250,000 and $394,000, respectively.
The $250,000 deferred in 2002 was paid out in 2003 in
conjunction with the Companys issuance of Convertible
Debentures (Note 6(d)). The $394,000 deferred in 2003 is
included in Accrued Expenses and Other Current Liabilities. Upon
the occurrence of a change of control or other liquidity event,
the Company will repay these employees in recognition of past
services.



| |                  
| | -----------------
| | (c) Contingencies

The Companys customer contracts typically
contain customary provisions that indemnify customers for losses
that they may incur in the unlikely event that there is an
intellectual infringement claim made against the customer
relating to use of the Companys PECOS products. The
Company believes that the financial risk relating to these
provisions is insignificant. The Company agreed to indemnify the
purchaser of the U.S. IT products business for any claims
arising from any actual or alleged breach of any warranty,
representation or covenant contained in the agreement for its
sale. Such indemnification obligation expired on March 29,
2003 without any material claims being made.

The Company is party to various litigation as
both plaintiff and defendant in cases related to contractual
issues, employment matters and other issues arising out of the
normal 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.

F-20



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(8) 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 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 certain of 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 during the
year ended December 31, 2001.

In addition to the sale of the Business, elcom,
inc., the Companys U.S. technology subsidiary
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. 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
purchase fees of approximately $2.9 million in the
aggregate, which were recorded as 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.

On March 29, 2002, the Company sold certain
of the assets and liabilities of its U.S. IT products and
Services business to ePlus. The assets acquired by ePlus
included the Companys customer list and certain
contractual rights related to the resale of IT products and
Services, certain fixed assets and rights under the
Companys real property lease in California (which was
subsequently assigned to ePlus). ePlus also assumed certain
related liabilities of the Company, including liabilities
related to employee compensation and liabilities under assigned
contracts. In addition, ePlus acquired certain of the
Companys software and a perpetual license for certain of
the Companys other software, all of which was used in the
U.S. IT products and Services business. Under the terms of
the sale, ePlus agreed to employ the majority of the
Companys employees who were involved in the U.S. IT
products and Services business. The sale price for the Business
consisted of cash consideration of $2.15 million, of which
approximately $0.6 million was held in escrow. The escrow
was released when the Company satisfied certain liabilities,
mostly related to employee commissions, severance and accrued
vacation. At December 31, 2002, approximately $10,000 of
the escrow amount remained in escrow, all of which was collected
during 2003. The Company recorded a net gain on the sale of
$1.1 million during the year ended December 31, 2002.

The Company also performed certain operational
and hosting services for ePlus to facilitate the transition of
the Business to ePlus in an efficient and effective manner
(Managed Services). The Company was reimbursed for
its costs incurred in the provision of the Managed Services. The
Managed Services include providing certain facilities for former
Company staff now employed by ePlus and hosting of certain
software applications used in the Business. The Managed Services
ended in February 2003. A total of $522,000 was billed under
these Managed Services.

F-21



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.
The fair value of the warrants (utilizing a Black-Scholes
pricing model) was $273,000 and was recorded as an offset to the
gain on the sale (Note 6(c)).

The results of discontinued operations were as
follows (in thousands):

|                                                            |  |                         |         |      |  |      |       |   |  |   |     |  
|----------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ----- | - |  | - | --- | -
|                                                            |  |                        
|                                                            |  | Year Ended December 31,
|                                                            |  |                        
|                                                            |  | 2001                    |         | 2002 |  | 2003
|                                                            |  |                         |         |      |  |     
|Revenue                                                     |  | $                       | 152,127 |      |  | $    | 4,880 |   |  | $ |    |  
|Net income (loss) from discontinued operations              |  | $                       | 845     |      |  | $    | (788  | ) |  | $ | (41 | )
|Gain on disposal of discontinued operations, net
    of tax |  | $                       | 2,738   |      |  | $    | 1,100 |   |  | $ |    |  

The assets and liabilities identified as part of
the disposed businesses 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 net income
(loss) from discontinued operations, net of tax.

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

|                                  |  |              |     |              |  |   |   | 
|--------------------------------- |  | ------------ | --- | ------------ |  | - | - | 
|                                  |  | December 31, |     | December 31,
|                                  |  | 2002         |     | 2003        
|                                  |  |              |     |             
|Accounts receivable               |  | $            | 174 |              |  | $ |  | 
|Prepaids and other current assets |  |              | 64  |              |  |   |  | 
|                                  |  |              |     |              |  |   |   | 
|                                  |  | $            | 238 |              |  | $ |  | 
|                                  |  |              |     |              |  |   |   | 

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

|                         |  |              |     |              |  |   |    | 
|------------------------ |  | ------------ | --- | ------------ |  | - | -- | 
|                         |  | December 31, |     | December 31,
|                         |  | 2002         |     | 2003        
|                         |  |              |     |             
|Other non-current assets |  | $            | 106 |              |  | $ | 80 | 
|                         |  |              |     |              |  |   |    | 
|                         |  | $            | 106 |              |  | $ | 80 | 
|                         |  |              |     |              |  |   |    | 

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

|                                               |  |              |    |              |  |   |     | 
|---------------------------------------------- |  | ------------ | -- | ------------ |  | - | --- | 
|                                               |  | December 31, |    | December 31,
|                                               |  | 2002         |    | 2003        
|                                               |  |              |    |             
|Accrued expenses and other current liabilities |  | $            | 41 |              |  | $ | 444 | 
|                                               |  |              |    |              |  |   |     | 
|                                               |  | $            | 41 |              |  | $ | 444 | 
|                                               |  |              |    |              |  |   |     | 

(9) Asset Impairment Charges

In 2001 and 2002, the Company recorded asset
impairment charges of $1.6 million and $0.3 million
respectively. These impairment charges relate to previously
capitalized software costs that were acquired to augment the
Companys PECOS technology. These software programs did not
perform as expected and were never installed into production.
There were no asset impairment charges recorded in 2003.

F-22



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(10) Business Segment
Information

The Companys continuing operation is
classified as a single business segment, specifically the
development and sale of Purchasing Internet-based software
solutions which automate many supply chain and financial
settlement functions associated with procurement. Prior to the
divestiture of the U.K. IT products business and the
U.S. IT products and services business, the Company
separately disclosed that business segment in its business
segment footnote. Discontinued operations represent all of the
IT products and services business for all applicable periods
presented. The Company operates both in the U.S. and U.K. and
geographic financial information for the years ended
December 31, 2001, 2002 and 2003, were as follows (in
thousands):

|                                                 |           |                              |         |         |  |      |       |       |  |   |       |       | 
|------------------------------------------------ | --------- | ---------------------------- | ------- | ------- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                                                 |           |                             
|                                                 |           | For Years Ended December 31,
|                                                 |           |                             
|                                                 |           | 2001                         |         | 2002    |  | 2003
|                                                 |           |                              |         |         |  |     
|Net sales from continuing operations             |           |                              |         |         |  |      |       |       |  |   |       |      
|                                                 | U.S.      |                              | $       | 4,012   |  |      | $     | 1,100 |  |   | $     | 1,117 | 
|                                                 | U.K.      |                              |         | 151     |  |      |       | 3,673 |  |   |       | 1,911 | 
|                                                 |           |                              |         |         |  |      |       |       |  |   |       |      
|                                                 |           |                              | 4,163   |         |  |      | 4,773 |       |  |   | 3,028 |      
|Net sales from discontinued operations           |           |                              |         |         |  |      |       |       |  |   |       |      
|                                                 | U.S.      |                              |         | 58,058  |  |      |       | 4,880 |  |   |       |      | 
|                                                 | U.K.      |                              |         | 94,069  |  |      |       |      |  |   |       |      | 
|                                                 |           |                              |         |         |  |      |       |       |  |   |       |      
|                                                 |           |                              | 152,127 |         |  |      | 4,880 |       |  |   |      |      
|                                                 |           |                              |         |         |  |      |       |       |  |   |       |      
|                                                 | Net sales |                              | $       | 156,290 |  |      | $     | 9,653 |  |   | $     | 3,028 | 
|                                                 |           |                              |         |         |  |      |       |       |  |   |       |      
|Gross profit from continuing operations          |           |                              |         |         |  |      |       |       |  |   |       |      
|                                                 | U.S.      |                              | $       | 2,768   |  |      | $     | 1,879 |  |   | $     | 862   | 
|                                                 | U.K.      |                              |         | 140     |  |      |       | 1,842 |  |   |       | 1,724 | 
|                                                 |           |                              |         |         |  |      |       |       |  |   |       |      
|                                                 |           |                              | 2,908   |         |  |      | 3,721 |       |  |   | 2,586 |      
|Gross profit (loss) from discontinued operations |           |                              |         |         |  |      |       |       |  |   |       |      
|                                                 | U.S.      |                              |         | 12,182  |  |      |       | 2,016 |  |   |       |      | 
|                                                 | U.K.      |                              |         | 11,191  |  |      |       |      |  |   |       |      | 
|                                                 |           |                              |         |         |  |      |       |       |  |   |       |      
|                                                 |           |                              | 23,373  |         |  |      | 2,016 |       |  |   |      |      
|                                                 |           |                              |         |         |  |      |       |       |  |   |       |      
|Gross profit                                     |           | $                            | 26,281  |         |  | $    | 5,737 |       |  | $ | 2,586 |      
|                                                 |           |                              |         |         |  |      |       |       |  |   |       |      

Identifiable assets as of December 31, 2002
and 2003 are as follows:

|                                                 |      |      |       |       |  |   |       |       | 
|------------------------------------------------ | ---- | ---- | ----- | ----- |  | - | ----- | ----- | 
|                                                 |      | 2002 |       | 2003 
|                                                 |      |      |       |      
|Identifiable assets from continuing operations   |      |      |       |       |  |   |       |      
|                                                 | U.S. |      | $     | 4,311 |  |   | $     | 1,522 | 
|                                                 | U.K. |      |       | 475   |  |   |       | 861   | 
|                                                 |      |      |       |       |  |   |       |      
|                                                 |      |      | 4,786 |       |  |   | 2,383 |      
|Identifiable assets from discontinued operations |      |      | 344   |       |  |   | 80    |      
|                                                 |      |      |       |       |  |   |       |      
|                                                 |      | $    | 5,130 |       |  | $ | 2,463 |      
|                                                 |      |      |       |       |  |   |       |      

F-23



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(11) Income Taxes

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

|        |  |      |         |      |  |      |        |   |  |   |        |  
|------- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|        |  | 2001 |         | 2002 |  | 2003
|        |  |      |         |      |  |     
|U.S.    |  | $    | (22,362 | )    |  | $    | (8,839 | ) |  | $ | (5,273 | )
|Foreign |  |      | 2,783   |      |  |      | (718   | ) |  |   | (1,036 | )
|        |  |      |         |      |  |      |        |   |  |   |        |  
|        |  | $    | (19,579 | )    |  | $    | (9,557 | ) |  | $ | (6,309 | )
|        |  |      |         |      |  |      |        |   |  |   |        |  

The tax benefits recorded in 2003 represent the
reversal of amounts provided in prior years, which are no longer
required. The expense (benefit) for income taxes consisted of
(in thousands):

|                                   |                               |                       |                                     |      |   |      |   |   |   |   |      |      |      |      |  
|---------------------------------- | ----------------------------- | --------------------- | ----------------------------------- | ---- | - | ---- | - | - | - | - | ---- | ---- | ---- | ---- | -
|                                   |                               | 2001                  |                                     | 2002 |   | 2003
|                                   |                               |                       |                                     |      |   |     
|Continuing operations              |                               |                       |                                     |      |   |      |   |   |   |   |      |     
|                                   | Current tax expense (benefit) |                       |                                     |      |   |      |   |   |   |   |      |      |     
|                                   |                               | United States federal |                                     | $    |  |      |   | $ |  |   |      | $    | (125 | )   
|                                   |                               | State                 |                                     |      |  |      |   |   |  |   |      |      | (68  | )   
|                                   |                               | Foreign               |                                     |      |  |      |   |   |  |   |      |      | (365 | )   
|                                   |                               |                       |                                     |      |   |      |   |   |   |   |      |     
|                                   |                               |                       | Total current tax expense (benefit) |      |   |     |   |   |   |  |      |      |      | (558 | )
|                                   |                               |                       |                                     |      |   |      |   |   |   |   |      |     
|Discontinued operations            |                               |                       |                                     |      |   |      |   |   |   |   |      |     
|                                   | Foreign                       |                       |                                     | 300  |   |      |   |  |   |   |      | (300 | )   
|                                   |                               |                       |                                     |      |   |      |   |   |   |   |      |     
|Expense (benefit) for income taxes |                               | $                     | 300                                 |      |   | $    |  |   |   | $ | (858 | )   
|                                   |                               |                       |                                     |      |   |      |   |   |   |   |      |     

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:

|                                                                                       |  |      |       |      |  |      |       |   |  |  |       |  
|-------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                                                                       |  | 2001 |       | 2002 |  | 2003
|                                                                                       |  |      |       |      |  |     
|Statutory tax rate                                                                     |  |      | 34.0  | %    |  |      | 34.0  | % |  |  | 34.0  | %
|Reversal of reserves no longer required                                                |  |      |      |      |  |      |      |   |  |  | 7.2   |  
|Valuation reserve provided against utilization of
    net operating loss carryforwards |  |      | (11.9 | )    |  |      | (34.0 | ) |  |  | (31.9 | )
|Non deductible goodwill and other                                                      |  |      | (22.1 | )    |  |      |      |   |  |  |      |  
|                                                                                       |  |      |       |      |  |      |       |   |  |  |       |  
|                                                                                       |  |      |      |      |  |      |      |   |  |  | 9.3   | %
|                                                                                       |  |      |       |      |  |      |       |   |  |  |       |  

F-24



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                          |                                                    |      |         |        |   |      |         |        |   |   |         |        |  
|------------------------- | -------------------------------------------------- | ---- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | -
|                          |                                                    | 2001 |         | 2002   |   | 2003
|                          |                                                    |      |         |        |   |     
|Deferred tax assets:      |                                                    |      |         |        |   |      |         |        |   |   |         |       
|                          | Nondeductible reserves                             |      | $       | 374    |   |      | $       | 50     |   |   | $       | 322    |  
|                          | Accrued expenses                                   |      |         | 198    |   |      |         | 60     |   |   |         | 228    |  
|                          | Other temporary differences                        |      |         | 205    |   |      |         | 77     |   |   |         | 92     |  
|                          | Depreciation                                       |      |         | 5,806  |   |      |         | 6,070  |   |   |         | 6,114  |  
|                          | Foreign net operating loss carryforwards           |      |         | 3,469  |   |      |         | 3,049  |   |   |         | 3,886  |  
|                          | Net federal and state operating loss carryforwards |      |         | 45,199 |   |      |         | 50,046 |   |   |         | 50,574 |  
|                          |                                                    |      |         |        |   |      |         |        |   |   |         |       
|                          |                                                    |      | 55,251  |        |   |      | 59,352  |        |   |   | 61,216  |       
|Valuation allowance       |                                                    |      | (52,455 | )      |   |      | (56,820 | )      |   |   | (58,684 | )     
|                          |                                                    |      |         |        |   |      |         |        |   |   |         |       
|Net deferred tax assets   |                                                    |      | 2,796   |        |   |      | 2,532   |        |   |   | 2,532   |       
|                          |                                                    |      |         |        |   |      |         |        |   |   |         |       
|Deferred tax liabilities: |                                                    |      |         |        |   |      |         |        |   |   |         |       
|                          | Other intangible assets                            |      |         | (2,796 | ) |      |         | (2,532 | ) |   |         | (2,532 | )
|                          |                                                    |      |         |        |   |      |         |        |   |   |         |       
|                          |                                                    |      | (2,796  | )      |   |      | (2,532  | )      |   |   | (2,532  | )     
|                          |                                                    |      |         |        |   |      |         |        |   |   |         |       
|Net deferred taxes        |                                                    | $    |        |        |   | $    |        |        |   | $ |        |       
|                          |                                                    |      |         |        |   |      |         |        |   |   |         |       

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 2004, 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, a reduction to the valuation allowance
would increase income in the period such determination was made.

At December 31, 2003, the Company had
U.S. federal net operating loss carryforwards of
approximately $117 million, which are available to offset
future Federal taxable income. These losses expire during the
years 2011 through 2023.

Section 382 (Sec 382) of the
Internal Revenue Code (IRC) 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
relative to the losses subject to these limitations support
current availability under Section 382 of all of the
Companys net operating losses and tax credits.

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, 2003, the Company had state
net operating loss carryforwards of approximately
$114 million, which are available to offset future state
taxable income. These losses expire during the years 2004
through 2023.

At December 31, 2003, the Company had
foreign net operating loss carryforwards of approximately
$4 million, which are available to offset future foreign
taxable income. Generally, these losses may be carried forward
indefinitely.

F-25



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The valuation allowance increased by
$4.4 million and $1.9 million during the years ended
December 31, 2002 and 2003, respectively. The Company
believes that it is more likely than not that the deferred tax
assets at December 31, 2003 will not be fully realized in
the future. The valuation allowance as of December 31, 2003
includes a tax effect of approximately $12 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.

(12) Net Income (loss) Per
Share

Diluted net loss per share in 2001, 2002 and 2003
does not reflect the dilutive effect of stock options or
warrants as the impact of including them is antidilutive. Total
dilutive securities were 1,289,000, 1,093,000 and 1,021,000, in
2001, 2002 and 2003, respectively.

(13) Quarterly Financial Data
(Unaudited)

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

|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |         |  
|--------------------------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                                |  | First   |        | Second  |  | Third   |        | Fourth  |  |     
|                                                                |  | Quarter |        | Quarter |  | Quarter |        | Quarter |  | Year
|                                                                |  |         |        |         |  |         |        |         |  |     
|Year Ended December 31, 2002                                    |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |         |  
|Net sales                                                       |  | $       | 599    |         |  | $       | 1,334  |         |  | $    | 1,155  |   |  | $ | 1,685  |   |  | $ | 4,773   |  
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |         |  
|Gross profit                                                    |  | $       | 506    |         |  | $       | 907    |         |  | $    | 769    |   |  | $ | 1,539  |   |  | $ | 3,721   |  
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |         |  
|Operating loss                                                  |  | $       | (4,168 | )       |  | $       | (2,565 | )       |  | $    | (2,383 | ) |  | $ | (1,331 | ) |  | $ | (10,447 | )
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |         |  
|Net loss from continuing operations                             |  | $       | (4,174 | )       |  | $       | (2,573 | )       |  | $    | (1,523 | ) |  | $ | (1,599 | ) |  | $ | (9,869  | )
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |         |  
|Net income (loss) from discontinued operations                  |  | $       | (1,420 | )       |  | $       | (86    | )       |  | $    | 87     |   |  | $ | 631    |   |  | $ | (788    | )
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |         |  
|Gain on disposal of discontinued operations                     |  | $       | 680    |         |  | $       | 232    |         |  | $    | 167    |   |  | $ | 21     |   |  | $ | 1,100   |  
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |         |  
|Net loss from total operations                                  |  | $       | (4,914 | )       |  | $       | (2,427 | )       |  | $    | (1,269 | ) |  | $ | (947   | ) |  | $ | (9,557  | )
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |         |  
|Basic and diluted net income (loss) per share
    data:         |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |         |  
|Loss from continuing operations                                 |  | $       | (0.14  | )       |  | $       | (0.08  | )       |  | $    | (0.05  | ) |  | $ | (0.05  | ) |  | $ | (0.32   | )
|Income (loss) from discontinued operations, net
    of tax      |  |         | (0.04  | )       |  |         |       |         |  |      |       |   |  |   | 0.01   |   |  |   | (0.03   | )
|Income from disposal of discontinued operations,
    net of tax |  |         | 0.02   |         |  |         |       |         |  |      | 0.01   |   |  |   | 0.01   |   |  |   | 0.04    |  
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |         |  
|Basic and diluted net loss per share                            |  | $       | (0.16  | )       |  | $       | (0.08  | )       |  | $    | (0.04  | ) |  | $ | (0.03  | ) |  | $ | (0.31   | )
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |         |  
|Basic and diluted weighted average shares
    outstanding       |  |         | 30,898 |         |  |         | 30,902 |         |  |      | 30,902 |   |  |   | 30,902 |   |  |   | 30,901  |  
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |         |  

F-26



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##### Table of Contents



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |        |  
|--------------------------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                |  | First   |        | Second  |  | Third   |        | Fourth  |  |     
|                                                                |  | Quarter |        | Quarter |  | Quarter |        | Quarter |  | Year
|                                                                |  |         |        |         |  |         |        |         |  |     
|Year Ended December 31, 2003                                    |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |        |  
|Net sales                                                       |  | $       | 669    |         |  | $       | 531    |         |  | $    | 367    |   |  | $ | 1,461  |   |  | $ | 3,028  |  
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |        |  
|Gross profit                                                    |  | $       | 475    |         |  | $       | 396    |         |  | $    | 331    |   |  | $ | 1,384  |   |  | $ | 2,586  |  
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |        |  
|Operating loss                                                  |  | $       | (1,934 | )       |  | $       | (2,129 | )       |  | $    | (1,346 | ) |  | $ | (277   | ) |  | $ | (5,686 | )
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |        |  
|Net loss from continuing operations                             |  | $       | (1,445 | )       |  | $       | (2,186 | )       |  | $    | (1,278 | ) |  | $ | (501   | ) |  | $ | (5,410 | )
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |        |  
|Net income (loss) from discontinued operations                  |  | $       | (116   | )       |  | $       | 423    |         |  | $    | (197   | ) |  | $ | (151   | ) |  | $ | (41    | )
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |        |  
|Net loss from total operations                                  |  | $       | (1,561 | )       |  | $       | (1,763 | )       |  | $    | (1,475 | ) |  | $ | (652   | ) |  | $ | (5,451 | )
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |        |  
|Basic and diluted net income (loss) per share
    data:         |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |        |  
|Loss from continuing operations                                 |  | $       | (0.05  | )       |  | $       | (0.07  | )       |  | $    | (0.04  | ) |  | $ | (0.02  | ) |  | $ | (0.18  | )
|Income (loss) from discontinued operations, net
    of tax      |  |         |       |         |  |         | 0.01   |         |  |      | (0.01  | ) |  |   |       |   |  |   |       |  
|Income from disposal of discontinued operations,
    net of tax |  |         |       |         |  |         |       |         |  |      |       |   |  |   |       |   |  |   |       |  
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |        |  
|Basic and diluted net loss per share                            |  | $       | (0.05  | )       |  | $       | (0.06  | )       |  | $    | (0.05  | ) |  | $ | (0.02  | ) |  | $ | (0.18  | )
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |        |  
|Basic and diluted weighted average shares
    outstanding       |  |         | 30,902 |         |  |         | 30,902 |         |  |      | 30,902 |   |  |   | 30,902 |   |  |   | 30,902 |  
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |        |  

F-27



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##### Table of Contents



ELCOM INTERNATIONAL, INC. AND
SUBSIDIARIES




2003 ANNUAL REPORT ON THE FORM 10-K


INDEX TO SCHEDULE


|                                                                                                              |  |           |             | 
|------------------------------------------------------------------------------------------------------------- |  | --------- | ----------- | 
|                                                                                                              |  | Page     
|                                                                                                              |  | Reference
|                                                                                                              |  |          
|Independent Auditors Reports                                                                                 |  |           | S-2 and S-3 | 
|Schedule II  Valuation and
    Qualifying Accounts for the Years Ended December 31, 2001,
    2002, and 2003 |  |           | S-4         | 

S-1



---



##### Table of Contents






INDEPENDENT AUDITORS REPORT

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

We have audited in accordance with auditing
standards generally accepted in the United States, the
consolidated balance sheet as of December 31, 2003, and the
related consolidated statement of operations and other
comprehensive income (loss), stockholders equity (deficit)
and cash flows for the year then ended included in Elcom
International, Inc.s (the Companys)
Form 10-K, and have issued our report thereon dated
March 26, 2004. Our audit was made for the purpose of
forming an opinion on those consolidated financial statements
taken as a whole. The schedule listed in the preceding index is
the responsibility of the Companys management and is
presented for purposes of complying with the Securities and
Exchange Commissions rules and is not part of the basic
financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial
statements and, in our opinion, based on our audit, fairly
states, in all material respects, the financial data required to
be set forth therein in relation to the basic financial
statements taken as a whole.

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



| |                                     
| | ------------------------------------
| | /s/ VITALE, CATURANO & COMPANY, P.C.
| |                                     
| | VITALE, CATURANO & CO., P.C.        

Boston, Massachusetts

March 26, 2004


S-2



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##### Table of Contents






INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders Elcom
International, Inc.:

Under date of March 7, 2003, we reported on
the consolidated balance sheet of Elcom International, Inc.
and subsidiaries as of December 31, 2002, and the related
consolidated statements of operations and other comprehensive
income (loss), stockholders equity, and cash flows for
each of the years in the two-year period then ended, which are
included in the annual report on Form 10-K. In connection
with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial
statement schedule included in the annual report on
Form 10-K. The financial statement schedule is the
responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statement schedule based on our audits.

In our opinion, such financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

The audit report on the consolidated financial
statements of Elcom International, Inc. and subsidiaries
referred to above contains an explanatory paragraph that states
that the Companys recurring losses from operations and
accumulated deficit raise substantial doubt about the
entitys ability to continue as a going concern. The
financial statement schedule included in the annual report on
Form 10-K does not include any adjustments that might
result from the outcome of this uncertainty.



| |             
| | ------------
| | /s/ KPMG LLP

Boston, Massachusetts

March 7, 2003


S-3



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##### Table of Contents



Schedule II

ELCOM INTERNATIONAL, INC. AND
SUBSIDIARIES






VALUATION AND QUALIFYING ACCOUNTS


For the Years Ended December 31, 2001,
2002, and 2003


|                                                         |  |                |       |                   |  |              |        |           |  |   |      |      |  |   |     | 
|-------------------------------------------------------- |  | -------------- | ----- | ----------------- |  | ------------ | ------ | --------- |  | - | ---- | ---- |  | - | --- | 
|                                                         |  | Balance at     |       |                   |  |              |        | Balance  
|                                                         |  | Beginning      |       | Additions         |  |              |        | at End of
|                                                         |  | of Period      |       | (Recoveries, Net) |  | Utilizations |        | Period   
|                                                         |  |                |       |                   |  |              |        |          
|                                                         |  |               
|                                                         |  | (In thousands)
|Allowance for Doubtful Accounts for the Years
    Ending |  |                |       |                   |  |              |        |           |  |   |      |      |  |   |     | 
|December 31, 2001                                        |  | $              | 2,400 |                   |  | $            | (1,283 | )         |  | $ | (800 | )(a) |  | $ | 317 | 
|                                                         |  |                |       |                   |  |              |        |           |  |   |      |      |  |   |     | 
|December 31, 2002                                        |  | $              | 317   |                   |  | $            | (236   | )         |  | $ | (53  | )    |  | $ | 28  | 
|                                                         |  |                |       |                   |  |              |        |           |  |   |      |      |  |   |     | 
|December 31, 2003                                        |  | $              | 28    |                   |  | $            | 39     |           |  | $ | (16  | )    |  |   | 51  | 
|                                                         |  |                |       |                   |  |              |        |           |  |   |      |      |  |   |     | 
|                                                        
|Inventory Valuation Accounts for the
    Years Ending    |  |                |       |                   |  |              |        |           |  |   |      |      |  |   |     | 
|December 31, 2001                                        |  | $              | 349   |                   |  | $            | (243   | )         |  | $ | (1   | )    |  | $ | 105 | 
|                                                         |  |                |       |                   |  |              |        |           |  |   |      |      |  |   |     | 
|December 31, 2002                                        |  | $              | 105   |                   |  | $            |       |           |  | $ | (105 | )    |  | $ |    | 
|                                                         |  |                |       |                   |  |              |        |           |  |   |      |      |  |   |     | 
|December 31, 2003                                        |  | $              |      |                   |  | $            |       |           |  | $ |     |      |  | $ |    | 
|                                                         |  |                |       |                   |  |              |        |           |  |   |      |      |  |   |     | 



---



|    |  |                                                                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Includes $580,000, which was sold to AJJP,
    Limited as part of the U.K. reseller business sale (See
    Footnote 7 of the consolidated financial statements.)

S-4



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##### Table of Contents






EXHIBIT INDEX

|            |   |                         |  |                                                                                                                                                                                                                                                                              
|----------- | - | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   | Description of Document
|            |   |                        
|            | 2 | .1                      |  | Agreement for the sale and purchase of shares in
    the capital of Prophet Group Limited dated December 6,
    1996, by and among Lantec (Management) Limited (a subsidiary of
    the Registrant) and the Vendors (as defined therein).(2)                                 
|            | 2 | .2                      |  | Agreement for the sale and purchase of shares in
    the capital of Data Supplies Limited dated February 21,
    1997, by and among Elcom Group Limited (a subsidiary of the
    Registrant), the Vendor (as defined therein) and
    Mr. Savage(3)                          
|            | 2 | .3                      |  | Offer for the Sale of Business and Certain Assets
    of Elcom Holdings Limited and Elcom Information Technology
    Limited(21)                                                                                                                                             
|            | 2 | .4.1                    |  | Domain Name Transfer Documents(21)                                                                                                                                                                                                                                           
|            | 2 | .4.2                    |  | Lloyds TSB Novation Agreement(21)                                                                                                                                                                                                                                            
|            | 2 | .4.3                    |  | Property Document.(21)                                                                                                                                                                                                                                                       
|            | 2 | .4.4                    |  | Elcom Logo License.(21)                                                                                                                                                                                                                                                      
|            | 2 | .4.5                    |  | Starbuyer Trademark License.(21)                                                                                                                                                                                                                                             
|            | 2 | .5                      |  | Asset Purchase and Sale Agreement by and among
    Elcom Services Group, Inc., elcom, inc. and Elcom
    International, Inc. and ePlus Technology, Inc. dated
    March 25, 2002(25)                                                                                         
|            | 2 | .6.1                    |  | Amendment to Asset Purchase Agreement.(25)                                                                                                                                                                                                                                   
|            | 2 | .6.2                    |  | Managed Services Agreement by and among Elcom
    Services Group, Inc., elcom, inc. and Elcom
    International, Inc. and ePlus Technology, Inc. dated
    March 29, 2002.(25)                                                                                               
|            | 2 | .6.3                    |  | Registration Rights Agreement by and between
    Registrant and Elcom International, Inc. and ePlus
    Technology, Inc. dated March 29, 2002.(25)                                                                                                                           
|            | 3 | .3                      |  | Second Restated Certificate of Incorporation of
    the Registrant, as amended(4)                                                                                                                                                                                            
|            | 3 | .4                      |  | By-Laws of the Registrant, amended as of
    November 6, 1995.(1)                                                                                                                                                                                                            
|            | 4 | .4                      |  | Specimen certificate of the Registrants
    Common Stock.(1)                                                                                                                                                                                                                
|            | 4 | .5                      |  | Form of 8% Series A Cumulative Convertible
    Preferred (Series A) Stock Purchase Agreement,
    with attached list of purchasers and number of shares purchased,
    as of December 10, 1993.(1)                                                                         
|            | 4 | .6                      |  | Form of Series B Preferred Stock Purchase
    Agreement for Closings held on April 15, June 21 and
    August 11, 1994, with attached list of purchasers and
    number of shares purchased.(1)                                                                              
|            | 4 | .7                      |  | Form of Series B Preferred Stock Purchase
    Agreement for Closings held on December 30, 1994 and
    February 6, 1995, with attached list of purchasers and
    number of shares purchased.(1)                                                                             
|            | 4 | .8                      |  | Form of Series C Preferred Stock Purchase
    Agreement for Closings held on June 22 and June 30,
    1995, with attached list of purchasers and number of shares
    purchased.(1)                                                                                          
|            | 4 | .9                      |  | Securities Agreement, dated September 1,
    1993, as amended February 1, 1994, by and among the
    Registrant, Robert J. Crowell, and 19 other listed purchasers,
    as of June 2, 1995(1), and list of other assignees of
    certain registration rights thereunder.(11)
|            | 4 | .10                     |  | Securities Agreement, dated October 28,
    1994, by and among the former stockholders of CSI and the
    Registrant.(1)                                                                                                                                                     
|            | 4 | .11                     |  | Computerware Stockholders Agreement, dated
    February 6, 1995, by and among the Registrant, Robert J.
    Crowell and the former shareholders of Computerware.(1)                                                                                                         
|            | 4 | .12                     |  | Amended and Restated Lantec Stockholders
    Agreement, dated April 6, 1996, by and among the
    Registrant, Robert J. Crowell and the former shareholders of
    Lantec(5) and Renouncement of related Board Observer Right
    effective December 16, 1999.(16)          
|            | 4 | .13                     |  | Form of Lantec Warrant Agreement, dated
    January 7, 2000, with attached Second Amended List of
    Holders of Warrants to Purchase Common Shares of the
    Registrant.(16)                                                                                               
|            | 4 | .14                     |  | AMA Securities Agreement, dated February 29,
    1996, by and among the Registrant and the former stockholders of
    AMA (UK) Limited.(7)                                                                                                                                   
|            | 4 | .15                     |  | Final Agreement of Settlement and Mutual Release
    of All Claims and Demands, dated March 26, 1997, by and
    among the Registrant and certain of its subsidiaries, and the
    Former Shareholders of Computerware Business Trust.(10)                                   



---



##### Table of Contents



|            |    |                         |  |                                                                                                                                                                                                                                                                                                                     
|----------- | -- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description of Document
|            |    |                        
|            | 4  | .16                     |  | Warrant by and between Registrant and ePlus
    Technology, Inc. dated March 29, 2002.(25)                                                                                                                                                                                                                          
|            | 4  | .17                     |  | Form of Elcom International, Inc.
    10% Convertible Senior Debenture Due April 25, 2003(x)                                                                                                                                                                                                                        
|            | 4  | .18                     |  | Warrant Agreement, dated December 3, 2001,
    between the Company and Cripple Creek Securities, LLC.(24)                                                                                                                                                                                                           
|            | 10 | .1                      |  | Form of Indemnity Agreement for Executive
    Officers and/or Directors of the Registrant(1), with attached
    list of Director and/or Executive Officer Indemnitees.(13)(*)                                                                                                                                       
|            | 10 | .2                      |  | Stock Option Plan of the Registrant dated
    February 23, 1993, as amended June 3, 1994 and
    November 6, 1995.(1)(*)                                                                                                                                                                                            
|            | 10 | .3                      |  | 1995 (Computerware) Stock Option Plan of the
    Registrant, dated February 6, 1995(1), as amended by
    Amendment No. 1 dated August 19, 1996.(7)(*)                                                                                                                                                              
|            | 10 | .4                      |  | Lease Agreement for the Registrants
    Headquarters, dated July 5, 1993, by and among Oceana Way
    Associates and the Registrant(1), and Agreement of Amendment
    thereto, dated October 20, 1997(11), and December 31,
    2000.(1)(11)(19)                                                                  
|            | 10 | .5                      |  | Lease Agreements for Lantec Headquarters, among
    Allied Dunbar Assurance PLC to Businessland (UK) Limited and
    Businessland Inc., dated November 23, 1988, with Licenses
    to Assign to Lantec Information Services Ltd., and Supplemental
    Deed dated November 4, 1993.(1)                              
|            | 10 | .6                      |  | Structured Equity Line Flexible Financing
    Agreement, dated December 30, 1999, between the Registrant
    and Cripple Creek Securities, LLC(15), Amended and Restated
    Structured Equity Line Flexible Financing Agreement, dated
    April 7, 2000(15), Amendment No. 1(15), and Amendment
    No. 2.(15)(17)
|            | 10 | .7                      |  | Registration Rights Agreement, dated
    December 30, 1999, between the Registrant and Cripple Creek
    Securities, LLC.(16), and Amended and Restated Registration
    Rights Agreement, dated April 7, 2000.(16)(15)                                                                                             
|            | 10 | .8                      |  | Form of Warrant and Minimum Commitment Warrant of
    the Registrant issuable to Cripple Creek Securities, LLC.(15)                                                                                                                                                                                                 
|            | 10 | .9                      |  | 1995 Non-Employee Director Stock Option Plan of
    the Registrant, dated October 9, 1995(1), and Amendment
    No. 1 thereto.(8)(*)                                                                                                                                                                                
|            | 10 | .10                     |  | The 1996 Stock Option Plan of Elcom
    International, Inc.(6)(*)                                                                                                                                                                                                                                                   
|            | 10 | .11                     |  | The 1997 Stock Option Plan of Elcom
    International, Inc.(8), and Amendments One and Two
    thereto.(11)(12)(*)                                                                                                                                                                                                  
|            | 10 | .12                     |  | The 2000 Stock Option Plan of the Registrant.(18)                                                                                                                                                                                                                                                                   
|            | 10 | .13                     |  | The 2001 Stock Option Plan of the Registrant, as
    amended and restated.(20)                                                                                                                                                                                                                                      
|            | 10 | .14                     |  | The 2002 Stock Option Plan of the Registrant.(22)                                                                                                                                                                                                                                                                   
|            | 10 | .15                     |  | International, Inc. Executive Profit
    Performance Bonus Plan for Executive Officers dated
    September 4, 1997.(9)(*)                                                                                                                                                                                           
|            | 10 | .16                     |  | Elcom International, Inc. Key Personnel
    Profit Performance Bonus Plan dated September 4, 1997.(9)(*)                                                                                                                                                                                                            
|            | 10 | .17                     |  | Amended and Restated Employment Agreement dated
    June 20, 2002 by and between Elcom International, Inc.
    and Robert J. Crowell.(23)(*)                                                                                                                                                                        
|            | 10 | .18                     |  | Employment Agreement dated June 20, 2002 by
    and between Elcom International, Inc. and John E.
    Halnen.(23)(*)                                                                                                                                                                                                
|            | 10 | .19                     |  | Form of Registration Agreement, dated
    April 23, 2003, between Elcom International, Inc. and
    the Investors party thereto.(x)                                                                                                                                                                                 
|            | 10 | .20                     |  | Form of Collateral Agency and Security Agreement,
    dated April 23, 2003, between Elcom
    International, Inc. and the Investors party thereto.(x)                                                                                                                                                               
|            | 10 | .21                     |  | Amendment to Amended and Restated Employment
    Agreement, dated March 8, 2004, by and between Elcom
    International, Inc. and Robert J. Crowell.(x)(*)                                                                                                                                                          
|            | 10 | .22                     |  | Amendment to Employment Agreement, dated
    March 9, 2003, by and between Elcom
    International, Inc. and John E. Halnen.(x)(*)                                                                                                                                                                                  
|            | 21 | .1                      |  | List of the Registrants Subsidiaries.(16)                                                                                                                                                                                                                                                                          



---



##### Table of Contents



|            |    |                         |  |                                                               
|----------- | -- | ----------------------- |  | --------------------------------------------------------------
|Exhibit No. |    | Description of Document
|            |    |                        
|            | 23 | .1                      |  | Consent of Vitale, Caturano & Company
    PC.(x)              
|            | 23 | .2                      |  | Consent of KPMG LLP(x)                                        
|            | 31 | .1                      |  | Rule 13a-14(a) Certification of Chief
    Executive Officer(x)
|            | 31 | .2                      |  | Rule 13a-14(a) Certification of Chief
    Financial Officer(x)
|            | 32 | .1                      |  | Section 1350 Certification of Chief
    Executive Officer(x)  
|            | 32 | .2                      |  | Section 1350 Certification of Chief
    Financial Officer(x)  



---



|    |                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(x) | Filed herewith.                                                                                                                                                                               
|   
|(*) | Management contract or compensatory plan or
    arrangement.                                                                                                                                  
|   
|(1) | Previously filed as an exhibit to Registration
    Statement No. 33-98866 on Form S-1 and incorporated
    herein by reference.                                                               
|   
|(2) | Previously filed as an exhibit to Current Report
    on Form 8-K dated December 6, 1996 (filed
    December 19, 1996, file no. 000-27376), and
    incorporated herein by reference.          
|   
|(3) | Previously filed as an exhibit to Current Report
    on Form 8-K dated February 21, 1997 (filed
    March 6, 1997, file no. 000-27376), and incorporated
    herein by reference.             
|   
|(4) | Previously filed as an exhibit to
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2002 (file no. 000-27376), and
    incorporated herein by reference.        
|   
|(5) | Previously filed as an exhibit to
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 1996 (file no. 000-27376), and
    incorporated herein by reference.     
|   
|(6) | Previously filed as an exhibit to
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 1996, (file
    no. 000-27376), and incorporated herein by reference.
|   
|(7) | Previously filed as an exhibit to
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 1996, and incorporated herein by
    reference.                             
|   
|(8) | Previously filed as an exhibit to
    Registrants Quarterly Report on Form  10-Q for
    the quarter ended June 30, 1997, (file no. 000-27376),
    and incorporated herein by reference.    
|   
|(9) | Previously filed as an exhibit to
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 1997, (file
    no. 000-27376), and incorporated herein by reference.



|     |                                                                                                                                                                                            
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Previously filed as an exhibit to
    Registrants Current Report on Form 8-K dated
    March 26, 1997 (filed April 8, 1997, file
    no. 000-27376), and incorporated herein by reference.
|    
|(11) | Previously filed as an exhibit to
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 1997, and incorporated herein by
    reference.                          
|    
|(12) | Previously filed as an exhibit to
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 1998 and incorporated herein by
    reference.                           
|    
|(13) | Previously filed as an exhibit to
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 1999, and incorporated herein by
    reference.                        
|    
|(14) | Previously filed as an exhibit to
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 1999, and incorporated herein
    by reference.                   
|    
|(15) | Previously filed as an exhibit to Registration
    Statement No. 333-94743 on Form S-3 and incorporated
    herein by reference.                                                           
|    
|(16) | Previously filed as an exhibit to
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 1999, and incorporated herein by
    reference.                          
|    
|(17) | Previously filed as an exhibit to
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2000, and incorporated herein by
    reference.                        
|    
|(18) | Previously filed as an exhibit to Registration
    Statement No. 333-54852 on Form S-8 and incorporated
    herein by reference.                                                           
|    
|(19) | Previously filed as an exhibit to
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2000, and incorporated herein by
    reference.                          



---



##### Table of Contents





|     |                                                                                                                                                                                         
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(20) | Previously filed as an exhibit to Registration
    Statement No. 333-61316 on Form S-8 and incorporated
    herein by reference.                                                        
|    
|(21) | Previously filed as an exhibit to
    Registrants Current Report on Form 8-K dated
    December 31, 2001, (filed in January 11, 2002), and
    incorporated herein by reference.       
|    
|(22) | Previously filed as an exhibit to Registration
    Statement No. 333-91488 on Form S-8, and incorporated
    herein by reference.                                                       
|    
|(23) | Previously filed as an exhibit to
    Registrants Quarterly Report on Form 10-Q for the
    quarter ended June 30, 2002 (file no. 000-27376), and
    incorporated herein by reference.
|    
|(24) | Previously filed as an exhibit to
    Registrants Annual Report on Form 10-K for the year
    ended December 31, 2001, and incorporated herein by
    reference.                       
|    
|(25) | Previously filed as an exhibit to Current Report
    on Form 8-K dated March 29, 2002 (filed April 10,
    2002) and incorporated herein by reference.