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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
  FORM 10-K/A
AMENDMENT NO. 2 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   ELCOM INTERNATIONAL, INC.  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:
NoneSecurities Registered pursuant to Section 12(g) of the Act: Title of each class
    
    Name of exchange
on which registeredCommon 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.  YesX
    
    No
 Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.)  Yes
    
    NoX
 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  Item 1. BusinessItem 7. Managements Discussion and Analysis of Financial Condition and Results of OperationItem 10. Directors and Executive Officers of the CompanyItem 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-KPART IPART IISTATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACTPART IIIItem 10. Directors and Executive Officers of the CompanyItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and ManagementItem 13. Certain Relationships and Related TransactionsItem 14. Principal Accounting Fees and ServicesPART IVSIGNATURESINDEX TO CONSOLIDATED FINANCIAL STATEMENTSINDEPENDENT AUDITORS REPORTINDEPENDENT AUDITORS REPORTCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME (LOSS)CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS2003 ANNUAL REPORT ON THE FORM 10-K INDEX TO SCHEDULEINDEPENDENT AUDITORS REPORTINDEPENDENT AUDITORS REPORTVALUATION AND QUALIFYING ACCOUNTSEXHIBIT INDEXEX-23.3 CONSENT OF VITALE, CATURANO & COMPANYEX-31.1 SECT. 302 CERTIFICATION OF C.E.O.EX-31.2 SECT. 302 CERTIFICATION OF C.F.O.EX-32.1 SECT. 906 CERTIFICATION OF C.E.O.EX-32.2 SECT. 906 CERTIFICATION OF C.F.O. EXPLANATORY NOTE Elcom International, Inc. (the Company) is filing this Amendment No. 2
to its Annual Report on Form 10-K for the period ended December 31, 2003, filed
with the Securities and Exchange Commission on March 29, 2004 and amended on
April 27, 2004, to (a) amend and restate the Independent Auditors Reports on
the Companys 2003 Consolidated Financial Statements and related Consolidated
Financial Statement Schedule which, as a result of the recent sale of Common
Stock, no longer include a going concern qualification, (b) amend and restate
certain notes to the Companys 2003 Consolidated Financial Statements and
certain other items to reflect the recent sale of Common Stock and removal of
the going concern qualification, and (c) amend and restate certain
disclosures required under Item 10. Directors and Executive Officers of the
Company. The filing of this amended Form 10-K shall not be deemed an admission that
the original filing, when made, included any untrue statement of a material
fact or omitted to state a material fact necessary to make a statement not
misleading. Amended Items We hereby amend the following items, financial statements, exhibits or
other portions of our Annual Report on Form 10-K for the year ended December
31, 2003, as set forth herein. This amendment reflects the changes discussed
above. All other information is unchanged and reflects the disclosures made at
the time of the original filing on March 29, 2004, as amended on April 27,
2004. The amended items are as follows: 
 Item 1. Business The information set forth under the caption Business is amended to read
in its entirety as set forth on pages 1 through 5. Item 5. Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Repurchase of Equity Securities The information set forth under the caption Market for Registrants
Common Equity and Related Stockholder Matters is amended to read in its
entirety as set forth on pages 5 through 7. 
 Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operation The information set forth under the caption Managements Discussion and
Analysis of Financial Condition and Results of Operation is amended to read in
its entirety as set forth on pages 9 through 17. 
 Item 10. Directors and Executive Officers of the Company The information set forth under the caption Directors and Executive
Officers of the Company is amended to read in its entirety as set forth on
pages 19 through 20. 
 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K The list of exhibits set forth in, and incorporated by reference from, the
Exhibit Index, is amended to include the following exhibits, filed herewith. 23.3
31.1
31.2
32.1
32.2
    
    Consent of Vitale, Caturano & Company PC
Rule 13a-14(a) Certification of Chief Executive Officer
Rule 13a-14(a) Certification of Chief Financial Officer
Section 1350 Certification of Chief Executive Officer
Section 1350 Certification of Chief Financial Officer




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Independent Auditors Reports The reports of the Companys Independent Auditors on the Companys 2003
Consolidated Financial Statements and on Schedule II, thereto, are amended to
read in their entirety as set forth on pages F-2 and S-2, respectively. Notes to Consolidated Financial Statements The information set forth under the caption Elcom International, Inc. and
Subsidiaries Notes to Consolidated Financial Statements is amended to read in
its entirety as set forth on pages F-8 through F-27.




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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.

On April 16, 2004, the Company closed on the
sale of 29,777,573 shares of its Common Stock (the
Regulation S Shares) to investors in the U.K.,
and listed the Regulation S Shares on the Alternative
Investment Market of the London Stock Exchange. The Company
raised a total of approximately $3.6 million via this
issuance and sale of Regulation S Shares in the U.K., with
net proceeds to the Company of approximately $3.2 million.
The Regulation S Shares were sold at a price equal to the
conversion rate of the Companys recent placements of
Convertible Debentures of $0.1246 per share. See Item 5.
Market For Registrants Common Equity and Related
Stockholder Matters  Recent Sale of Unregistered
Securities  Common Stock Sold Under
Regulation S. The funds derived from the sale of the
Regulation S Shares will be used to support the
Companys working capital requirements.

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.

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.

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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.

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

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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
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.

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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.

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

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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.

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,

6



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##### 



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.

Recent Sale of Unregistered
Securities  Common Stock Sold Under
Regulation S

On April 16, 2004, the Company closed on the
sale of 29,777,573 shares of its Common Stock (the
Regulation S Shares) to investors in the U.K.,
and listed the Regulation S Shares on the Alternative
Investment Market of the London Stock Exchange
(AIM). The Company raised a total of approximately
$3.6 million via this issuance and sale of Regulation S
Shares in the U.K., with net proceeds to the Company of
approximately $3.2 million. The Regulation S Shares
were sold at a price equal to the conversion rate of the
Companys recent placements of Debentures of $0.1246 per
share. The funds derived from the sale of the Regulation S
Shares will be used to support the Companys working
capital requirements.

The Regulation S Shares were issued in
reliance on the exemption from registration under
Regulation S of the Securities Act of 1933, as amended (the
Act), for offers and sales of securities outside the
United States. Under Regulation S, the holders of the
Regulation S Shares are prohibited from selling their
Regulation S Shares in the United States, to a U.S.
person (as defined in the Act) or for the benefit or
account of a U.S. person, for a one-year period which commenced
on April 16, 2004. During this one-year period, the holders
of the Regulation S Shares may otherwise trade their
Regulation S Shares in the United Kingdom and outside the
United States, pursuant to Regulation S of the Act and
other securities laws applicable in the jurisdiction in which
the Regulation S Shares are traded. Upon the expiration of
this one-year period, the Regulation S Shares will be
restricted securities, as the term is defined under
Rule 144 promulgated under the Act, and may be sold in the
United States, to a U.S. person or for the benefit or account of
a U.S. person pursuant to Rule 144. The Regulation S
Shares trade on the AIM exchange and will not commingle with the
Companys stock traded on the OTCBB until and unless the
Company registers the Regulation S Shares with the SEC or
an exemption from registration exists with respect to the
Regulation S Shares. The Regulation S Shares have not been
registered under the Act 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.

7



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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 |  
|                                                            |  |                                      |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  

8



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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

9



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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 sale of
the Regulation S Shares.


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 has incurred significant operating
losses, has used cash in operating activities and has an
accumulated deficit that raised substantial doubt about the
Companys ability to continue as a going concern. On
April 16, 2004, the Company closed on the sale of
29,777,573 shares of its Common Stock (the
Regulation S Shares) to investors in the U.K.,
and listed the Regulation S Shares on the Alternative
Investment Market of the London Stock Exchange. The Company
raised a total of approximately $3.6 million via this
issuance and sale of Regulation S Shares in the U.K., with
net proceeds to the Company of approximately $3.2 million.
The Regulation S Shares were sold at a price equal to the
conversion rate of the Companys recent placements of
Debentures of $0.1246 per share. The funds derived from the
sale of the Regulation S Shares will be used to support the
Companys working capital requirements. Accordingly, the
Company now believes it has adequate funds to operate through
the first quarter of 2005. See Item 5. Market For
Registrants Common Equity and Related Stockholder
Matters  Recent Sale of Unregistered
Securities  Common Stock Sold Under Regulation S.

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

10



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##### 



$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
$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.

11



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##### 



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.

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

12



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##### 



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 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.

13



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##### 



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.

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 |  |  | $ |  |  |  | $ |  | 
|                 |  |                        |       |           |  |           |     |           |  |         |     |  |  |   |   |  |  |   |   | 

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. 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.

Sale of Regulation S Shares

On April 16, 2004, the Company closed on the
sale of 29,777,573 shares of its Common Stock to investors
in the U.K., and listed the Regulation S Shares on the
Alternative Investment Market of the London Stock Exchange. The
Company raised a total of approximately $3.6 million via
this issuance and sale of Regulation S Shares in the U.K.,
with net proceeds to the Company of approximately
$3.2 million. The Regulation S Shares were sold at a
price equal to the conversion rate of the Companys recent
placements of Debentures of $0.1246 per share. The funds
derived from the sale of the Regulation S Shares will be
used to support the Companys working capital requirements
and the Company believes it has adequate funds to operate
through the first quarter of 2005.

Risk Factors Relating to Liquidity

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
comprised 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 results 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 will use the proceeds from sale of the
Regulation S Shares to support its liquidity requirements.

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

14



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##### 



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 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,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

15



---



##### 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 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.

16



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##### 



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. The Company will use the
proceeds from sale of the Regulation S Shares to support
its ongoing working capital requirements. See Risk Factors
Relating to Liquidity and Sale of
Regulation S Shares 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) 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
substantially 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) 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. The
Company assumes no obligation to update any of the information
contained or referenced in this Annual Report on Form 10-K.



|         |                                                               
|-------- | --------------------------------------------------------------
|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.

17



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##### 





|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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).



|         |                        
|-------- | -----------------------
|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,

18



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##### 



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 Company The name, age and position of the Companys Executive Officers and
Directors are as follows: NAME
    
    AGE
    
    POSITIONRobert J. Crowell
    
    
    52
    
    
    Class III Director, Chairman of the Board of Directors
and Chief Executive Officer of the CompanyMelinda F. Ellett
    
    
    42
    
    
    Secretary of the CompanyJohn E. Halnen
    
    
    37
    
    
    Class I Director, President and Chief Operating Officer
of the CompanyRichard J. Harries, Jr. (1)(2)(3)
    
    
    66
    
    
    Class II Director of the CompanyJohn Ortiz (1) (2)
    
    
    80
    
    
    Class I Director of the CompanyWilliam W. Smith (1) (2) (3)
    
    
    53
    
    
    Class III Director and Vice Chairman of the Board of Directors
   (1)
    
    Member of the Compensation Committee.(2)
    
    Member of the Audit Committee.(3)
    
    Member of Nominating Committee. A brief resume for each of the Companys Executive Officers and Directors
is set forth below. Robert J. Crowell, the Companys founder, has been the Chairman of the
Board of Directors and Chief Executive Officer of the Company since its
inception in 1992. Mr. Crowell has founded and managed several companies since
1977. From May 1990 to April 1992, he was the Chairman, and from May 1990 to
January 1992, Chief Executive Officer also, of JWP Information Services, Inc.,
a subsidiary of JWP INC. (JWP), with approximately $1.4 billion in 1992
revenues. From 1983 to 1990, Mr. Crowell was the Chairman and Chief Executive
Officer of NEECO, Inc. (NEECO), a publicly-held national PC reseller which
was acquired by JWP (forming JWP Information Services, Inc.) in May 1990 for
approximately $100 million. From 1977 to 1983, Mr. Crowell founded and managed
New England Electronics Co., Inc. (which was renamed NEECO and became a public
company in 1986), and Microamerica Distributing Co., Inc. (Microamerica), a
PC products distributor which Mr. Crowell founded in 1979 as a subsidiary of
NEECO. Microamerica was later spun-off by its acquirer and subsequently merged
with Softsel to form Merisel, then a PC products distributor, now a provider of
software license products to resellers. Mr. Crowell also founded Professional
Software, Inc. in 1980, a PC-based word processing and database software
company (Professional Software), which was sold in 1986. Mr. Crowell holds a
Magna Cum Laude Bachelor of Science degree in Accounting from the University of
Massachusetts and is a Vietnam veteran. Melinda F. Elletthas been the Secretary of the Company since April 2003
and the Vice President, Business Systems Development since January 2000. From
June 1998 through January 2000, Ms. Ellett was Director, Information Technology
of elcom.com, inc. From December 1996 through June 1998, Ms. Ellett was Vice
President, Quality Assurance of Elcom Services Group, Inc. and from May 1996
through December 1996, Ms. Ellett was Business Operations Executive. From
August of 1987 through May 1996, Ms. Ellett was Director, Advanced Systems for
GTSI, an IT solutions provider to federal, state, and local government
customers worldwide. Prior to that time Ms. Ellett was the Manager of
Purchasing for MBI, Inc. John Halnen, was appointed as a Class I Director in June 2003 and has been
the President of the Company since November 2000 and President and Chief
Operating Officer since June 2001. From December 1999 through October 2000,
Mr. Halnen was President and Chief Executive Officer of Elcom Services Group,
Inc. From April 1998 through December 1999, Mr. Halnen was Chief Operations
Officer for Elcom Services Group, Inc. From January 1995 through April 1998,
Mr. Halnen served as Vice President of Operations for Elcom Services Group,
Inc. and prior to that time held other positions at Elcom Services Group, Inc.
since joining the organization in October 1992. 19




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Richard J. Harries, Jr., a Director of the Company since December 1993,
retired from IBM in 1992 after twenty-five years of service. In 1997, Mr.
Harries rejoined IBM North America as a Business Partner Senior Sales
Executive. He subsequently retired in 2001. During 1995 and 1996, Mr. Harries
was a Director of Sales of the Institute for Software Advancement. From July
1992 to August 1995, after retiring from IBM, Mr. Harries worked as the general
manager of Tascor; was a sales and marketing consultant; and was an independent
distributor for Equinox, Inc. Prior thereto, from 1988 to July 1992, Mr.
Harries served as a National Account Executive for IBM. During his career with
IBM, Mr. Harries has held a number of executive marketing and sales management
positions, including ten years of experience in IBMs National Distribution
Division Reseller Channel where he was responsible for field sales and
marketing programs. Mr. Harries holds a Bachelor of Arts Degree in Political
Science and a Master of Arts Degree in Economics from Boston College. John W. Ortiz, a Director of the Company since December 1993, is a retired
banking executive of South Shore Bank (now part of Bank of America) where he
was employed from 1942 to 1989, most recently as Senior Vice President and
Group Head of Commercial Lending. Mr. Ortiz also presided as the president of
the New England Chapter of Robert Morris Associates and as a director of the
Massachusetts Higher Education Loan Corporation at times during his banking
career. Mr. Ortiz is a graduate of Northeastern Universitys Bachelor of Arts
program. William W. Smithhas been Vice Chairman and a Director of the Company
since March 1993. Mr. Smith develops real estate and has been semi-retired
since August 1991. Mr. Smith joined NEECO as a major stockholder in 1978 and
served as Chief Financial Officer until its acquisition by JWP in May 1990.
Mr. Smith continued to serve as Chief Financial Officer of JWP Information
Services, Inc. until December 1990, then he served as a consultant until he
retired in August 1991. Mr. Smith holds a Magna Cum Laude Bachelor of Science
degree in Accounting from the University of Massachusetts and is a Vietnam
veteran. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the
Companys Officers and Directors and persons who beneficially own more than ten
percent of a registered class of the Companys equity securities (i.e., the
Common Stock), to file reports of ownership and changes in ownership of such
securities with the Commission. Officers, Directors and
greater-than-ten-percent beneficial owners are required by applicable
regulations to furnish the Company with copies of all Section 16(a) forms they
file. Based solely upon a review of the copies of the forms furnished to the
Company during or with respect to 2003, and written representations from
certain reporting persons, the Company believes that, except as set forth
below, no Officer, Director or greater-than-ten-percent beneficial owner failed
to file on a timely basis during the year ended December 31, 2003 any report
required by Section 16(a) of the Securities Exchange Act of 1934. Form 4 reports inadvertently were not timely filed in connection with the
following transactions: Name
    
    Description of Transaction
    
    Required FormRobert J. Crowell
    
    Purchase of $300,000 Senior Convertible Debenture on April 23, 2003
    
    Form 4Robert J. Crowell
    
    Purchase of $150,000 Senior Convertible Debenture on October 16,
2003
    
    Form 4John E. Halnen
    
    Purchase of $60,000 Senior Convertible Debenture on April 23, 2003
    
    Form 4William W. Smith
    
    Purchase of $300,000 Senior Convertible Debenture on April 23, 2003
    
    Form 4William W. Smith
    
    Purchase of $150,000 Senior Convertible Debenture on October 16,
2003
    
    Form 4
 Each of the above Officers and Directors reported their respective
transaction(s) on a Form 5 within 45 days of the end of fiscal year 2003. Audit Committee The Audit Committee
is directly responsible for, among other things, the appointment, compensation, retention
and oversight of the Companys auditors, with whom the Audit Committee reviews the scope
of audit and non-audit assignments and related fees, the accounting principles used by the
Company in financial reporting, internal financial control procedures and the adequacy of
such internal control procedures. The Audit Committee is also responsible for pre-approving
all audit and non-audit services performed by the Companys independent auditors.
Messrs. Smith (Chairman), Ortiz and Harries serve as the members of the Audit Committee.
Each of the members of the Audit Committee is an independent
director, as defined under
NASDAQ listing standards. The Board of Directors has determined that Mr. Smith qualifies as
an audit committee financial expert, as defined under Securities and Exchange Commission
regulations. The Board of Directors also believes that each Audit Committee member has
sufficient knowledge in financial and auditing matters to serve on the Committee. The Audit
Committee has the authority to engage legal counsel or other experts or consultants as it
deems appropriate to carry out its responsibilities. Code of Ethics On March 31, 2004,
the Company adopted a Code of Ethics for Senior Executives and Financial Officers
(the Code) which applies to the Companys CEO, President, COO, CFO,
controller, or treasurer or persons performing similar functions. Upon written request
to Elcom International, Inc. c/o Corporate Secretary, 10 Oceana Way, Norwood, Massachusetts
02062 or via email to Corporate.invrel@elcom.com, the Company will provide any person
without charge a copy of the Code. Item 11.Executive Compensation The table below sets forth information concerning calendar 2003 annual and
long-term compensation for services in all capacities with respect to those
persons (collectively, the Named Executive Officers) who were (i) the Chief
Executive Officer and (ii) the other executive officers of the Company at the
end of the fiscal year, as well as the other individuals that were executive
officers during the year ended December 31, 2003. 20




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Summary Compensation Table Long-TermAnnual
    
    CompensationCompensation(1)
    
    AwardsShares ofCommon StockUnderlying
    
    All OtherName and Principal Position (1)
    
    Year
    
    Salary
    
    Bonus
    
    Option Grants
    
    CompensationRobert J. Crowell
    
    
    2003
    
    
    $
    487,000
    
    
    
    
    
    
    
    400,000
    
    
    $
    250Chairman of the Board of Directors and
    
    
    2002
    
    
    $
    390,000
    
    
    
    
    
    
    
    790,000
    
    
    $
    500Chief Executive Officer of the Company (2)
    
    
    2001
    
    
    $
    524,000
    
    
    
    
    
    
    
    300,000
    
    
    $
    250John E. Halnen
    
    
    2003
    
    
    $
    281,000
    
    
    $
    11,000
    
    
    
    275,000
    
    
    
    President and Chief Operating Officer
    
    
    2002
    
    
    $
    184,000
    
    
    $
    66,000
    
    
    
    505,000
    
    
    $
    22,500of the Company (3)
    
    
    2001
    
    
    $
    225,000
    
    
    $
    75,000
    
    
    
    200,000
    
    
    
    Peter A. Rendall
    
    
    2003
    
    
    $
    45,000
    
    
    
    
    
    
    
    
    
    
    
    Former Chief Financial Officer and
    
    
    2002
    
    
    $
    215,000
    
    
    
    
    
    
    
    505,000
    
    
    $
    600Former Secretary of the Company (4)
    
    
    2001
    
    
    $
    240,000
    
    
    
    
    
    
    
    175,000
    
    
    
    Scott M. Soloway
    
    
    2003
    
    
    $
    38,000
    
    
    
    
    
    
    
    
    
    
    
    Former Vice President and General Counsel
    
    
    2002
    
    
    $
    193,000
    
    
    
    
    
    
    
    71,000
    
    
    
    of the Company (5)
    
    
    2001
    
    
    $
    195,000
    
    
    
    
    
    
    
    47,000
    
    
    
    
   (1)
    
    No Named Executive Officer received perquisites or other personal
benefits in excess of the lesser of $50,000 or 10% of such individuals
salary plus annual bonus unless otherwise indicated herein.(2)
    
    The Company and Mr. Crowell entered into an Amended and Restated
Employment Agreement on June 20, 2002, which was amended, effective as of
April 16, 2004 (the 2002 Crowell Agreement). See Employment
Contracts, Executive Profit Performance Bonus Plan and  Option
Grants in 2003. In order to assist the Company in conserving cash, Mr.
Crowell voluntarily reduced his cash compensation at various times in
2001, 2002 and 2003. Such reductions amounted to approximately $135,000
in 2002 and $257,000 in 2003. In April 2003, Mr. Crowell received a
$187,000 repayment of certain deferred base compensation amounts, which he
invested in the Companys Debentures. Mr. Crowell also received
withholding and estimated income taxes of $32,000, which were paid to the
appropriate tax authorities. These amounts ($219,000) are included in the
Summary Compensation Table for 2003. Mr. Crowell also invested an
additional $263,000 of cash in the Companys Debentures (see Transactions
With Management). As of December 31, 2003, Mr. Crowell has deferred a
net aggregate of $173,000 in base compensation, which may be paid to Mr.
Crowell depending upon the success of future operations, which is not
included in the Summary Compensation Table for 2003. Through April 16,
2004, Mr. Crowells 2004 cash compensation paid totaled $10,000. The
Company reinstated Mr. Crowells cash compensation to $364,000 per annum
in accordance with the 2002 Crowell Agreement, effective April 19, 2004.
The 2002 Crowell Agreement originally provided for annual base
compensation of $525,000, much of which was deferred as described herein
through April 16, 2004, when the annual base compensation was reduced to
$364,000. All other compensation represents premiums paid by the Company
for group term life insurance ($250 for 2003), see Employment Contracts.(3)
    
    On November 29, 2000, Mr. Halnen was appointed as President of the
Company; on June 12, 2001, Mr. Halnen also was appointed as Chief
Operating Officer of the Company and, on June 4, 2003, Mr. Halnen was
appointed as a Director of the Company. On June 20, 2002, the Company and
Mr. Halnen entered into an Employment Agreement, which was amended on
March 9, 2004. See Employment Contracts, Executive Profit
Performance Bonus Plan and  Option Grants in 2003. Mr. Halnens
employment contract provides for annual base compensation of $225,000 plus
an annual bonus opportunity of $75,000, payable quarterly. In order to
assist the Company in conserving cash, Mr. Halnen voluntarily reduced his
cash base and bonus compensation at various times in 2001, 2002 and 2003.
Such reductions were approximately $50,000 in 2002 and $107,000 in 2003.
In April 2003, Mr. Halnen received a $60,000 repayment of certain deferred
base compensation and bonuses, which he invested in the Companys
Debentures. Mr. Halnen also received $39,000 of withholding and estimated
income taxes, which were paid to the appropriate tax authorities. These
amounts ($99,000) are included in the Summary Compensation Table for 2003.
As of December 31, 2003, Mr. Halnen has deferred a net aggregate of
$58,000 of base and bonus compensation, which may be paid to Mr. Halnen
depending on the success of future operations, which is not included in
the Summary Compensation 21




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##### 



Table for 2003. Through April 16, 2004, Mr. Halnens cash compensation is at
an annual rate of $172,000 and he has voluntarily deferred his bonus
payments. The Company reinstated Mr. Halnens cash compensation in
accordance with his employment agreement effective April 19, 2004. All other
compensation represents premiums paid by the Company for term life insurance
($22,500 for 2002), see Employment Contracts.(4)
    
    Mr. Rendall joined the Company in April 1999 and was appointed Chief
Financial Officer of Elcom International on October 4, 1999 at an annual
salary of $200,000 and a bonus opportunity of up to $40,000. During 2000,
Mr. Rendalls annual salary was increased to $240,000 with no bonus
opportunity. In April 2002, Mr. Rendall elected to reduce his 2002 annual
salary by $36,000 to $204,000. On January 6, 2003, Mr. Rendall elected to
reduce his salary by a further $24,000 resulting in an annual salary of
$180,000. All other compensation represents premiums paid by the Company
for Group Term Life Insurance ($570 for 2002), see Employment Contracts.
Mr. Rendall voluntarily left the employ of the Company, effective March 7,
2003.(5)
    
    Mr. Soloway joined the Company on March 29, 2000 at an annual salary of
$150,000 and a bonus opportunity of $30,000. During 2001, Mr. Soloways
annual salary was increased to $192,000 with no bonus opportunity. On
January 6, 2003, Mr. Soloway elected to reduce his fiscal 2003 salary by
$28,800, resulting in an annual salary of $163,200. Mr. Soloway
voluntarily left the employ of the Company, effective March 25, 2003. Stock Option Plans As of December 31, 2003, the Company has adopted the 1995 Non-Employee
Director Stock Option Plan (the Director Plan), The Stock Option Plan of
Elcom International, Inc. (the 1993 Stock Option Plan), The 1995
(Computerware) Stock Option Plan of the Company (the Computerware Stock Option
Plan), The 1996 Stock Option Plan of the Company (the 1996 Stock Option
Plan), The 1997 Stock Option Plan of the Company (the 1997 Stock Option
Plan), The 2000 Stock Option Plan (the 2000 Stock Option Plan), The 2001
Stock Option Plan, as amended and restated (the 2001 Stock Option Plan) and
The 2002 Stock Option Plan (the 2002 Stock Option Plan) (collectively
hereinafter the Stock Option Plans) covering 250,000, 5,000,000, 1,000,000,
2,400,000, 3,000,000, 2,750,000, 2,400,000 and 1,800,000 shares, respectively,
of the Companys Common Stock, pursuant to which officers, employees and
directors of the Company, as well as other persons who render services as
independent contractors to the Company, or any of its affiliates, are eligible
to receive incentive stock options (ISOs) and/or non-qualified stock options
(NQOptions). The 1993 Stock Option Plan has expired and no further options
may be granted thereunder. These plans generally operate in the following
manner. Overview of the Plans. Pursuant to the plans, key personnel, which
includes employees and outside directors of the Company or any affiliate, as
well as other persons who render services as independent contractors to the
Company, or any of its affiliates, who in the judgment of the Compensation
Committee, are important to the successful operation of the Company or an
affiliate, are eligible to receive stock options. Stock options may include
NQOptions, which may be granted to any key personnel, and/or ISOs, which may
only be granted to employees of the Company or a subsidiary. The plans are administered by the Compensation Committee of the Board of
Directors (the Committee), presently comprised of Messrs. Harries, Ortiz and
Smith. Members of the Committee must be persons who qualify as outside
directors under Section 162(m) of the Internal Revenue Code and who are
non-employee directors under Rule16(b)(3) of the Securities Exchange Act of
1934. Subject to the terms and conditions of the applicable plan, and in
addition to t he other authorizations granted to the Committee under the
applicable plan, the Committee shall have full and final authority in its
absolute discretion to (a) select the optionees to whom options will be
granted, (b) determine the number of shares of Common Stock subject to any
option, (c) determine the time when options will be granted, (d) determine the
option price of Common Stock subject to an option, (e) determine the time when
Common Stock subject to an option may be purchased, (f) prescribe the form of
the option agreements governing the options which are granted under the
applicable plan and to set the provisions of such option agreements as the
Committee may deem necessary or desirable provided such provisions are not
contrary to the terms and conditions of the applicable plan, (g) adopt, amend
and rescind such rules and regulations as, in the Committees opinion, may be
advisable in the administration of the applicable plan, and (h) construe and
interpret the applicable plan, the rules and regulations and the instruments
evidencing options granted under the applicable plan and to make all other
determinations deemed necessary or advisable for the administration of the
applicable plan. Subject to the approval of the Board of Directors, the Committee may at
any time amend, modify, suspend or terminate any plan. In no event, however,
without the prior approval of the Companys stockholders, shall any action of
the Committee or the Board result in: (a) amending, modifying or altering the
eligibility requirements for those persons eligible for options; (b) increasing
or decreasing, except in the event of stock splits, stock dividends,
combinations, exchanges of shares or similar capital adjustments, the maximum
number of shares for which options may be granted; (c) decreasing the minimum
option price per share at which options may be granted under the applicable
plan; (d) extending either the maximum period during which an option is
exercisable or the date on which the applicable plan shall terminate; or (e)
changing the requirements relating to the Committee; except as necessary to
conform the applicable plan and/or the option agreements to changes in the
Internal Revenue Code or other governing law. 22




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##### 



Any decision made or action taken by the Committee in connection with the
administration, interpretation, and implementation of the applicable plan and
of its rules and regulations, shall, to the extent permitted by law, be
conclusive and binding
upon all optionees under the applicable plan and upon any person claiming under
or through such an optionee. Neither the Committee nor any of its members
shall be liable for any action taken by the Committee pursuant to the
applicable plan. No member of the Committee shall be liable for the action of
any other Committee member. In the event of stock splits, stock dividends, combinations, exchanges of
shares or similar capital adjustments, the Compensation Committee must make an
appropriate adjustment in the options granted under the applicable plan, and
the aggregate number of shares reserved for issuance thereunder also shall be
adjusted accordingly. If any option expires without having been fully
exercised, the shares with respect to which such options have not been
exercised will be available for further options as will any shares paid or
withheld to satisfy an optionees withholding tax or option payment liability. Subject to certain conditions, the duration of each option granted under
the applicable plan will be determined by the Committee, provided that no
option shall be exercisable later than the tenth anniversary of the date the
option was granted. Each option granted under the applicable plan may be
subject to restrictions with respect to the time and other conditions of
exercise as determined by the Committee. ISOs granted under the applicable plan are exercisable for a period of up
to ten years from the date of grant at an exercise price that is not less than
the fair market value of the Common Stock on the date of the grant, except that
the term of an ISO granted under the Stock Option Plan to a stockholder owning
more than 10% of the voting power of the Company on the date of grant may not
exceed five years and its exercise price may not be less than 110% of the fair
market value of the Common Stock on the date of the grant. NQOptions may be
granted at more or less than fair market value under the applicable plan.
Shares of Common Stock underlying an option shall be purchased by the optionee
(i) giving written notice to the Company of the optionees exercise of the
option accompanied by full payment of the purchase price either in cash or,
with the consent of the Committee (or as per the terms of the option
agreement), in whole or in part in shares of Common Stock by delivery to the
Company of shares of Common Stock that have been already owned by the optionee
for at least six months, having a fair market value on the date the option is
exercised equal to that portion of the purchase price for which payment in cash
is not made, and (ii) making appropriate arrangements acceptable to the Company
with respect to income tax withholding, as required, which arrangements may
include, at the absolute discretion of the Committee, in lieu of other
withholding arrangements, (a) the Company withholding from issuance to the
optionee such number of shares of Common Stock otherwise issuable upon exercise
of the option as the Company and the optionee may agree for the minimum
required withholding, or (b) the optionees delivery to the Company of shares
of Common Stock having a fair market value on the date the option is exercised
equal to that portion of the withholding obligation for which payment in cash
is not made. Options granted under the applicable plan are generally not
transferable other than upon an optionees death, provided that the Committee
has discretion to permit the transferability of NQOptions granted under the
applicable plan to certain parties. The 2001 Stock Option Plan and the 2002 Stock Option Plan each provide
that an optionee may exercise his or her stock options for up to 180 days
following the date of termination without cause if the option agreement so
provides. 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. Any options that are ISOs must be exercised within 90 days
after such termination, otherwise these options will receive the tax treatment
offered to NQOptions. The maximum number of options that can be granted to any one participant
during any one fiscal year is 500,000 under the 1993 Stock Option Plan, 210,000
under the Computerware Stock Option Plan, 300,000 under the 1996 Stock Option
Plan, 150,000 under the 1997, the 2000 and the 2001 Stock Option Plans, and
250,000 under the 2002 Stock Option Plan. The Director Plan. Non-employee Directors are entitled to participate in
the Director Plan, adopted by the Board of Directors in October 1995, and
approved by stockholders in November 1995. A total of 250,000 shares of Common
Stock have been reserved for issuance under the Director Plan. The Director
Plan provides for an automatic grant of an option to purchase 5,000 shares of
Common Stock to each non-employee Director serving as such on October 9, 1995
or for persons who become a non-employee Director thereafter, on their date of
election or appointment as applicable. Options granted under the Director Plan
have a term of ten years. One-third of the shares subject to each option vest
on each anniversary date of the grant of the option so long as the optionee
continues to serve as a Director on such dates. Of the 250,000 shares of Common
Stock reserved for issuance thereunder, as of December 31, 2003, options
covering 10,000 shares of Common Stock have been exercised, and options to
acquire an aggregate of 95,000 shares of Common Stock (85,250 of which were
exercisable at December 31, 2003) were outstanding at exercise prices ranging
from $0.20 to $6.7813 per share, and accordingly, as of December 31, 2003
additional options covering 145,000 shares of Common Stock could be granted
under such option plan. The 1993 Stock Option Plan. The 1993 Stock Option Plan was adopted by the
Board of Directors in February 1993, was approved by the Companys
stockholders, and terminated on February 23, 2003. Of the 5,000,000 shares of
Common Stock reserved for issuance thereunder, as of December 31, 2003, options
covering 2,817,497 shares of Common Stock have been exercised, options 23




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##### 



covering
416,495 shares of Common Stock have expired, and options to acquire an
aggregate of 1,766,008 shares of Common Stock (1,757,758 of which were
exercisable at December 31, 2003) were outstanding at exercise prices ranging
from $0.445 to $22.50. The Computerware Stock Option Plan. The Computerware Stock Option Plan
was adopted by the Board of Directors in February 1995, was approved by the
Companys stockholders, and terminates on February 5, 2005. Of the 1,000,000
shares of Common Stock reserved for issuance under the Computerware Stock
Option Plan, options totaling 1,000,000 shares have been granted at an exercise
price of $4.00 per share, 414,000 of which have been exercised as of December
31, 2002, and 586,000 of which were exercisable as of December 31, 2003. The 1996 Stock Option Plan. The 1996 Stock Option Plan was adopted by the
Board of Directors in August 1996, was approved by the Companys stockholders
and terminates on August 19, 2006. Of the 2,400,000 shares of Common Stock
reserved for issuance under the 1996 Stock Option Plan, as of December 31,
2003, options covering 774,040 shares of Common Stock have been exercised, and
options to acquire an aggregate of 1,247,718 shares of Common Stock (912,969 of
which were exercisable at December 31, 2003) were outstanding as of December
31, 2003, at exercise prices ranging from $0.08 to $22.50 per share, and
accordingly, options covering 378,242 shares of Common Stock were available to
be granted under such option plan as of that date. The 1997 Stock Option Plan. The 1997 Stock Option Plan was adopted by the
Board of Directors in April 1997, initially amended in February 1998, and
approved by stockholders at the 1998 Annual Meeting. The 1997 Stock Option
Plan also was amended in March 1999 to increase the shares covered by 1,000,000
(to a total of 3,000,000 shares) and, as amended, was approved by the
stockholders at the 1999 Annual Meeting. Of the 3,000,000 shares reserved for
issuance thereunder, as of December 31, 2003, options covering 439,504 shares
of Common Stock have been exercised and options to acquire an aggregate of
2,271,713 shares of Common Stock (1,214,413 of which were exercisable at
December 31, 2003) were outstanding at exercise prices ranging from $0.08 to
$5.75 per share, and accordingly, options covering 288,783 shares of Common
Stock were available to be granted under such option plan as of that date. The 2000 Stock Option Plan. The 2000 Stock Option Plan was adopted by the
Board of Directors in March 2000, was approved by the Companys stockholders,
and terminates on March 21, 2010. Of the 2,750,000 shares of Common Stock
reserved for issuance thereunder, as of December 31, 2003, options covering
10,000 shares of Common Stock have been exercised, options to acquire an
aggregate of 2,400,838 shares of Common Stock were outstanding (1,060,061 of
which were exercisable at December 31, 2003) at exercise prices ranging from
$0.08 to $6.1563 per share, and accordingly, options covering 339,162 shares of
Common Stock were available to be granted under such option plan as of that
date. The 2001 Stock Option Plan. The 2001 Stock Option Plan was adopted by the
Board of Directors in November 2000 and was amended and restated to provide for
greater flexibility with respect to option agreement provisions related to the
vesting of options following an optionees termination of employment by reason
of a termination without cause, and was approved by the Companys stockholders
in May 2001. The 2001 Stock Option Plan terminates on November 10, 2010. Of
the 2,400,000 shares of Common Stock reserved for issuance thereunder, as of
December 31, 2003, options covering 59,950 shares of Common Stock have been
exercised, options to acquire an aggregate of 1,939,150 shares of Common Stock
(895,537 of which were exercisable at December 31, 2003) were outstanding at
exercise prices ranging from $0.08 to $1.68 per share, and accordingly, options
covering 400,900 shares of Common Stock were available to be granted under such
option plan as of that date. The 2002 Stock Option Plan. The 2002 Stock Option Plan was adopted by the
Board of Directors in June 2001 and was approved by the Companys stockholders
on June 12, 2002. The 2002 Stock Option Plan terminates on June 11, 2011. Of
the 1,800,000 shares of Common Stock reserved for issuance thereunder, as of
December 31, 2003, options to acquire an aggregate of 991,400 shares of Common
Stock (470,412 of which were exercisable at December 31, 2003) were outstanding
at exercise prices ranging from $0.08 to $1.68 per share, and accordingly,
options covering 808,600 shares of Common Stock were available to be granted
under such option plan as of that date. Change of Control Feature Generally, all option agreements under the Stock Option Plans, including those
relative to the Named Executive Officers, contain provisions requiring the cash
payment of the value of the options (represented by the difference between the
option exercise price and the then-current fair market value of the underlying
Common Stock), in some instances upon certain defined changes in control or
sales of substantially all of the Companys assets. Such changes of control
also may trigger, in certain cases, acceleration of the exercisability of
certain options, which may occur if the Company is reorganized, consolidated or
merged with another company and the Company is not the surviving company, or if
50% or more of the shares of the capital stock of the Company which are then
issued and outstanding are purchased by a single person or entity. 24




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##### 



Option Grants In 2003 Shown below is information relating to grants of stock options pursuant to
the Stock Option Plans during the year ended December 31, 2003 to the Named
Executive Officers. Such grants also are reflected in the Summary Compensation
Table above. Potential Realizable Value Individual Grants
    
    Potential Realizable
ValueAt Assumed Annual% of Total
    
    Exercise
    
    
    
    
    
    
    
    
    
    Rates of Stock PriceNo. of
    
    Granted To
    
    or Base
    
    
    
    
    
    
    
    
    
    Appreciation for theSecuritiesUnderlying
    
    EmployeesIn Fiscal
    
    Price($ per
    
    Grant
    
    Expiration
    
    Option Term (3)Name
    
    Options
    
    Year
    
    share)(1)
    
    Date
    
    Date
    
    5%
    
    10%Robert J. Crowell (4)
    
    
    357,142
    
    
    
    8.77
    
    
    $
    0.297
    (2)
    
    
    05/21/03
    
    
    
    05/21/08
    
    
    $
    135,000
    
    
    $
    171,00048,858
    
    
    
    1.05
    
    
    $
    0.27
    
    
    
    05/21/03
    
    
    
    05/21/13
    
    
    $
    19,000
    
    
    $
    30,000John E. Halnen (4)
    
    
    275,000
    
    
    
    6.76
    
    
    $
    0.27
    
    
    
    05/21/03
    
    
    
    05/21/13
    
    
    $
    121,000
    
    
    $
    193,000Melinda F. Ellett (5)
    
    
    75,000
    
    
    
    1.84
    
    
    $
    0.08
    
    
    
    03/25/03
    
    
    
    03/25/13
    
    
    $
    10,000
    
    
    $
    16,000
   (1)
    
    This price represents the fair market value at the date of grant pursuant
to the terms of the Companys Stock Option Plans, except for (2) below.(2)
    
    This price represents 110% of the fair market value at the date of grant
pursuant to the terms of the Stock Option Plans.(3)
    
    Potential Realizable Value is based on certain assumed rates of
appreciation pursuant to rules prescribed by the Securities and Exchange
Commission (the Commission). Actual gains, if any, on stock option
exercises are dependent on the future performance of the stock. There can
be no assurance that the amounts reflected in this table will be achieved.
In accordance with rules promulgated by the Commission, Potential
Realizable Value is based upon the exercise price of the options.(4)
    
    The options granted to Messrs. Crowell and Halnen vest in full on May 21,
2004.(5)
    
    The options granted to Ms. Ellett vest as follows: 30,000 on March 25,
2004; 22,500 on March 25, 2005 and 22,500 on March 25, 2006. 25




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##### 



Fiscal Year-End Option Value Table The following table shows the number of shares of Common Stock acquired
during 2003 by the exercise of options and the related value realized, as well
as the number of shares of Common Stock and values represented by outstanding
stock options held by each of the Named Executive Officers as of December 31,
2003. The value of unexercised in-the-money options at December 31, 2003 is
calculated using the $0.20 per share closing price of such shares on that date.
See note (2) below. Number of Securities
    
    Value of UnexercisedUnderlying
    
    In The MoneyUnexercised Options at
    
    Options AtSharesAcquired on
    
    Value
    
    December 31, 2003
    
    December 31, 2003(1)(2)Exercise
    
    Realized
    
    Exercisable
    
    Unexercisable
    
    Exercisable
    
    UnexercisableRobert J. Crowell
    
    
    
    
    
    
    
    
    
    
    2,798,587
    
    
    
    451,899
    
    
    
    
    
    
    
    John E. Halnen
    
    
    
    
    
    
    
    
    
    
    1,138,249
    
    
    
    287,250
    
    
    
    
    
    
    
    Melinda F. Ellett
    
    
    
    
    
    
    
    
    
    
    226,525
    
    
    
    150,725
    
    
    
    
    
    
    
    9,000
   (1)
    
    Options are in-the-money if the fair market value of the Common Stock
exceeds the exercise price.(2)
    
    Represents the total gain which would be realized if all in-the-money
options beneficially held at December 31, 2003 were exercised, determined
by multiplying the number of shares underlying the options by the
difference between the per share option exercise price and $0.20, the
closing sale price per share of the Companys Common Stock on the OTCBB
Market on December 31, 2003. Executive Profit Performance Bonus Plan At the Companys 1998 Annual Meeting, the stockholders approved the Elcom
International, Inc. Executive Profit Performance Bonus Plan For Executive
Officers (the Executive Performance Plan) which was approved by the Board of
Directors in September 1997. The Executive Performance Plan covers, for a
fiscal year, those persons who, on the ninetieth day of that particular fiscal
year, are the executive officers of the Company (Executive Officers). As
such, the number of people covered will generally be limited to no more than
ten, and in order to participate in the Executive Performance Plan, the
Executive Officer must be employed as of March 30th of the calendar year and
must be awarded a participation (also by March 30th) by the Compensation
Committee of the Board of Directors (the Committee). The Executive Performance Plan provides for incentive compensation
payments (limited in amount to the lesser of: (a) two times the executives
base salary or (b) one million dollars) to be made to covered Executive
Officers based upon the increase in the Companys reported operating income (or
reduction in operating loss) over the prior year. Accordingly, the Board of
Directors believes that the Executive Performance Plan provides a substantial
incentive to those Executive Officers in the best position to affect the
Companys operating performance and that substantial benefits will accrue to
the Company from granting participations in the Executive Performance Plan.
Such participations afford the Executive Officers a substantial incentive to
enhance the value of the Companys Common Stock through their own efforts in
improving the Companys operating results. The granting of participations also
is expected to be instrumental in attracting and retaining key executives.
Accordingly, the Company will, from time to time, grant participations to such
Executive Officers as may be selected to participate in the Executive
Performance Plan in accordance with the terms thereof. Although, the Companys
reported operating profit improved from 2002 to 2003 (i.e. the operating loss
decreased), no payments were made to Executive Officers for 2003 in respect of
the Executive Performance Plan. The Executive Performance Plan is administered by the Compensation
Committee of the Board, presently comprised of Messrs. Harries, Ortiz and
Smith. Members of the Committee must be persons who qualify as outside
directors under Section 162(m) of the Internal Revenue Code and who are
non-employee directors under Rule 16(b)(3) of the Securities Exchange Act of
1934. Through December 31, 2000, the Executive Performance Plan was not
permitted to be terminated or amended in any way that would adversely impact
any current participant, without such participants written consent.
Thereafter, the Board of Directors or the Committee may amend or terminate the
Executive Performance Plan. The participants have waived participation in the
Executive Performance Plan for calendar year 2003. For fiscal year 2004, Mr.
Crowell and Mr. Halnen each will participate in the Executive Performance Plan
with a 50% and 25% participation interest respectively. The Elcom International, Inc. Key Personnel Profit Performance Plan (the
Key Personnel Performance Plan), which is designed to operate in conjunction
with the Executive Performance Plan, is intended to provide a substantial
incentive to key personnel who are not Executive Officers, but who can, in the
performance of their duties, affect the Companys operating results. 26




---



##### 



The Key Personnel Performance Plan Bonus Pool is limited to that portion of the
20% Bonus Pool (as defined in the Key Personnel Performance Plan) calculated
under the terms of the Executive Performance Plan less payments under the
Executive Performance Plan. Accordingly, the bonus pool available under the
Key Personnel Performance Plan is generally limited to that portion of the 20%
Bonus Pool calculated under the Executive Performance Plan, which is either
unallocated to Executive Officers or is in excess of the payment limitations
under the Executive Performance Plan (the annual payment to any one individual
is limited in amount to the lesser of: (a) two times the executives base
salary or (b) one million dollars). Thus, based on existing allocations under
the Executive Performance Plan, for 2002 approximately 65% of any Bonus Pool
would have been available for award under the Key Personnel Performance Plan.
The terms and administration of the Key Personnel Performance Plan generally
correspond to those of the Executive Performance Plan, except that in the case
of the Key Personnel Performance Plan, the annual payout to any one participant
is limited to the lesser of $500,000 or two times the participants base
salary. The Compensation Committee controls participation in the Key Personnel
Performance Plan. No payments were made under the Key Personnel Performance
Plan with respect to the calendar year 2003. Employment Contracts Effective June 20, 2002, the Company entered into an Amended and Restated
Employment Agreement with Robert J. Crowell, which was amended effective as of
April 16, 2004, (the 2002 Crowell Agreement) replacing the Employment
Agreement between the Company and Mr. Crowell entered into in 1997. Pursuant
to the 2002 Crowell Agreement, Mr. Crowell has been retained for a term ending
June 20, 2006 as the Chairman and Chief Executive Officer of the Company. Mr.
Crowell had voluntarily suspended portions of his compensation during 2001,
2002, and 2003 (see Footnote (2) to the Summary Compensation Table). The
2002 Crowell Agreement was amended and his annual base salary was reduced to
$364,000 effective April 16, 2004, from the original annual base salary of
$525,000. Mr. Crowell also may be awarded a quarterly bonus of up to $37,500
based upon the Compensation Committees evaluation of his performance. (see
Summary Compensation Table). The 2002 Crowell Agreement provides that Mr.
Crowell is entitled to participate in all Company compensation plans and fringe
benefit plans, on terms at least as favorable as other executives of the
Company, and that Mr. Crowell will have a minimum rate of 50% participation in
the Executive Performance Plan Bonus Pool, see Executive Profit Performance
Bonus Plan. Under the 2002 Crowell Agreement, Mr. Crowell is also entitled to
receive an annual option grant to purchase at least 400,000 shares of the
Companys Common Stock under the Companys Stock Option Plans to be made no
later than July of each year. The options will be exercisable as determined by
the Compensation Committee, and, to the maximum extent allowable, shall be
ISOs. If Mr. Crowells employment with the Company should terminate because of a
disability (as defined) he becomes entitled to receive (i) a payment equal to
two years each of base salary plus maximum potential bonus, payable in 24
equal monthly installments, and (ii) health, dental benefits and group term
life insurance for 24 months following termination of employment with the
Company. If Mr. Crowells employment with the Company should terminate other
than for cause (as defined in the agreement) or upon Mr. Crowells resignation
for good reason (as defined) after a change in control (as defined in the
agreement) he becomes entitled to receive (i) a severance payment equal to 2.99
times his base salary plus maximum potential bonus, payable 50% upon Mr.
Crowell executing a release in favor of the Company and 50% payable in twelve
equal monthly installments, (ii) all of Mr. Crowells stock options shall
become immediately vested and exercisable, and (iii) health, dental benefits
and group term life insurance for a three year period following termination of
employment with the Company. For purposes of calculating any such payment,
Mr. Crowells base salary and maximum potential bonus shall be calculated
without giving effect to any reduction in his base salary that might have
occurred after a change in control of the Company. Effective June 20, 2002, the Company entered into an Employment Agreement
with John E. Halnen, which was amended on March 9, 2004, (the Halnen
Agreement) and an Employment Agreement with Peter A. Rendall (the Rendall
Agreement). Together, the Halnen Agreement and the Rendall Agreement are
referred to herein as the Employment Agreement. Pursuant to the Halnen
Agreement, Mr. Halnen was retained for a term ending June 20, 2005 as the
President and Chief Operating Officer of the Company. During the term, Mr.
Halnen is entitled to receive a base salary of $225,000 per year, unless Mr.
Halnen voluntarily agrees to a reduction in his base salary, and shall have the
opportunity to receive an annual bonus of up to $75,000, payable quarterly, see
footnote to the Summary Compensation Table. Pursuant to the Rendall
Agreement, Mr. Rendall was retained for a term ending June 20, 2005 as the
Chief Financial Officer of the Company. During the term, Mr. Rendall was
entitled to receive a base salary of $240,000 per year, unless Mr. Rendall
voluntarily agreed to a reduction in his salary, see Summary Compensation
Table. Mr. Rendall voluntarily left the Company on March 7, 2003 and his
termination provisions were not triggered. The Halnen Agreement provides that Mr. Halnen is entitled to participate
in all Company compensation plans and fringe benefit plans, on terms at least
as favorable as other executives of the Company, and that Mr. Halnen will have
a minimum rate of 25% participation in the Executive Performance Plan Bonus
Pool, see Executive Performance Bonus Plan. Under the Halnen Agreement, Mr.
Halnen also is entitled to receive an annual option grant to purchase at least
200,000 shares of the Companys common stock under the Companys Stock Option
Plans to be made no later than July of each year. The options will be
exercisable as determined by the Compensation Committee, and, to the maximum
extent allowable, shall be incentive stock options. 27




---



##### 



If Mr. Halnens employment with the Company should terminate because of a
disability (as defined in the agreement) Mr. Halnen shall become entitled to
receive (i) a payment equal to twelve months base salary plus his maximum
potential bonus, payable in twelve equal monthly installments, and (ii) health,
dental benefits and group term life insurance for twelve months following
termination of employment with the Company. If Mr. Halnens employment with
the Company should terminate other than for cause (as defined in the
agreement), Mr. Halnen shall become entitled to receive (i) a severance payment
equal to twelve months base salary plus his maximum potential bonus payable in
twelve equal monthly installments or, if, at the time of such termination, Mr.
Crowell is no longer Chairman and Chief Executive Officer of the Company, then
such severance payment shall be equal to eighteen months base salary plus his
maximum potential bonus, payable 50% upon Mr. Halnen executing a release in
favor of the Company and 50% payable in twelve equal monthly installments, and
(ii) health, dental benefits and group term life insurance for twelve months
following termination of employment with the Company. If Mr. Halnens
employment with the Company should terminate other than for cause (as defined
in the agreement), following a change in control (as defined in the agreement)
Mr. Halnen shall be entitled to receive (i) a severance payment equal to the
greater of his base salary plus his maximum potential bonus for the remainder
of the term of the Halnen Employment Agreement or his base salary plus his
maximum potential bonus for two years, payable 50% upon Mr. Halnen executing a
release in favor of the Company and 50% payable in 24 equal monthly
installments, (ii) all of Mr. Halnens stock options shall become immediately
vested and exercisable, and (iii) Mr. Halnen shall become entitled to receive
health, dental benefits and group term life insurance for 24 months following
termination of employment with the Company. For purposes of calculating any
such payment, Mr. Halnens base salary and maximum potential bonus shall be
calculated without reference to any voluntary reductions then in effect. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The following report of the Compensation Committee describes the
philosophy, objectives and components of the Companys executive compensation
programs for 2003 and discusses the determinations concerning the compensation
for the Chief Executive Officer for 2003. The members of the Compensation Committee are William W. Smith, Richard J.
Harries, Jr., and John W. Ortiz. Each of Messrs. Smith, Harries and Ortiz is
an independent director, as defined under NASDAQ listing standards. Compensation Philosophy In reviewing and overseeing the Companys compensation programs, the
Compensation Committee adheres to a compensation philosophy which provides
executive compensation programs that are designed to: (i) attract and retain
key executives crucial to the long-term success of the Company; (ii) relate to
the achievement of operational and strategic objectives; and (iii) be
commensurate with each executives performance, experience and
responsibilities. In making its recommendations concerning salaries and awards
under compensation plans, the Committee considers the financial condition and
operational performance of the Company during the prior year, the Companys
success in achieving strategic objectives that may have a long-term beneficial
effect on the Companys results of operations and financial condition, and its
assessment of the contributions of the individual executive officer to the
Companys performance and to the achievement of its strategic objectives. The
Committee, however, has not specifically focused on the compensation levels of
executives in peer group companies in making compensation decisions.
Historically, the Committee has not relied extensively on objective criteria in
measuring individual performance and its decisions concerning compensation are
primarily based on subjective decisions concerning the appropriate levels of
compensation. Compensation Program As a means of implementing these compensation philosophies and objectives,
the Companys compensation program for executive officers consists of the
following primary elements: salary, participation in the Companys Stock Option
Plans, and participation in the Executive Performance Plan. These particular
elements are further explained below. Salaries Salary levels for executive officers reflect the Committees
subjective judgments of appropriate salaries in light of the duties and
responsibilities inherent in the executives respective positions. The
particular qualifications of an individual being considered for a position and
his or her level of experience are considered in establishing a salary level
when an individual is first appointed to a given position. The performance and
contribution of the individual to the Company, as well as Company performance,
are the primary criteria influencing salary administration. Salaries of
executive officers are generally reviewed each year. In many instances, the
primary factor in setting salary levels was the Companys desire to provide
compensation in amounts sufficient to induce these individuals to join or
remain with the Company. Stock Options The Company uses stock options as a long-term incentive
program for executives, management and employees. Stock options are used
because they directly relate the amounts earned by the executive to the amount
of appreciation realized by the Companys stockholders over comparable periods.
Stock options also provide executives with the opportunity to acquire and
build a meaningful ownership interest in the Company. The Committee considers
possible grants of stock options throughout the year. In determining the
number of options awarded to an individual executive, the Committee generally
establishes a 28




---



##### 



level of award based upon the position of the individual, his or her level of
responsibility and length of service. The Committee also considers (without
assigning any particular weight) amounts of base salary and/or bonus payments
which executives and other personnel may elect to forgo, in determining the
quantity of options to be granted. Executive Performance Plan and Bonuses The Executive Performance Plan
and potential bonuses reflect the Committees desire to provide the Companys
executives an opportunity to earn bonuses based upon actual reported
improvements in the Companys performance and/or subjective assessments of an
executives performance. Accordingly, the Committee believes that the
Executive Performance Plan and potential bonuses provides substantial
incentives to the executives who are in the best position to affect the
Companys operating performance. The Committee believes that by granting
participation in the Executive Performance Plan and/or providing bonus
opportunities, the executives will have a substantial incentive to enhance the
value of the Companys Common Stock through their own efforts in improving the
Companys operating profitability. Benefit Programs The executive officers also participate in various
welfare and benefit programs that are generally made available to all salaried
employees. Executive officers also receive certain traditional perquisites,
which are customary for their positions. Chief Executive Officer Compensation The compensation arrangements for Mr. Crowell with respect to the 2003
fiscal year were primarily based upon the terms of his employment contracts
with the Company, as described under Executive CompensationEmployment
Contracts. Pursuant to the 2002 Crowell Agreement, Mr. Crowell is entitled to
an annual minimum base salary of $525,000, which was reduced to $364,000
effective April 16, 2004. In order to assist the Company in conserving cash,
Mr. Crowell voluntarily reduced his cash compensation at various times in 2001,
2002 and 2003. Such reductions amounted to approximately $135,000 in 2002 and
$257,000 in 2003. In April 2003, Mr. Crowell received a $187,000 repayment of
certain deferred base compensation amounts, which he invested in the Companys
Debentures. Mr. Crowell also received withholding and estimated income taxes
of $32,000, which were paid to the appropriate tax authorities. These amounts
($219,000) are included in the Summary Compensation Table for 2003. Mr.
Crowell also invested an additional $263,000 of cash in the Companys
Debentures (see Transactions With Management). As of December 31, 2003, Mr.
Crowell has deferred a net aggregate of $173,000 in base compensation, which
may be paid to Mr. Crowell depending upon the success of future operations.
Through April 16, 2004, Mr. Crowells 2004 cash compensation paid totaled
$10,000. The Company reinstated Mr. Crowells cash compensation in accordance
with the 2002 Crowell Agreement to the level of $364,000 per year, effective
April 19, 2004. The 2002 Crowell Agreement originally provided for annual base
compensation of $525,000, much of which was deferred as described herein
through April 16, 2004, when the annual base compensation was reduced to
$364,000. The Compensation Committee did not conduct any official surveys of
competitive, industry or revenue peer groups, but believed that, over the
course of negotiation on the 2002 Crowell Agreement, that this annual base
salary in 2003 was fair and reasonable given the position of the Company and
Mr. Crowells responsibilities. In addition, the 2002 Crowell Agreement provides that Mr. Crowell is
entitled to participate in all of the other Company compensation plans and
fringe benefit plans, on terms at least as favorable as other executives of the
Company and that he participates in the Executive Performance Plan at a minimum
rate of 50% of any bonus pool generated by such plan. Under the 2002 Crowell
Agreement, Mr. Crowell also is entitled to receive annual grants of options
under the Companys Stock Option Plans of no less than 400,000, to be made no
later than July of each year, under terms to be determined by the Compensation
Committee. Section 162(m) Section 162(m) of the Internal Revenue Code (the Section) disallows a
tax deduction for any publicly traded company for individual compensation
exceeding $1 million in any year for any of the Named Executive Officers,
unless the compensation is performance-based or otherwise meets an applicable
exemption. Since the aggregate compensation of each of the Companys executive
officers is below the $1 million threshold and since the Committee believes
that options granted under the Companys Stock Option Plans generally will meet
the performance based provisions under the Section, the Committee currently
believes that the Section will not reduce the tax deduction available to the
Company for compensation paid in 2003 to the Companys executive officers. Compensation Committee
William W. Smith, Chairman
Richard J. Harries, Jr.
John W. Ortiz 29




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##### 



Compensation Committee Interlocks And Insider Participation The Companys Compensation Committee is currently composed of Messrs.
Harries, Ortiz, and Smith. No current member of the Compensation Committee has
ever been an officer or employee of the Company or any of its subsidiaries. No
interlocking relationship exists between the Companys Board of Directors or
Compensation Committee and the board of directors or compensation committee of
any other company. During 2003, Mr. Smith invested $350,000 in the Companys
Convertible Debentures. See Transactions with Management. PERFORMANCE GRAPH Set forth below is a line graph and a table of the related underlying data
comparing the percentage change in the cumulative total stockholders return on
the Companys Common Stock against the cumulative total return of the Total
Return Index for The Nasdaq Stock Market  U.S. and Foreign (Nasdaq Total),
and the index for Nasdaq Computer and Data Processing Services Stocks
(Industry) for the period beginning on December 31, 1999 and as of the last
trading day on the Nasdaq or OTCBB, as applicable, in each calendar year
thereafter through 2003. The Industry index includes all Nasdaq listed
securities with a Standard Industrial Classification (SIC) of 737. The graph
assumes that the value of an investment in the Common Stock of Elcom
International, Inc., at the average of its high and low price, and each index
was $100 on December 31, 1999 and that all dividends, if any were reinvested. Comparison of the Common Stock of Elcom International, Inc. (The Company),
The Total Return Index for The Nasdaq Stock Market - U.S. and Foreign (Nasdaq Total), And
The Index for Nasdaq Computer and Data Processing Services Stocks (SIC Code 737) (Industry) (LINE GRAPH) 12/31/1999
    
    12/29/2000
    
    12/31/2001
    
    12/31/2002
    
    12/31/2003The Company
    
    
    100
    
    
    
    4
    
    
    
    4
    
    
    
    1
    
    
    
    1Nasdaq Total
    
    
    100
    
    
    
    60
    
    
    
    48
    
    
    
    33
    
    
    
    49Industry
    
    
    100
    
    
    
    46
    
    
    
    37
    
    
    
    25
    
    
    
    34
 30




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##### 



Item 12.Security Ownership of Certain Beneficial Owners and Management EQUITY COMPENSATION PLAN INFORMATION The following table provides information as of December 31, 2003 with
respect to compensation plans maintained by the Company under which equity
securities of the Company are authorized for issuance: Number of securitiesNumber of securities
    
    
    
    
    
    remaining available forto be issued
    
    
    
    
    
    future issuance underupon exercise of
    
    Weighted-average
    
    equity compensationoutstanding
    
    exercise price of
    
    plans (excludingoptions,
    
    outstanding options,
    
    securitiesPlan Category
    
    warrants and rights
    
    warrants and rights
    
    reflected in column (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders
    
    
    11,297,827
    (1)(2)
    
    $
    1.89
    
    
    
    2,360,687
    (2)(3)Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    11,297,827
    
    
    $
    1.89
    
    
    
    2,360,687
  (1)
    
    Includes shares of Common Stock to be issued upon the exercise of options
outstanding as of December 31, 2003, under the following Company Stock
Option Plans: The Director Plan, 95,000; The 1993 Stock Option Plan,
1,766,008; The Computerware Stock Option Plan, 586,000; The 1996 Stock
Option Plan, 1,247,718; The 1997 Stock Option Plan, 2,271,713; The 2000
Stock Option Plan, 2,400,838; The 2001 Stock Option Plan, 1,939,150; and
The 2002 Stock Option Plan, 991,400.(2)
    
    All outstanding options are subject to adjustments for stock splits,
stock dividends, recapitalizations, and other similar transactions or
events.(3)
    
    Reflects options covering shares of Common Stock which may be issued,
under the following Company Stock Option Plans: The Director Plan,
145,000; The 1996 Stock Option Plan, 378,242; The 1997 Stock Option Plan,
288,783; The 2000 Stock Option Plan, 339,162; The 2001 Stock Option Plan,
400,900; and The 2002 Stock Option Plan, 808,600. 31




---



##### 



PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWNERSHIP The following table sets forth the beneficial ownership of Common
Stock as of April 16, 2004 by (i) each Director of the Company, (ii) any
executive officer who was (a) the Chief Executive Officer and (b) an
executive officer of the Company at the end of the fiscal year, as well as
the individuals that were executive officers during the year ended
December 31, 2003, (iii) all Directors and executive officers as a group,
and (iv) each person or group known by the Company to own beneficially
more than 5% of its outstanding shares of Common Stock. All information
with respect to beneficial ownership has been furnished by the respective
Director or executive officer, or by reference to a public filing, as the
case may be. Unless otherwise indicated below, each stockholder named
below has sole voting and investment power with respect to the number
of shares set forth opposite his or its respective name. Directors and Executive Officers and
    
    Number of Shares
    
    Percentage ofOther Beneficial Owners(2)
    
    Beneficially Owned (1)
    
    Common Stock (1)Class I Director - Term expires at the 2005 Annual MeetingJohn E. Halnen (3)
    
    
    1,426,299
    
    
    
    2.3
    %John W. Ortiz (4)
    
    
    54,625
    
    
    
    *Class II Director - Term expires at the 2006 Annual MeetingRichard J. Harries, Jr. (4)
    
    
    54,625
    
    
    
    *Class III Directors - Term expires at the 2004 Annual MeetingRobert J. Crowell (5)
    
    
    7,136,295
    
    
    
    11.1
    %William W. Smith (4)(6)
    
    
    53,075
    
    
    
    *Named Executive OfficersPeter A. Rendall (7)
    
    
    
    
    
    
    *Scott M. Soloway (7)
    
    
    
    
    
    
    *Melinda F. Ellett (4) (8)
    
    
    309,450
    
    
    
    *All Directors And Executive Officers as a Group (6 Persons)(9)
    
    
    9,034,370
    
    
    
    13.6
    %
   *
    
    Less than 1%.  (1)
    
    In accordance with Securities and Exchange Commission rules, each
beneficial owners holdings have been calculated assuming full exercise of
all outstanding options and warrants to acquire Common Stock, regardless
of the option price, which are exercisable by such owner within 60 days
after April 16, 2004, while assuming no exercise of outstanding options
and warrants covering Common Stock held by any other person.(2)
    
    For purposes hereof, the address of the Companys Directors and executive
officers is the same as that of the Company: 10 Oceana Way, Norwood,
Massachusetts 02062.(3)
    
    Mr. Halnen is a Director and President and Chief Operating Officer of the
Company. Mr. Halnens Common Stock ownership is comprised of 800 shares
held in an Individual Retirement Account and 1,425,499 shares, which he
has the right to acquire at various prices within 60 days of April 16,
2004 through the exercise of stock options. See Executive Compensation 
Option Grants in 2003, and Fiscal Year End Option Value Table. During
2003, Mr. Halnen invested $60,000 in the Companys Convertible Debentures,
as described elsewhere herein. After April 23, 2005 (or earlier in
certain circumstances) Mr. Halnen may convert his debenture into
481,542 shares of Common Stock, which shares are not included in Mr. Halnens
beneficial ownership in the accompanying table.(4)
    
    This number represents shares of Common Stock which can be acquired
through the exercise of options that are exercisable by the owner
regardless of the option price, within 60 days of April 16, 2004.(5)
    
    Mr. Crowell is Chairman of the Board of Directors and Chief Executive
Officer of the Company. Mr. Crowells Common Stock ownership is comprised
of 3,636,742 shares which he owns directly (including 110,000 shares in a
retirement plan account); 188,401 shares held in a revocable trust for the
benefit of one of Mr. Crowells daughters, for which Mr. Crowell serves as
Trustee; 121,616 shares held by the Crowell Educational Foundation with
respect to which Mr. Crowell shares the power to vote and dispose of and
3,189,537 shares which he has the right to acquire at various prices
within 60 days of April 16, 2004 through the exercise of stock options.
See Executive Compensation  Option Grants in 2003, and Fiscal Year End
Option Value Table. During 2003, Mr. Crowell invested $450,000 in the
Companys Convertible Debentures, as described elsewhere herein. After
April 23, 2005 (or earlier in certain circumstances), Mr. Crowell may
convert these Debentures into 3,611,557 shares of Common Stock, which shares are not included in Mr. Crowells beneficial ownership in the
accompanying table.(6)
    
    During 2003, Mr. Smith invested $350,000 in the Companys Convertible
Debentures, as described elsewhere herein. After April 23, 2005 (or
earlier in certain circumstances), Mr. Smith may convert these Debentures
into 2,808,989 shares of Common Stock, which shares are not included in
Mr. Smiths beneficial ownership in the accompanying table. 32




---



##### 



(7)
    
    As of March 7, 2003, and March 25, 2003, Messrs. Rendall and Soloway
voluntarily left the employ of the Company and their respective options
terminated as of their last day of employment.(8)
    
    Ms. Ellett was elected as Secretary by the Board of Directors on April 2,
2003.(9)
    
    Includes 5,086,811 shares of Common Stock which the Directors and
executive officers of the Company have the right to acquire within 60 days
of April 16, 2004 through the exercise of stock options. Item 13.Certain Relationships and Related Transactions Transactions with Management On April 23, 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 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. The Company also paid
estimated income and withholding taxes on such amounts of $32,000 on behalf of
Mr. Crowell and $39,000 on behalf of Mr. Halnen. 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 $710,000 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 Investors are considered related parties and
invested a total of $200,000 in the Company via purchases of Debentures in the
Second Closing. To date, 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 23,
2004 and October 16, 2004. The principal amount is due at maturity on April
23, 2013. The Company has accrued $104,000 in interest expense for these
Debentures as of March 31, 2004, and currently plans to satisfy the 2004
interest obligations with a payment in-kind of Debentures. The Debentures are collateralized by a security interest in substantially
all of the Companys assets for a two-year period ending April 23, 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 23,
2005 through April 23, 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. The Debentures are convertible into 10,146,474 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. 33




---



##### 



Item 14.Principal Accounting Fees and Services The Audit Committee oversees the Companys financial reporting process on
behalf of the Board of Directors. The Audit Committee is directly responsible
for, among other things, the appointment, compensation, retention and oversight
of the Companys independent auditors. In addition, the Audit Committee must
preapprove all audit and non-audit services performed by the Companys
independent auditors. The Audit Committees activities are governed by a
written charter adopted by the Board of Directors. Fees for services rendered by the Companys Independent Public Accountants for the last two fiscal years were: 2002
    
    2003(in thousands)Audit fees
    
    $
    225
    
    
    $
    79Audit related fees
    
    
    22
    
    
    
    Tax services
    
    
    85
    
    
    
    All Other Fees
    
    
    
    
    
    
    2Total fees
    
    $
    332
    
    
    $
    81
 Audit Fees VCC has billed the Company $79,000 for professional services rendered for
the audit of the Companys annual financial statements for the year ended
December 31, 2003, a review of interim financial statements included in a
Company Form 10-Q filed during the year ended December 31, 2003, and for
consultation relating to accounting matters. KPMG billed the Company $225,000 for professional services rendered for
the audit of the Companys annual financial statements for the year ended
December 31, 2002, the reviews of interim financial statements included in the
Companys Forms 10-Q filed during the year ended December 31, 2002, and for
consultation relating to accounting matters. KPMG has also billed the Company $32,000 for reviews of interim financial
statements included in the Companys Forms 10-Q filed during the year ended
December 31, 2003 and $59,000 for work related to issuance of their consent to
inclusion of their opinion on the Companys 2001 and 2002 financial statements
in the Companys 2003 Form 10-K. Audit Related Fees KPMG has billed the Company $22,000 for 2002 audit related fees for audits
of employee benefit plans and for certain statutory audits in the United
Kingdom. Tax Fees KPMG has billed the Company $85,000 for 2002 tax planning and preparation
services. All Other Fees Other fees for 2003 of $2,000 were paid to VCC for certain specific
procedures performed by VCC to assist the Company in investigating check fraud
committed by a former employee and designing enhanced internal controls. No other fees were paid to KPMG relative to 2002. 34




---



##### 



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.

35



---



##### 





| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | 3. Current Report on Form 8-K, dated
    November 17, 2003, furnishing a press release under
    Item 12.

(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.

36



---



##### 



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: May 7, 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) |  | May 7, 2004
|                                                
|/s/ KATHRYN A. MONACOKathryn A. Monaco           |  | Chief Accounting Officer
    (Principal Financial Officer)                                           |  | May 7, 2004
|                                                
|/s/ JOHN E. HALNENJohn E. Halnen                 |  | President, Chief Operating Officer
    and Director                                                  |  | May 7, 2004
|                                                
|/s/ WILLIAM W. SMITHWilliam W. Smith             |  | Vice Chairman and Director                                                                           |  | May 7, 2004
|                                                
|/s/ RICHARD J. HARRIES JR.Richard J. Harries Jr. |  | Director                                                                                             |  | May 7, 2004
|                                                
|/s/ JOHN W. ORTIZJohn W. Ortiz                   |  | Director                                                                                             |  | May 7, 2004

37



---



##### 



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



---



##### 



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),
stockholders 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.



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

March 26, 2004 (except with respect

to the matter discussed in Note 14,


as to which the date is April 16, 2004),


Boston, Massachusetts


F-2



---



##### 



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



---



##### 



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



---



##### 



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



---



##### 



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



---



##### 



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



---



##### 



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.

The Company has incurred significant operating
losses, has used cash in operating activities and has an
accumulated deficit that raised substantial doubt about the
Companys ability to continue as a going concern. As
discussed in Note (14), the Company raised approximately
$3.6 million through the sale of common stock on
April 16, 2004, with net proceeds to the Company of
approximately $3.2 million. Accordingly, the Company now
believes it has adequate funds to operate through the first
quarter of 2005.



|    |                                               
|--- | ----------------------------------------------
|(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 consolidation. 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).

F-8



---



##### 



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                     
| | --------------------
| | (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.

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.

F-9



---



##### 



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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

F-10



---



##### 



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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.

F-11



---



##### 



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                     
| | ------------------------------------
| | (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



---



##### 



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



---



##### 



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



---



##### 



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



---



##### 



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



---



##### 



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



---



##### 



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. The Company also
paid and expensed (as additional compensation) estimated income
and withholding taxes on such amounts of $32,000 on behalf of
Mr. Crowell and $39,000 on behalf of Mr. Halnen. 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

F-18



---



##### 



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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
10,146,474 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.

F-19



---



##### 



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

(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, 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.

F-20



---



##### 



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

(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

F-21



---



##### 



ELCOM INTERNATIONAL, INC.


AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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



---



##### 



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



---



##### 



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



---



##### 



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



---



##### 



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



---



##### 



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 |  
|                                                                |  |         |        |         |  |         |        |         |  |      |        |   |  |   |        |   |  |   |        |  

(14) Subsequent Event

On April 16, 2004, the Company closed on the
sale of 29,777,573 shares of its Common Stock (the
Regulation S Shares) to investors in the U.K.,
and listed the Regulation S Shares on the Alternative
Investment Market of the London Stock Exchange
(AIM). The Company raised a total of approximately
$3.6 million via this issuance and sale of Regulation S
Shares in the U.K., with net proceeds to the Company of
approximately $3.2 million. Accordingly, on an unaudited,
pro forma basis Total Stockholders Equity would have been
approximately $478,000 at December 31, 2003, assuming the
Regulation S Shares had been sold as of December 31,
2003. The Regulation S Shares were sold at a price equal to
the conversion rate of the Companys recent placements of
Debentures of $0.1246 per share (see Note 6(d)). The funds
derived from the sale of the Regulation S Shares will be
used to support the Companys working capital requirements.

The Regulation S Shares were issued in
reliance on the exemption from registration under
Regulation S of the Securities Act of 1933, as amended (the
Act), for offers and sales of securities outside the
United States. Under Regulation S, the holders of the
Regulation S Shares are prohibited from selling their
Regulation S Shares in the United States, to a U.S.
person (as defined in the Act) or for the benefit or
account of a U.S. person, for a one-year period which commenced
on April 16, 2004. During this one-year period, the holders
of the Regulation S Shares may otherwise trade their
Regulation S Shares in the United Kingdom and outside the
United States, pursuant to Regulation S of the Act and
other securities laws applicable in the jurisdiction in which
the Regulation S Shares are traded. The Regulation S
Shares trade on the AIM exchange and will not commingle with the
Companys stock traded on Nasdaqs Over The Counter
Bulletin Board until and unless the Company registers the
Regulation S Shares with the Securities and Exchange
Commission or an exemption from registration exists with respect
to the Regulation S Shares. The Regulation S Shares
have not been registered under the Act 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.

F-27



---



##### 



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



---



##### 



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 (except with respect to the matter discussed
in Note 14, as to which the date is April 16, 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.



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

Boston, Massachusetts

March 26, 2004 (except with respect


to the matter discussed in Note 14,


as to which the date is April 16, 2004),


Boston, Massachusetts


S-2



---



##### 



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



---



##### 



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



---



##### 



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)                                   



---



##### 



|            |    |                         |  |                                                                                                                                                                                                                                                                                                                     
|----------- | -- | ----------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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(26)                                                                                                                                                                                                                       
|            | 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.(26)                                                                                                                                                                                
|            | 10 | .20                     |  | Form of Collateral Agency and Security Agreement,
    dated April 23, 2003, between Elcom
    International, Inc. and the Investors party thereto.(26)                                                                                                                                                              
|            | 10 | .21                     |  | Amendment to Amended and Restated Employment
    Agreement, dated March 8, 2004, by and between Elcom
    International, Inc. and Robert J. Crowell.(26)(*)                                                                                                                                                         
|            | 10 | .22                     |  | Amendment to Employment Agreement, dated
    March 9, 2003, by and between Elcom
    International, Inc. and John E. Halnen.(26)(*)                                                                                                                                                                                 
|            | 21 | .1                      |  | List of the Registrants Subsidiaries.(16)                                                                                                                                                                                                                                                                          



---



##### 



|            |    |                         |  |                                                               
|----------- | -- | ----------------------- |  | --------------------------------------------------------------
|Exhibit No. |    | Description of Document
|            |    |                        
|            | 23 | .1                      |  | Consent of Vitale, Caturano & Company
    PC.(26)             
|            | 23 | .2                      |  | Consent of KPMG LLP(26)                                       
|            | 23 | .3                      |  | Consent of Vitale, Caturano & Company
    PC(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.                          



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##### 





|     |                                                                                                                                                                                         
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                  
|    
|(26) | Previously filed on March 29, 2004 as an
exhibit to Registrants Annual Report
    on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference.