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

                                    FORM 10-K

 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                   ACT OF 1934
                 For the fiscal Year Ended December 31, 1997
                                       or
   [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

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

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

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

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

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


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

                               Yes...     No..X..

     Indicate by check mark if disclosure of  delinquent  filers  pursuant to
Item  405  of  Regulation  S-K  is  not  contained  herein,  and  will  not be
contained,  to the best of the registrant's  knowledge, in definitive proxy or
information  statements  incorporated  by  reference  in Part III of this Form
10-K or any amendment to this Form 10-K.  [X]

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant  based on the  closing  price of such stock on The Nasdaq  Stock
Market on March 3, 1998, was  approximately  $124,965,000.  For purposes of this
disclosure  only,  the  registrant  has assumed  that its  directors,  executive
officers,  and beneficial owners of 5% or more of the registrant's  common stock
are affiliates of the registrant.

     The registrant had  27,248,327  shares of common stock,  $.01 par value,
outstanding as of March 3, 1998.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  Registrant's  definitive  proxy  statement  for the 1998 annual
meeting  of  stockholders  of Elcom  International,  Inc.  are  incorporated  by
reference into Part III of this report.


<PAGE>


                                   



                                     PART I

Item 1. Business

Overview

      Elcom International,  Inc. (the "Company") develops and licenses automated
procurement  software  applications  which  enable the  conduct  of  interactive
electronic commerce and, through its PC remarketing  subsidiary,  uses a version
of its  technology to support the sale and marketing of PC products,  the source
of  substantially  all the  Company's  net sales since  inception.  The Company,
through its technology subsidiary, has developed the PECOS(R) technologies which
enable companies to communicate, market, sell and buy various goods and services
electronically.  PECOS  stands for  Personal  Electronic  Catalog  and  Ordering
System,  and the Company  believes that its PECOS Commerce Manager was the first
transaction-based electronic commerce system to generate substantial revenues in
the emerging area of PC-based electronic commerce.  The Company currently has 10
active license  agreements to companies in a broad range of industries,  for its
PECOS.net Family of Products and is pursuing additional license agreements.

      The Company's  wholly-owned  technology  subsidiary,  Elcom Systems,  Inc.
("Elcom Systems"),  has introduced and continues to develop electronic  commerce
applications  to meet  the  business  objectives  of  organizations  seeking  to
leverage  electronic  commerce to extend market reach, reduce operating expenses
and enable new  service  offerings.  These  applications  direct  communications
between  trading  partners'  systems  for the  buying  and  selling of goods and
services  and are built  upon the  Company's  PECOS.net  distributed  processing
framework  which  provides  secure  and  reliable  transaction  processing  over
networks  including  intranets,   extranets  and  the  Internet.  The  Company's
PECOS.net  Family of Products are designed in a year 2000  compliant  manner and
can support large numbers of end-user customers, products and transactions.  The
Company's  transaction server middleware  provides a fully scaleable  foundation
for robust system performance and high transaction capacity.

      The PECOS.net Family of Products offers electronic  commerce solutions for
sellers as well as buyers.  Elcom Systems' PECOS Commerce  Manager  ("PECOS.cm")
system  provides  selling  organizations  with the  ability  to  support  direct
electronic  linkages  with its  customers,  providing  automation of sales order
processing utilizing personal computers and networking infrastructure.  PECOS.cm
can support a number of deployment  alternatives which include Windows,  Java or
HTML operating in conjunction  with standard browser  applications.  The Windows
client combines a convenient, easy-to-use, interactive, graphical user interface
and robust front-end client, with an integrated  back-end  information and order
transaction  processing  server system operating on UNIX or NT-based  platforms.
Elcom Systems'  buy-side  solution is PECOS  Procurement  Manager  ("PECOS.pm"),
which was  announced  in 1997,  and  provides  purchasing  departments  with the
ability to  automate  internal  procurement  processes  related to  maintenance,
repair and operational products and services ("MRO items").  PECOS.pm can assist
organizations in their  implementation of procurement best practices,  which can
result in reduced order  processing  costs,  consolidation  of vendors,  and the
implementation  of new  service  capabilities,  such  as  desktop  ordering  and
just-in-time purchasing.  Additionally, PECOS.pm can be integrated with existing
enterprise   management   information  systems.   PECOS.pm  is  deployed  as  an
intranet-based technology, which integrates with a company's existing management
information  system  infrastructure  and enables  electronic  commerce  with key
vendors.  Based upon  customer-defined  controls,  the system supports such work
flow processes as requisition  routing and approval,  electronic order placement
and  automated  payment  processing.  The  Company  believes  that  the  current
marketplace  for  a   business-to-business   automated   procurement  system  is
substantial. PECOM.pm version 1.9 is currently in "beta" use at a customer site,
and the Company intends to announce the general availability of PECOS.pm version
2.1 in the summer of 1998, and continue the product's further development during
1998.

      The Company uses the PECOS.cm technology through Catalink Direct,  Inc.(R)
("Catalink"),  the Company's other wholly-owned  subsidiary,  to market and sell
PC-related  products to business customers.  Heretofore,  the Company's Catalink
subsidiary  has  generated   substantially  all  of  the  Company's  net  sales.
Catalink's use of PECOS.cm  represents the first  utilization of this technology
and the Company believes that its PECOS.cm system 

                                       1
<PAGE>

significantly  differentiates Catalink from other PC remarketers while providing
Catalink  with  certain  marketing  and  cost  advantages.   Catalink  commenced
operations  in  December  1993 and has  experienced  rapid  growth.  The Company
achieved  its  growth  by  offering  its  PECOS.cm  technology  to its  Catalink
customers  and by various  marketing  efforts,  including  the  expansion of its
direct sales force nationwide and by the acquisition of six PC remarketers.  The
Company's PC  remarketer  acquisition  strategy  includes  utilizing an acquired
company's  sales force to offer PECOS.cm to  prospective  customers in those new
markets and, over time, to transition  the acquired  company's  customers to the
PECOS.cm system,  thereby generating  increasing revenues transacted through the
PECOS.cm system.  Although there can be no assurance as to the timing or success
of any acquisition,  the Company intends to acquire additional  companies either
to expand its customer base and the use of PECOS.cm or to  complement  its Elcom
Systems'  PECOS.net  technology.  A certain  portion of the  Company's  revenues
continue to be generated by several companies acquired by the Company which have
not converted their  customers'  orders to transact  through  PECOS.cm and these
entities  continue to use, in whole or in part,  traditional  methods of selling
and order taking.

      In addition to PECOS.cm,  Catalink intends to offer its customers PECOS.pm
in  1998,  thereby  providing  its  corporate  customers  with  the  ability  to
reengineer  their MRO items  (including  PCs and related  products and services)
procurement   practices  and   consolidate   suppliers   through  the  Company's
easy-to-use automated procurement system. Although there can be no assurances as
to the ultimate  timing,  capabilities,  or  successfulness  of this technology,
management  believes  that by  providing  PECOS.pm to existing  and  prospective
customers,  Catalink's  sales force will be empowered  with another  significant
competitive  differentiation in the PC remarketing marketplace,  with the intent
to  improve  Catalink's  market  share  as well as  providing  solutions  to its
business partners' needs.

      Catalink  offers over 18,000 products  manufactured  by leading  companies
such as Compaq,  IBM, Toshiba,  Hewlett-Packard and Apple at competitive prices.
Compaq,  IBM,  Hewlett  Packard,  IBM  Software,  Lotus,  3COM and other product
manufacturers  have paid marketing fees to Catalink to advertise  their products
in PECOS.cm. In some cases, these advertisements use full motion video and sound
presentations  which activate "on demand" when a customer clicks for information
on selected  products.  Orders placed through PECOS.cm for products which are in
stock  generally  are  fulfilled  from  the  inventory  of  Catalink  or  one of
Catalink's  Distribution  Fulfillment  Partners ("DFPs"),  which includes Ingram
Micro,   Inc.,   the   largest  PC  product   distributor   in  the  world  (See
--"Fulfillment/Logistics/Information    Systems").   PECOS.cm   is   distributed
primarily by Catalink's  telemarketing and direct sales personnel to current and
potential customers at no charge on five diskettes or a single CD-ROM.  Catalink
operates 15 Field Sales and Support Offices  ("FSSO") in the United States and 7
in  the  United  Kingdom  and  also  maintains  configuration  and  distribution
facilities in Canton,  MA; Irvine, CA; and Langley,  Berkshire,  United Kingdom,
and also utilizes an outsourced facility in Hartford, CT.

      The  Company's  strategy  also  includes   leveraging  its  technology  in
operating  units or  joint  ventures  (in  which  the  Company  owns a  minority
position)  to create  companies  to market  products in other  industries.  This
strategy may reinforce the PECOS.net Family of Products as significant  enabling
technologies  for  electronic  commerce  while  positioning  Elcom  Systems as a
provider   of   electronic   commerce   systems  for  both  buying  and  selling
organizations.

      In 1996,  the  Company  invested a nominal  amount in,  and  licensed  its
technology to,  ShopLink  Incorporated  ("ShopLink").  ShopLink is a provider of
personal  computer-based shopping services whereby consumers are able to use the
PECOS.cm technology to conveniently  purchase groceries,  health and beauty care
products and other home  consumable  products  and  services and receive  direct
deliveries from ShopLink's product  consolidation  center or product fulfillment
partners to their homes or other specified  locations.  As further  discussed in
the Notes to Consolidated  Financial  Statements  contained elsewhere herein, in
September 1997, the Company sold options to acquire its entire equity  ownership
interest in ShopLink, which may be exercised through March 31, 1999.

      The Company also is pursuing additional  licensing  agreements through its
Elcom  Systems  subsidiary  for the  PECOS.pm  and  PECOS.cm  technologies.  The
Company's  strategy also includes  augmenting its growth by acquiring  companies
with complementary technologies and expertise or existing customer bases.

                                       2
<PAGE>

Electronic Commerce Overview

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

      The Company's  PECOS.net Family of Products  currently  operates on common
carrier networks and over the Internet.  The commercial  market for products and
services designed for use with internetworks (i.e. intranet, Internet, extranet)
has only recently  started to develop.  Because  commerce and online exchange of
information  over the Internet  are new and  evolving  and concerns  exist as to
security  of data  during  transmission,  it is  difficult  to predict  with any
assurance  whether the  marketplace  in general  will  accept the  Internet as a
viable environment to support substantial  electronic  commerce  applications or
systems.  The Company also anticipates that the Internet commerce market will be
the focus of rapidly emerging and shifting business and technological  alliances
and  innovations  which  may  affect  the  ability  of the  Company  to  compete
effectively.

Elcom Systems

      Elcom  Systems  designs,  develops  and  licenses  interactive  and robust
electronic  commerce  software systems for use over public and private networks.
In  addition,  Elcom  Systems  offers a full  range of  consulting  services  to
implement,  support and deploy its  electronic  commerce  technology,  including
complete outsourcing. The Company targets businesses that wish to automate their
selling and/or  procurement  processes  through the integration of an electronic
commerce  solution  with their  existing  enterprise  systems.  On a stand-alone
presentation basis for the year ended December 31, 1997, revenues generated from
Elcom  Systems'  licenses,   including  associated   professional  services  and
maintenance fees, were approximately $4.8 million.

      The  Company's  PECOS.net  Family of  Products is designed to be year 2000
compliant  and  create  "full-circle"  electronic  linkages  between  buyers and
sellers  (trading  partners)  which  automate  and  support  many key  functions
necessary  for  large-scale  interactive  electronic  commerce,  including  user
registration  and  authentication,   catalog  and  content  management,  product
searching  and  selection,  order  capture  and  management,  security,  payment
processing,  customer service functions,  and real-time links to order entry and
warehouse management systems thereby facilitating the fulfillment of orders. The
PECOS.net Family of Products includes:

PECOS Commerce Manager - PECOS.cm is an electronic  commerce system that enables
online  transactions.  PECOS.cm  automates the complete sales order  transaction
cycle -  linking  sellers  to  their  customers  throughout  product  selection,
ordering, fulfillment,  delivery and financial settlement. The application helps
companies reduce  manually-oriented  sales operational costs, create new revenue
opportunities,  and enhance  buyer-seller  relationships.  By automating routine
tasks,  PECOS.cm can enable  companies to assert  and/or  maintain a competitive
sales advantage,  compressing  traditional sales cycles from days to minutes, 24
hours a day, seven days a week.  PECOS.cm operates on UNIX and Windows (3.1, 95,
NT)  platforms;   integrates  with  legacy   applications  and  databases;   and
communicates  on  private  and  public IP  networks  (i.e.  intranet,  Internet,
extranet).

PECOS  Procurement  Manager  -  PECOS.pm  is an  intranet-deployable,  automated
procurement  system  that  enables  purchasing   departments  to  improve  their
procurement processes for MRO items, which can reduce product acquisition costs,
improve  service  and  create  desktop  PC  purchasing  relationships  with  key
suppliers.  PECOS.pm can  dramatically  lower  procurement  costs by  automating
traditionally manual or disparate processes by enabling 

                                       3

<PAGE>

automated  procurement  to the individual  desktop PC.  PECOS.pm can replace the
conventional  paper-based  purchasing  process  with an  automated  system  that
includes multi-vendor electronic catalogs, online order entry,  customer-defined
requisition and automated order routing,  and back-end  settlement of electronic
invoices.  In  addition,   approval  routing  and  order  status  updates  occur
automatically with users receiving e-mail  notification of the progress of their
orders.   Other  features  include   archiving  and  reporting  which  allow  an
organization  to review  purchase  histories  and  trends and  monitor  supplier
performance.  In  addition,  the  "recurring  order"  feature  enables  users to
establish and reuse "template orders" for frequently  purchased items.  PECOS.pm
operates on UNIX and Windows NT  platforms  and can be deployed  using  either a
browser or Windows-based client. PECOS.pm can be integrated with a wide range of
enterprise management information systems. The Company believes that the current
marketplace for a business to business supply-chain oriented electronic commerce
procurement solution is substantial.

      In  April  1997,  Elcom  Systems  acquired  certain  key  elements  of the
electronic  procurement  software  which is being  augmented and developed  into
PECOS.pm. The purchase price was approximately $1.2 million,  consisting of cash
and stock.  The Company  intends to continue its investment in PECOS.pm in 1998,
including  finalizing the development of an  intranet-enabled  version which was
deployed as a "beta  version" at a large  customer  during the fourth quarter of
1997, as well as further  development  during 1998 to integrate  other PECOS.net
functions and features.

      Elcom Systems has been  developing  and enhancing the PECOS.net  Family of
Products since 1992, and began actively marketing PECOS.cm in mid-1995. PECOS.cm
is a complete "sell-side" business solution for interactive electronic commerce,
incorporating a front-end  customer  interface which operates on a user's PC for
presentation and end-user functionality and a back-end Transaction Server System
("TSS")  for  transaction  processing  and  electronic  linkage to a  licensee's
internal  information system.  PECOS.cm technology creates electronic  marketing
capabilities,  including support of "click-on" product or other marketing videos
(via CD-ROM), and capture of a customer's  purchasing proclivity and consumption
data, while also maximizing  efficiencies and reducing  operational  expenses by
automating  routine customer service and other  information or  order-associated
functions.

      Elcom Systems continues to develop its PECOS.net  technologies through the
integration of a suite of technologies  that will  effectively  provide a robust
PECOS user interface over the World Wide Web, using industry  standard  browsers
such as Netscape Navigator and Microsoft Explorer.  The Company is able to offer
a complete range of electronic commerce technology deployment  alternatives from
full  CD-ROM  client/server-based  video  interactivity,  to a  so-called  "thin
client" front-end customer interface utilizing standard browser technologies.

      Historically,  Elcom Systems has marketed and sold its products  primarily
through  direct  selling.  Due to its  focus  on  Catalink's  implementation  of
PECOS.cm,  Elcom Systems'  marketing and sales activities did not begin actively
until mid-1995.  Elcom Systems moved into its own leased facility in August 1996
and commenced more active sales activities by expanding its sales personnel.  At
the  beginning  of the  third  quarter  of 1997,  the  direct  sales  force  was
significantly  reduced to a level more consistent with its current and near-term
product  marketing  strategy  and  revenue  expectations.  Elcom  Systems is now
expanding its indirect  selling  methodologies,  which are focused on partnering
with system integrators, suppliers and technology partners.

      Elcom  Systems'  strategy  is  to  enhance  the  PECOS.net   technologies,
proliferate  the  technologies  via  licenses,  and develop new versions to take
advantage of the significant emerging market for Internet commerce applications.
Although  license  revenues  to date have not been  material to the Company as a
whole,  Elcom Systems has 10 (including  Catalink) active license  agreements in
such  diverse  industries  as PC products  distribution,  stationery  and office
supplies, business machine supplies, home consumable products and utilities, and
is pursuing additional licensing opportunities for its PECOS.net technologies. A
further  element of Elcom  Systems'  strategy  is to provide  digital  media and
content management  services to licensees,  including  producing and maintaining
electronic catalogs.

      Elcom Systems is also  investigating  various  growth  options,  which may
include a strategic alliance with a technology or financial partner.

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<PAGE>

Catalink

      Catalink  Direct,  Inc.,  the  Company's  other  wholly-owned  subsidiary,
utilizes  PECOS.cm  technology  to support the sale and  marketing of PC-related
products electronically. The Company commenced commercial operations in December
1993, and consummated the  acquisitions of Catalink Direct  (Connecticut),  Inc.
(formerly  known as Computer  Specialties,  Inc.) ("CDCI") in 1994, and Catalink
Direct   (Pennsylvania),   Inc.   (formerly   known   as   Computerware,   Inc.)
("Computerware")  and  a  group  of  companies  which  owned  a  United  Kingdom
remarketer of PC products known as Lantec Information Services ("Catalink U.K.")
in 1995, each of which operated as a wholly-owned  subsidiary of Catalink.  CDCI
(as of December  31,1995) and Computerware (as of December 31, 1997) were merged
into  Catalink,  and are no longer  separate  entities.  In February  1996,  the
Company  completed  the  acquisition  of AMA (U.K.)  Limited  ("AMA"),  a United
Kingdom-based  remarketer of personal  computer products which was accounted for
as a pooling of interests.  In December 1996,  Catalink  acquired  Prophet Group
Limited,  a United  Kingdom-based  PC  remarketer,  which was accounted for as a
purchase.  On February 21, 1997,  Catalink  acquired  Data Supplies  Limited,  a
United  Kingdom-based  PC remarketer,  with 1996 revenues of  approximately  $21
million, which was accounted for as a purchase.  Catalink's acquisition strategy
is to utilize an acquired company's sales force to offer PECOS.cm to prospective
customers  in  those  new  markets  and  to  transition  an  acquired  company's
customers, over time, to the PECOS.cm technology.

      Catalink's  PECOS.cm System.  Catalink's PECOS.cm system is a proprietary,
Windows-based  interactive  and integrated  multi-media  electronic  catalog and
interactive  ordering  system that takes  advantage of Windows'  graphical  user
interface.  While the  PECOS.cm  technology  can be  implemented  in  customized
versions,  most of its operational  characteristics  and basic functionality are
common to Catalink's PECOS.cm system.  PECOS.cm is loaded on the hard disk drive
of the customer's PC and "senses" the hardware and color display capabilities of
the  customer's PC system and displays one or more  messages,  if necessary,  to
allow the  customer  to  maximize  the sound (if  available)  and color  display
capabilities  of their PC system to  enhance  displayed  images.  In the  CD-ROM
version,  the front-end  client interface and associated  product  databases are
installed on the customer's  hard drive from the CD-ROM while an object database
consisting of product information (including images, sound and full motion video
advertisements)  resides on the CD-ROM.  PECOS.cm  operates  in a  client/server
architecture  as  an  "electronic"   catalog  with  interactive  and  integrated
communications and ordering capabilities. Click-on icon commands allow customers
to "browse"  through visual display pages to view product images and information
in varying  levels of detail or to search the product  pricing  and  description
databases  and,  using  various  parameters  and  criteria,  compare  and select
products.  When combined with the Company's  transaction-based,  back-end server
systems,  which  communicate  with the Company's and its primary DFP's inventory
system, PECOS.cm creates a "full-circle" electronic commerce system.

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

      To initiate an order, the customer enters his or her confidential password
authorization,  and  PECOS.cm  automatically  initiates  a  communications  link
("Commlink")  via modem over a toll-free  number or the  Internet to  Catalink's
back-end  transaction  server  system  allowing  information  to be exchanged in
real-time  between the client (the front-end  client interface on the customer's
PC) and the server  (the  back-end  transaction  server  systems  at  Catalink).
Commlinks  typically  last one to three  minutes,  depending  on the  extent  of
product data updates which are necessary, with order-oriented  information being
exchanged  concurrently  with the  computer  systems of the  Company  and/or its
primary DFP. A  comprehensive  electronic link currently is utilized by Catalink
with its primary DFP and  electronic  links are being  pursued  with other DFPs.
During periodic Commlinks, product information on the customer's hard drive also
is updated  automatically to reflect  changes,  such as new products and 

                                       5
<PAGE>

pricing revisions,  new PECOS.cm electronic mail messages, and other information
updates,  unless it has been so long since that customer's last Commlink that it
is determined that it would be more expedient to send that customer a new set of
PECOS.cm disks.

      In addition to providing  its  customers  PECOS.cm,  during 1998  Catalink
intends to further  differentiate itself by offering a Catalink version of Elcom
Systems' next PECOS.pm  system release to its  customers,  as soon as it is made
available,   as  a  systems  tool  to  support  the  consolidation  of  supplier
relationships  into one  manageable  procurement  system.  PECOS.pm  will  offer
various  features to streamline and  consolidate  the  historically  inefficient
process of acquiring products through traditional means.  Catalink believes that
PECOS.pm,  as has  been  the case  with  PECOS.cm,  can  provide  a  significant
competitive  advantage  in the area of  electronic  commerce  that  will  enable
Catalink to continue to differentiate  itself from its  competitors.  Management
believes  that use of PECOS.pm  will empower its  customers  to achieve  process
reengineering and best practice objectives,  as well as leveraging the system to
order  other  desired  supplier's  products  via a fully  integrated  electronic
procurement  system.  There can be no  assurances  as to when  PECOS.pm  will be
finalized,  or made available to Catalink, and after delivery,  whether PECOS.pm
will be accepted and used by customers.

Products and Pricing

      Products.  Catalink  offers over 18,000  products  from a wide  variety of
manufacturers  through  the  PECOS.cm  system.  In the United  States,  Catalink
currently  purchases  selected  products  directly  from certain  manufacturers,
including Compaq and Toshiba,  with the balance of products being purchased from
DFPs,  while in the United  Kingdom,  the  substantial  majority of products are
purchased directly from manufacturers on net terms.  Catalink provides customers
with a large product selection,  including personal computer systems,  monitors,
printers,  peripherals,  software,  accessories and supplies.  Catalink  markets
products sold by the following manufacturers, among others:

                               PERSONAL COMPUTERS
                  Compaq             IBM                 Apple
                    NEC       Digital Equipment Corp    Toshiba
              Hewlett-Packard        AST               Panasonic

                                    PRINTERS
           Hewlett-Packard          Canon               Lexmark
                   Epson             QMS               Tektronics

                                   PERIPHERALS
                    NEC              Sony                Cisco
                   Intel          Mitsubishi            Kingston
                 Viewsonic           3Com                Iomega

                                    SOFTWARE
                Microsoft           Lotus                Corel
                 Seagate            Novell        Computer Associates
                   Adobe            Claris              Symantec

      In the United States,  Catalink has established  electronic purchasing and
supply   relationships   with  Ingram  Micro,   Inc.,  as  well  as  traditional
relationships   with  several  other  large,   national  PC  product  suppliers.
Catalink's   purchasing   relationships  with  DFP  suppliers  are  pursuant  to
industry-standard  arrangements  with  negotiated  pricing based on  anticipated
volume levels and with payment being made through  existing floor plan financing
arrangements.

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

                                       6
<PAGE>

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

Professional Services

      Catalink offers a wide range of  professional  services in both the United
States and the United  Kingdom.  Service  offerings  to  customers in the United
States and United Kingdom,  include advising on project and roll-out management,
providing  on-site  engineers  for  network  integration  and  systems  support,
responsive "Help" desk and break/fix services.  The Company also offers national
dispatch  service for  warranty  and repair  contracts.  In the United  Kingdom,
Catalink provides  additional  service  offerings,  including offering customers
complete PC lifecycle  management from purchase to disposal,  high-end technical
consulting,  as well as  designing  and  overseeing  implementations  of complex
applications.  The Company's  service-oriented revenues increased 60% in 1997 to
approximately  $32  million,  from  approximately  $20 million in 1996,  and the
Company  believes  there is a  significant  opportunity  to expand  its  service
operations in the future. Accordingly, the Company expects to continue its focus
on growing this higher margin segment of its business.

Fulfillment/Logistics/Information Systems

      Fulfillment.  In the United  Kingdom,  Catalink  sources  the  substantial
majority  of its  products  directly  from  manufacturers,  while in the  United
States,  Catalink has direct purchasing  arrangements  with Compaq,  Toshiba and
certain other manufacturers. Catalink also sources its products from a number of
DFPs,  including  Ingram  Micro,  Inc.,  its primary DFP, from which it normally
purchases a majority of domestically purchased PC products which are not sourced
directly.  Ingram  Micro,  Inc. is the largest PC  products  distributor  in the
world, with annual sales in excess of $12 billion, and distributes  thousands of
products from over 1,100 suppliers.  Augmented by its DFPs,  Catalink draws from
inventories  which the Company  believes are well in excess of $1.5 billion.  In
the United Kingdom, in addition to its direct purchasing arrangements,  Catalink
also  maintains  relationships  with  several  DFPs.  Catalink's  customers  can
typically   expect   products  that  are  in  stock  and  that  do  not  require
configuration to be immediately available for shipment.

      For computer systems which require configuration, the Company operates two
configuration  facilities in the United States and one in the United Kingdom and
also utilizes an additional  outsourced facility in the United States.  Products
that the Company  purchases  directly are typically shipped to these facilities.
Although  the Company  believes  that both its DFPs and  Catalink  are given due
consideration regarding supply of products by manufacturers and that Catalink is
given due consideration regarding supply of products by its DFPs, constraints on
certain products have been a historical  problem in the PC channel and there can
be no assurance that such periodic constraints may not have an adverse effect on
the  Company's  business  in  the  future.  The  Company  believes  that  it can
substantially  mitigate the risks associated with additional inventory positions
resulting from expanding its United States direct  purchasing  relationships  in
1997 in the same  manner that this has  historically  been  accomplished  in the
United Kingdom, which is to limit the range of models that it stocks to those in
demand  and by  carefully  monitoring  items on hand and  their  associated  net
carrying  costs,  relative to demand.  The  Company  also  believes  that direct
purchasing  of these  products  can improve its delivery  time to customers  and
quality control of configured systems.

      In the United States,  the electronic links between  PECOS.cm's  front-end
client  "interface",  Catalink's  back-end  transaction  server system,  and its
primary  DFP's  computer  system  provides  the  customer  with  seamless  order
processing  and  shipment,  as if a customer's  order was shipped  directly from
Catalink.  Using  PECOS.cm,  when a  customer  clicks and  accepts an order,  if
applicable,   its  primary  DFP's  system  prints  out  a  "pick  ticket"  in  a
distribution  facility,  for the product to be picked for direct shipment to the
customer  or to one of  Catalink's  

                                       7
<PAGE>

configuration  centers.  PECOS.cm  also  can  automatically  select  one  of the
Company's  configuration  and distribution  facilities in the United States (and
similarly in the United  Kingdom) as the source and print a "pick  ticket" there
for  fulfillment.  In order to  provide  similar  electronic  links  with  other
suppliers,  Catalink  is  in  the  process  of  pursuing  electronic  price  and
availability links with its secondary DFPs, which are primarily aggregators, for
electronic  inquiry of product price and availability  (although there can be no
assurances that any such electronic  links will be finalized and implemented or,
if  so,  what  the  timing  thereof  will  be).  Until  these  links  are  fully
established,  Catalink  obtains some of its product to fulfill  customer  orders
from these aggregators and its other suppliers,  including manufacturers,  using
direct order entry  systems  provided by these  companies  and by telephone  and
facsimile  transmissions.  These traditional product fulfillment methods involve
expenses  associated  with ordering,  invoicing and product  tracking being done
manually.  The  Company  has  arrangements  with  most  of  these  "traditional"
suppliers  so that  ordered  products  may  still  be  directly  shipped  to the
customer,  or if necessary,  to a Company  location for  configuration  prior to
shipment to the customer.

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

      Information  System.  During  1997,  in the  United  States,  the  Company
licensed and installed year 2000 compliant  software from Oracle Corporation and
other  software firms as its  Management  Information  System ("MIS") to improve
management's  ability to monitor and manage the Company and its expected growth.
The Company's installation went "live" in the United States in November of 1997.
This  system  provides  full  year  2000  compliance  and  incorporates  modules
supporting General Ledger,  Accounts Payable,  Purchasing,  Accounts Receivable,
Inventory  and Order  Entry.  The MIS design is a unique  implementation  of the
Oracle  software  applications  which are being  and/or have been  enhanced  and
extended to provide  functionality  not found in the standard system,  including
the ability to:

         Accept  electronically  delivered  sales  orders such as PECOS and EDI
           orders, as well as converted quotations;
         Automatically source product from its own or DFP inventories based
           on set parameters; and
         Automatically  create purchase orders,  electronically  transmit them,
           and electronically confirm shipments by DFPs to enable  invoicing or
           anticipate receipt as the case may be.

      During   1998,   the   Company   intends  to  augment  its  MIS  with  the
implementation of a year 2000 compliant  warehousing system in its United States
distribution  centers.  In  1998,  the  Company  also  plans  to  implement  its
Oracle-based year 2000 compliant  applications in the United Kingdom. The United
Kingdom is currently using a year 2000 compliant  warehousing  system;  however,
the balance of MIS  applications  in use in the United Kingdom are generally not
year 2000 compliant. By the end of 1998 the Company expects installation of year
2000  compliant  applications  to be  substantially  complete in both the United
States and the United  Kingdom.  The Company has been assured by its  electronic
trading partners that their information systems applications either are, or will
be, year 2000 compliant before issues may arise. The Company is dependent on its
MIS and any  problems  with its ongoing  development  and  installation,  or any
interruption in its functional  availability may have an adverse effect on sales
to customers  and/or customer  satisfaction.  Although the Company believes that
its  technology  and operating  systems will be adequate for its current  needs,
such systems will  undoubtedly  require ongoing  modification and improvement as
the Company expands and evolves.

                                       8
<PAGE>



Marketing and Sales

      Catalink Targeted Customer  Segments.  Catalink uses its telemarketing and
direct sales forces in the United States and United  Kingdom to sell to targeted
business and corporate  accounts,  its educational and government  customer base
and,  in the  United  Kingdom,  to its  value-added  reseller  customers.  As of
December 31, 1997,  Catalink employed  approximately 325 sales  representatives,
account executives, telemarketers and related support personnel to service those
customer segments.

      As of December 31, 1997,  Catalink  sales and support  personnel  operated
from FSSOs in 15  metropolitan  areas in the  United  States and 7 in the United
Kingdom. Catalink's primary locations and FSSOs are listed below:

                 UNITED STATES:  15
                 - Allentown, PA             - New York City, NY
                 - Atlanta, GA               - Norwood, MA (Boston)
                 - Chicago, IL               - Philadelphia, PA
                 - Dallas, TX                - Pittsburgh, PA
                 - Edison, NJ                - San Diego, CA
                 - Hartford, CT              - San Francisco Bay Area, CA
                 - Houston, TX               - Stamford, CT
                 - Irvine, CA

                 UNITED KINGDOM:  7
                 - Basingstoke, Hampshire    - London (City of)
                 - Birmingham                - Manchester
                 - Glasgow (Scotland)        - Slough, Berkshire
                 - Langley, Berkshire


      The Company's  strategy includes  expanding  existing FSSOs as appropriate
and opening additional FSSOs and/or acquiring  remarketers in other metropolitan
areas as it deems necessary or desirable.

      Corporate  and Business  Accounts.  Large  corporations  that wish to make
their PC product  procurement  functions more  efficient are Catalink's  primary
target  customers.  Corporate  accounts  typically employ  purchasing  agents or
buyers  with  above-average  product  knowledge  who view  most PC  products  as
commodities.  Business  accounts  targeted by Catalink  range from  divisions of
large  corporations  to  businesses  with as few as  fifty  employees.  Catalink
penetrates   the   corporate   market  with  both  direct   sales   efforts  and
telemarketing.  The Company targets business  customers using a defined business
telemarketing  staff  operating  from  certain of its  United  States and United
Kingdom  locations  whose mission is to introduce  Catalink to businesses  which
would  not  otherwise  be  cost-effectively   penetrated  by  Catalink's  direct
corporate  sales  force.   Catalink's   direct  sales  efforts  include  on-site
presentations,  as well as  demonstrations to potential  corporate  customers of
PECOS.cm,  and as soon as it is made available in 1998, PECOS.pm.  Telemarketers
assist the sales  professionals  by contacting and  pre-qualifying  accounts for
follow-up  and  on-site  visits by the  direct  sales  force.  Customer  support
representatives  and  entry-level   corporate  sales   representatives   provide
day-to-day  administrative  and  operational  support in order to  maximize  the
selling time of the direct sales force.

      Educational and Governmental Accounts.  Customers in this category consist
of educational institutions at a variety of levels, including public and private
K-12 school systems in the United States,  colleges and universities,  and state
and local  governmental  agencies.  These  customers  require a remarketer  with
special knowledge of budgetary cycles and bid processes, and the ability to work
directly with major  manufacturers to support special programs designed to serve
educational  institutions.  In 1992,  Apple Computer  began its Apple  Education
Sales  Agent  ("AESA")  program  for  sales to grade  K-12  schools.  Since  its
acquisition  of  Computerware  in 1995,  Catalink  has operated  under  periodic
contracts  with Apple as the  exclusive  AESA in  Pennsylvania,  West  Virginia,
Delaware and New Jersey.  The current  contract  expires in December 1998. Under
this sales agent  arrangement,  Catalink  

                                       9
<PAGE>

recognizes as revenues only the sales  commissions  on each sale rather than the
full product sales price.  Sales to the education market also can generate sales
of related products and services.  The Company has developed a specialized PECOS
catalog on diskette focused on education-oriented  products and content which is
being offered under the name EdNet. Catalink serves these customers from certain
FSSOs via a separate dedicated sales force.

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

Customer and Technical Services

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

Product Warranty and Service Policies

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

Competition

      Electronic  Commerce  Systems  Marketplace.  The  market  for  interactive
electronic commerce software is new and rapidly evolving and the Company expects
competition  in this market to continue to intensify in the future.  The Company
competes with vendors of prepackaged  electronic  commerce software,  vendors of
software  tools for developing  electronic  commerce  applications,  and systems
integrators.  The Company's competitors include IBM, Open Market, Inc., Connect,
Inc.,  Trade'ex Electronic  Commerce Systems,  Ariba Technologies,  Inc., Elekom
Procurement,  CommerceOne  and  Actra  Business  Systems.  The  Company  expects
additional competition from other emerging and established companies,  including
Microsoft  Corp.,  SAP and  Oracle,  all of which have  announced  products  for
Internet-based  electronic  commerce.  The Company's potential  competitors also
include systems  integrators  such as Electronic Data Systems (EDS) and a number
of EDI solution vendors, including Sterling Commerce, Inc.

      Certain of these and other competitors have longer operating histories and
significantly greater financial,  technical,  marketing and other resources than
the  Company and thus may be able to develop or respond  more  quickly to new or
changing  opportunities,  technologies  and customer  requirements.  Also,  many
current  and  potential  competitors  have  greater  name  recognition  and more
extensive  customer bases that could be leveraged,  thereby gaining market share
to the  Company's  detriment.  Such  competitors  may be able to undertake  more

                                       10
<PAGE>

extensive  promotional  activities,  adopt more aggressive  pricing policies and
offer more  attractive  terms to purchasers than the Company and to bundle their
products in a manner that may discourage users from purchasing  products offered
by the Company. In addition,  current and potential competitors have established
or may  establish  cooperative  relationships  among  themselves  or with  third
parties  to  enhance  their  products.  Accordingly,  it is  possible  that  new
competitors  or  alliances  among  competitors  may emerge and  rapidly  acquire
significant  market  share.  There can be no assurance  that the Company will be
able to compete  effectively with competitors or that the competitive  pressures
faced by the Company will not have an adverse effect on the Company's  business,
results of operations and/or financial  condition.  See  "--Electronic  Commerce
Overview".

      PC Products  Marketplace.  The Company has invested substantial effort and
capital to develop and implement its  proprietary  PECOS.cm  front- and back-end
system,  as well as for the  associated  hardware and  electronic  link with its
primary  DFP. The overall  market of companies  which sell PC products is highly
fragmented and Catalink operates in an extremely  competitive  environment which
is rapidly evolving and subject to rapid technological  change. Of the more than
10,000  total  outlets,  the  Company  believes  that  there are more than 1,000
significant  PC product  remarketers  of various  types in the United States and
United  Kingdom.  In response to  competitive  pressures and declining  margins,
traditional computer remarketers are cutting costs and acquiring or merging with
other remarketers to increase scale and efficiency.  A prospective  purchaser of
personal   computer  products  has  the  option  to  purchase  directly  from  a
manufacturer or assembler (e.g.,  IBM, Dell Computer Corp.,  Gateway 2000 Inc.),
from a major remarketer (e.g., Entex Information  Systems,  Inc., Vanstar Corp.,
MicroAge,  Inc.,  Inacom Corp.,  CompuCom  Systems,  Inc.), from a computer mail
order company (e.g., CDW Computer Centers,  Inc., Micro Warehouse Inc., Creative
Computers  Inc.,  INMAC  Corp.),  from  a  systems  integrator  (e.g.,  Andersen
Consulting, EDS), from computer superstores (e.g., CompUSA Inc., Computer City),
electronics  superstores  (e.g., Best Buy Company Inc., Circuit City Group), and
local  computer  stores,  among  others.  Catalink  competes  with  all of these
entities  for the  sale of its PC  products.  Each of these  entities  in the PC
distribution channel competes on a wide variety of capabilities including price,
delivery   performance,   breadth  of  products,   services   offered,   overall
convenience, and in some cases specialized and distinct capabilities. Certain of
these and other potential  competitors  have  substantially  greater  financial,
technical and marketing  resources than the Company and greater name recognition
and more extensive customer bases.

Intellectual Property

      The Company's success and ability to compete are dependent,  in part, upon
its  proprietary  technology.  While the Company  relies to a certain  extent on
trademark, trade secret, patent and copyright law to protect its technology, the
Company believes that factors such as the  technological  and creative skills of
its personnel,  new product developments,  frequent product  enhancements,  name
recognition and reliable  product  availability  and  distribution  are of equal
importance for establishing and maintaining a leadership position.  Although the
Company has  received a patent on  certain,  specific  aspects of its  PECOS.net
technologies, 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 trade secret and as an unregistered  copyrighted work. Despite
these  precautions,  it may be possible  for a third party to copy or  otherwise
obtain and use some  portions of the Company's  products or  technology  without
authorization,  or to develop  similar  technology  independently.  In addition,
effective copyright and trade secret protection may be unavailable or limited in
certain  foreign  countries,  and the  global  nature of the  Internet  makes it
virtually impossible to control the ultimate destination of the front-end client
portion of the PECOS.net technologies.

      The Company generally enters into  confidentiality  or license  agreements
with its  employees,  consultants,  licensees  and certain of its  vendors,  and
generally  attempts to control  access to and  distribution  of its  proprietary
software,   documentation  and  other   information.   In  connection  with  the
distribution of Catalink's PECOS.cm front-end client,  Catalink employs licenses
that  generally  are not paid for,  or  manually  signed by, the  end-user  and,
therefore, could in certain circumstances, be found unenforceable under the laws
of  certain  jurisdictions.   Despite  the  Company's  efforts  to  protect  its
proprietary  rights,  unauthorized  parties may  attempt to copy  aspects of the
Company's  proprietary  system or to obtain and use information that the Company
regards as proprietary.  Policing  unauthorized use of the Company's products is
difficult.  There can be no  assurance  that the steps taken by the Company will
prevent  misappropriation  of its  technology  or that such  agreements  will be
enforceable.  In addition,  

                                       11
<PAGE>

litigation may be necessary in the future to enforce the Company's  intellectual
property  rights,  to protect the  Company's  trade  secrets,  to determine  the
validity and scope of the  proprietary  rights of others,  or to defend  against
claims  of  infringement  or  invalidity.   Such  litigation   could  result  in
substantial  costs and diversion of resources and could have a material  adverse
effect on the Company's business,  operating results or financial condition. The
Company  believes  that each of the following  are  proprietary  features of its
"front-end"  client  interface:   the  architecture  allowing  for  easy  custom
modification by the Company or its licensees,  the  capabilities  for display of
certain  business  forms and catalog page  screens,  and the  interfaces  to the
"back-end". However, the Company believes that the most critical and proprietary
elements of its PECOS.net  technology  are the "back-end"  transaction  servers,
order  processing  authentication  and catalog  updating  modules,  which reside
within the computer  systems in the Company's or licensee's  facilities  and are
not available to end-users.

Government Regulation

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

Environmental Matters

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

Personnel

      As of  December  31,  1997,  the  Company  had a total  of 996  personnel,
including 917 salaried and 79 hourly personnel.  The Company's personnel are not
represented  by any labor  union and the  Company  believes  that its  personnel
relations are good. The Company's future success depends,  in significant  part,
upon the continued service of its key technical and senior management  personnel
and its continuing ability to attract and retain highly qualified  technical and
managerial  personnel,   including  its  sales  force.  Competition  for  highly
qualified  personnel is intense and there can be no  assurance  that the Company
can retain its key managerial and technical personnel or that it will be able to
attract or retain additional highly qualified technical and managerial personnel
in the future.

      The  rapid  execution  necessary  for the  Company  to fully  exploit  the
opportunities  for its products and services and the Company's  rapid growth has
presented a  significant  challenge to the Company's  personnel  and  management
resources.  To mitigate  this  challenge  and manage its  expected  growth,  the
Company will continue to implement and improve its information  systems and will
continue to expand, train and manage its personnel base.

Company Trade Names and Trademarks

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

                                       12
<PAGE>



Item 2.  Properties

      As of December  31,  1997,  the Company  leased the  properties  set forth
below,  and rented 15 other smaller field sales and support  offices  ("FSSOs").
The  following  leases vary in length  remaining,  from less than one year to 16
years for the Langley, Berkshire facility and, in some cases, include options to
extend the lease terms.

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

    Westwood, Massachusetts    24,000           Elcom Systems Headquarters

    Canton, Massachusetts      84,000           Catalink Configuration and
                                                       Distribution

    Irvine, California         34,000        Catalink FSSO, Configuration and
                                                      Distribution

    Bristol, Pennsylvania      35,000        Catalink Administrative and FSSO

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

    Slough, Berkshire (U.K.)    7,800                       FSSO
         
Basingstoke, Hampshire (U.K.)   7,500         Catalink Administrative and FSSO
         

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

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

Item 3.  Legal Proceedings

      On May  30,  1996,  the  Company  filed  a  complaint  (Civil  Action  No.
96004108-22-05)  in the Civil  Division  of the  Court of Common  Pleas of Bucks
County  Pennsylvania  (the  "Court")  against  John R.  Kovalcik,  Sr.,  John R.
Kovalcik,  Jr.,  James R.  Kovalcik,  Thomas M.  Kovalcik and David E.  Kovalcik
(collectively the "Kovalciks" or the "Defendants"),  the principal former owners
of Computerware Business Trust ("Computerware"), which the Company acquired by a
merger in February 1995. As of May 29, 1996,  none of the Kovalciks,  certain of
whom had been terminated by the Company, were employed by the Company, including
John R. Kovalcik, Jr., a former Corporate Executive Vice President and President
of Catalink  Direct,  Inc.,  who resigned from the Company's  Board of Directors
effective  April 24,  1996.  The  Company's  complaint,  which was  subsequently
amended,  sought  to: (1)  enforce  confidentiality  agreements/obligations  and
prevent the  misappropriation  of proprietary  Company  information  and Company
property, (2) obtain a declaration from the Court that certain of the Kovalciks'
rights under stock option agreements were limited,  (3) enforce the covenants of
the merger  agreement  to determine  the final  amount of the purchase  price of
Computerware,  and (4) recover damages arising from various causes including the
Defendants'  fraudulent  misrepresentations,  and certain breaches of the merger
agreement.

      The Defendants counterclaimed against the Company, seeking to: (1) rescind
the merger  agreement on the purported  grounds that it was not legal, or in the
alternative to receive unspecified additional purchase price consideration,  (2)
receive unspecified  damages for fraud,  breaches of the merger agreement and of
employment  and  

                                       13

<PAGE>

stock option agreements, wrongful termination,  conversion,  misappropriation of
trade  secrets,  unfair  competition,  and  defamation,  and (3) have the  Court
declare the status of the rights of certain  Kovalciks  under their stock option
agreements as being more favorable than the Company contended.

      On March 26,  1997,  the Company and certain of its  subsidiaries  entered
into a Final  Agreement  of  Settlement  and  Mutual  Release  of All Claims and
Demands with the former owners of  Computerware,  including the dismissal of all
litigation pending against the Defendants and of their counterclaims against the
Company. The essence of the settlement, a complete copy of which was filed as an
exhibit to a Current Report on Form 8-K dated March 26, 1997, and filed on April
8, 1997, includes a confirmation of the merger transaction and confirms that the
1,326,417  shares of the Company's  stock issued in 1995 is the  appropriate and
final amount of stock due and payable in  connection  with the  transaction.  In
addition,  the  Kovalciks  have  agreed to  certain  volume  and  manner of sale
limitations on their ability to sell their shares of the Company's common stock.
The  settlement  of  these  disputes  and  related  litigation  did  not  have a
significant impact on the Company's results of operations.

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

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

      None

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

Price Range of Common Stock

      The Company's  Common Stock is listed on The Nasdaq Stock Market  (Symbol:
ELCO). As of December 31, 1997,  there were  approximately  184  stockholders of
record of the Company's  Common Stock.  This number does not reflect  persons or
entities  who hold  their  stock in nominee or  "street  name"  through  various
brokerage  firms.  The high and low closing sales prices  reported by The Nasdaq
Stock Market for each of the quarters in the two year period ended  December 31,
1997 are set forth in the table  below.  For the period from  January 1, 1998 to
March 3, 1998,  such high and low closing sales prices were:  high:  $6.69,  and
low: $5.19.

    Quarter Ended         1996              1997
    --------------   ---------------  -----------------
                      High     Low     High      Low
                     -------  ------  -------  --------
        March 31,    $14.50   $6.25    $9.00     $5.63
         June 30,     14.63    6.88     7.31      4.56
    September 30,     12.63    5.38     7.00      5.81
     December 31,     10.38    7.25     8.00      5.63

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

Item 6.  Selected Financial Data

      The following  table sets forth selected  consolidated  financial data for
the Company for the years ended December 31, 1993 through December 31, 1997. The
historical financial data are derived from the consolidated financial statements
of the Company audited by Arthur Andersen LLP,  independent public  accountants.
This information  should be read in conjunction with the Company's  Consolidated
Financial Statements and related Notes thereto and with "Management's Discussion
and  Analysis  of  Financial  Condition  and Results of  Operations",  which 

                                       14

<PAGE>
are included elsewhere in this Annual Report. The data for the periods presented
are not necessarily  comparable  because of acquisitions  consummated at various
times during the periods presented.

                                  (in thousands, except per share data)
                                         YEAR ENDED DECEMBER 31,
                               ---------------------------------------------
                               1993     1994      1995      1996       1997
                             --------  -------  --------  --------  --------
INCOME STATEMENT DATA (1):
Net sales                    $22,387  $57,712  $311,423  $620,115  $760,136
Gross profit                   3,749    8,778    39,382    70,039    90,394
Selling, general and
  administrative expenses      4,996   10,364    36,016    57,551    70,200
Research and development
  expenses                       644    1,166     1,122     1,200     1,275
                             -------- -------- --------- --------- ---------
Operating profit (loss)       (1,891)  (2,752)    2,244    11,288    18,919
Interest and other income
(expense), net                  (116)    (146)   (1,909)   (2,303)   (4,142)
                             -------- -------- --------- --------- ---------
Income (loss) before income   
  taxes                       (2,007)  (2,898)      335     8,985    14,777
Provision for income taxes       266      564     1,239     3,410     4,489
                             -------- -------- --------- --------- ---------
Net income (loss)            $(2,273) $(3,462)   $ (904)   $5,575   $10,288
                             ======== ======== =========  ======== =========
                                                       

Basic net income (loss) per share     $ (0.37)   $(0.05)    $0.21    $ 0.38
                                      ========   =======   =======   ======
Basic weighted average shares
  outstanding                           9,247    18,195    26,363    26,937
                                      ========   =======   =======   ======

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

                                                DECEMBER 31,
                                ---------------------------------------------
                                1993     1994      1995       1996       1997
                                ----     ----      -----      ----       ----
CONSOLIDATED BALANCE 
SHEET DATA (1):
Total current assets           $5,098   $20,313   $136,781  $210,185   $277,806
Total assets                    7,010    22,356    174,231   260,769    332,068
Total current liabilities       5,169    13,997     89,290   161,158    218,300
Long-term liabilities, net of        
  current portion                 401       236         91     1,008      3,465
Total stockholders' equity      1,440     8,123     84,850    98,603    110,303
----------

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

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

OVERVIEW

      To date,  substantially  all of the  Company's net sales have been derived
from the sale of PC products by the Company's wholly-owned subsidiary, Catalink,
and its subsidiaries,  to corporate customers. In addition, the Company, through
its wholly-owned technology subsidiary,  Elcom Systems,  generates revenues from
licensing its PECOS.net  technologies  and providing  related  services to other
companies.  On a stand-alone  presentation basis for the year ended December 31,
1997,  revenues  generated from Elcom Systems'  licenses,  including  associated
professional services and maintenance fees, were approximately $4.8 million.

      The Company was founded in 1992,  commenced  operations in December  1993,
and has experienced  rapid growth.  The Company  achieved its growth by offering
its PECOS.cm  technology  to its  Catalink  customers  and by 

                                       15
<PAGE>

various  marketing  efforts,  including  the expansion of its direct sales force
nationwide  and by the  acquisition of six PC products  remarketers.  In October
1994,  the Company  completed the  acquisition of CDCI, a  Connecticut-based  PC
products remarketer,  which was accounted for on a  pooling-of-interests  basis.
Accordingly,  the  results of this  entity  (which was merged  into  Catalink in
December  1995) have been included with the Company's  results since the date of
the Company's organization. In February 1995, the Company acquired Computerware,
a Bristol,  Pennsylvania-based  PC  products  remarketer  (which was merged into
Catalink in December 1997). In June 1995, the Company acquired all of the equity
of Catalink  U.K. a PC products  remarketer in the United  Kingdom  operating as
Lantec  Information  Services.  The Computerware and Catalink U.K.  acquisitions
have been accounted for as purchase transactions.

      In  February  1996,  the  Company  completed  the  acquisition  of AMA,  a
remarketer of PC products in the United Kingdom, which has been accounted for on
a pooling-of-interests basis. Accordingly, AMA's results have been included with
the Company's results since the date of the Company's organization.  In December
1996, the Company acquired Prophet Group Limited,  a PC products  remarketer and
in February  1997,  the Company  acquired Data Supplies  Limited,  a PC products
remarketer,  both of which are located in the United Kingdom.  The Prophet Group
and Data Supplies acquisitions have been accounted for as purchase transactions.
The Company's  remarketer  acquisition  strategy includes  utilizing an acquired
company's  sales  force to offer  PECOS to  prospective  customers  in those new
markets  and,  over a period  of time,  to  transition  the  acquired  company's
customers  to  the  PECOS.net   technologies.   The  Company   intends  to  seek
acquisitions of additional  companies either to expand its customer base and the
use of the PECOS.net  technologies or to complement its Elcom Systems' PECOS.net
technologies, although there can be no assurances as to the success or timing of
any such acquisitions.

      On April 29,  1997,  the Board of Directors  adopted,  and on February 17,
1998 the Board amended The 1997 Stock Option Plan of Elcom International,  Inc.,
reserving up to an aggregate of 2,000,000  shares of the Company's  Common Stock
for possible  issuances pursuant to stock options granted  thereunder.  On April
30, 1997, the Company's wholly-owned subsidiary Elcom Systems, Inc. canceled its
stock option plan under which no stock options were then issued or outstanding.

      On July 23,  1997,  the  Company  announced  that its  Board of  Directors
authorized the engagement of the investment banking firm of Salomon Smith Barney
to assist the Company by coordinating and evaluating  options which would enable
the strategic potential of the Company to be realized.  These actions,  intended
to maximize stockholder value, include evaluating the possible sale or merger of
the Company, strategic financing options, and potential strategic partners. This
process  also  includes  investigation  of various  potential  options for Elcom
Systems as a separate company,  including  possible  strategic  alliances with a
technology or financial partner.  The rapid growth of the Company, and the Board
of Directors' belief that the Company's stock is undervalued in the marketplace,
prompted  the  Company to take this  step.  There can be no  assurance  that the
Company will be successful in consummating a transaction or realizing additional
stockholder value as a result of this process, which is currently ongoing.

      On  September  4, 1997,  the  Company's  Board of  Directors  approved and
adopted the Executive Profit  Performance Bonus Plan for Executive Officers (the
"Executive  Performance  Plan") and the Key Personnel Profit  Performance  Bonus
Plan (the "Key  Personnel  Plan" and,  together  with the  Executive  Plan,  the
"Plans").  The Plans will only be effective if the Executive Performance Plan is
approved by the  stockholders  of the Company,  and provide that the  designated
Executive  Officers and Key Personnel  collectively  will be entitled to a bonus
based on a  designated  portion of the  year-to-year  increase in the  Company's
Operating Profit (as defined in the Plans and which could include a reduction in
operating losses). The aggregate total of the designated percentages for bonuses
under both Plans cannot  exceed 20% of the increase in the  Company's  Operating
Profit (the "Bonus Pool") and an individual's annual  participation in the Bonus
Pool is limited to two times the individual's base salary. The Company will seek
approval and ratification of the Executive  Performance Plan by its stockholders
at the Company's 1998 Annual Meeting. The Plans cover fiscal years commencing in
1998; however, if the Executive Performance Plan is not approved by Stockholders
at the Company's 1998 Annual Meeting, the Plans will automatically terminate and
no payments will accrue or be paid thereunder.

                                       16

<PAGE>

      During  the  fourth  quarter  of  1997,  the  Company   completed  initial
implementation  in the United  States of its year 2000  compliant,  Oracle-based
enterprise  Management  Information  System  ("MIS").  During 1998,  the Company
intends  to augment  the MIS with the  implementation  of a year 2000  compliant
warehousing  system in its United  States  distribution  centers.  In 1998,  the
Company also plans to implement  these year 2000 compliant  applications  in its
United Kingdom  operations.  The United Kingdom operations are currently using a
year 2000 compliant warehousing system,  however the balance of MIS applications
in use in the United Kingdom are generally not year 2000  compliant.  By the end
of 1998,  the Company  expects the  installation  of its year 2000 compliant MIS
applications to be  substantially  complete in both its United States and United
Kingdom  operations.  The Company has been assured by its key electronic trading
partners that their information system applications either are, or will be, year
2000  compliant  before  issues may arise.  The  Company's  PECOS.net  family of
electronic commerce  technology  applications have been developed in a year 2000
compliant fashion.

RESULTS OF OPERATIONS

      The following  table sets forth various items as a percentage of net sales
for each of the years in the three year period ended December 31, 1997:

                                                Year Ended December 31,
                                                 1995    1996     1997
                                                 ----    ----     ----
                 Net sales                       100%    100%     100%
                 Gross profit                     13      11       12
                 Selling, general and
                   administrative expense         12       9        9
                 Research and development         
                 expenses.....                    --      --       --
                 Operating profit(loss)            1       2        3
                 Interest expense                  1       1        1
                 Interest income and other, net   --       1       --
                 Provision for income taxes       --       1        1
                 Net income(loss)                (--)      1        1
                
Year Ended December 31, 1997 compared to the year ended December 31, 1996

     Net  Sales.  Net sales for the year ended  December 31, 1997  increased to
$760.1  million from $620.1  million in the year ended  December  31,  1996,  an
increase of $140 million or 22.6%.  Net sales in the United States  increased to
$473.8  million in 1997 from $435.1  million in 1996,  an 8.9%  increase,  which
reflects  management's  decision to defer significant  expansion of its domestic
sales  force and focus its  efforts  on  consolidation  of certain  general  and
administrative   functions  of  acquisitions  and   implementation  of  its  new
management information system. Such implementation  adversely impacted net sales
in the United  States in the forth  quarter  of 1997.  During  1998,  management
intends to focus its energies on rebuilding  sales momentum and expansion of its
United States sales force.  The Company believes that its 1997 efforts provide a
solid foundation to support the anticipated growth in revenues. Net sales of the
Company's  United Kingdom based  operations  increased to $286.3 million in 1997
from $185.0 million in 1996, an increase of 54.8%.  Net sales for the year ended
December 31, 1997 in the United  Kingdom  include an aggregate of $51.1  million
generated  by  Prophet  Group  Limited  (acquired  in  December,  1996) and Data
Supplies  Limited  (acquired in February,  1997).  During 1997,  management also
completed the consolidation of certain general and  administrative  functions of
United  Kingdom  acquisitions,   and  intends  to  install  its  new  management
information system in the United Kingdom during 1998.

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

                                       17
<PAGE>

professional  services revenues in both countries.  The Company anticipates that
ongoing  increases  in  direct  purchasing   volume,  and  continued  growth  in
higher-margin  professional  services  revenues should mitigate a portion of the
product gross margin decline  expected to be associated with targeted  expansion
of sales to high volume corporate accounts during 1998, which typically generate
lower gross margin percentages than other customers.

      Selling,  General  and  Administrative  Expenses.   Selling,  general  and
administrative ("S,G&A") expenses for the year ended December 31, 1997 increased
to $70.2  million from $57.6  million in the year ended  December  31, 1996,  an
increase of $12.6 million or 22%. This increase is attributable primarily to the
cost of the  Company's  larger  work force and other  expenses  of the  acquired
companies.  Other S,G&A  expenses  also  increased  as the Company  continued to
invest in  administrative  infrastructure  to  support  its  current  and future
growth,  including the development and implementation of its Oracle-based,  year
2000  compliant  management  information  system.  Until  such  system  is fully
operational  worldwide,  which the  Company  expects to  substantially  complete
during 1998,  the Company will  continue to maintain  additional  personnel  and
manual support processes (and incur additional S,G&A expenses) to facilitate its
actual and anticipated growth in volume.  The new management  information system
is being  implemented  to allow the  Company  to  operate  more  efficiently  by
providing  an  information  systems  backbone  for the Company and to provide an
efficient  means to accomplish the  consolidation  of the  information and other
internal systems of potential acquisitions.

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

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

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

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

      Income Tax Provision. The income tax provisions in 1997 and 1996 primarily
relate to the income taxes of the Company's United Kingdom-based  operations, as
well as certain  current federal and state income taxes provided by the Company.
During  1997,  the  Company  utilized  substantially  all of its  remaining  net
operating  loss  ("NOL")  carryforwards  which were  eligible  to reduce its tax
provision.  Hence, such NOLs will no longer be available to reduce the Company's
effective  tax rate for income  reported in United  States,  if any, in 1998 and
future years,  although the Company does have approximately $3.3 million of NOLs
available to reduce its United States taxable income in 1998 and future years.

                                       18
<PAGE>

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

Year ended December 31, 1996 compared to the year ended December 31, 1995

     Net  Sales.  Net sales for the year ended  December 31, 1996  increased to
$620.1  million from $311.4  million in the year ended  December  31,  1995,  an
increase of $308.7 million,  or 99%. Net sales in the United States increased to
$435.1  million  in 1996 from  $219.4  million  in 1995,  a 98%  increase.  This
increase is generally  attributable to increased sales staffing,  the use of the
Company's PECOS  technology to market to potential  customers and the consequent
generation of incremental  customers and related sales, and to a certain extent,
from increased sales to existing  customers.  Net sales of the Company's  United
Kingdom-based  operations (Catalink U.K. and AMA) increased to $185.0 million in
1996 from $92.0  million  in 1995.  This  increase  results  primarily  from the
inclusion of Lantec's  results for all of 1996 versus only a portion of 1995, as
well as organic growth of the United Kingdom group.

     Gross Profit.  Gross profit for the year ended December 31, 1996 increased
to $70.0  million from $39.4  million in the year ended  December  31, 1995,  an
increase  of  $30.6  million,  or 78%.  The  increase  in gross  profit  dollars
generated  resulted  primarily from the substantial  growth in net sales.  Gross
profit, including the contribution from acquisitions,  as a percent of net sales
decreased  from  13% in  1995 to 11% in  1996.  The  decrease  in  gross  profit
percentage  is  due  primarily  to the  increasing  contribution  of  net  sales
generated from large corporate  customers  which typically  generate lower gross
profit percentages on such larger volumes.

     Selling,  General and Administrative Expenses. S,G&A expenses for the year
ended  December 31, 1996  increased to $57.6  million from $36.0  million in the
year ended December 31, 1995, an increase of $21.6 million or 60%. This increase
is  attributable  primarily  to the  increase  in the  Company's  work force and
associated  overhead as well as the S,G&A of acquired  entities,  including $2.2
million of goodwill  amortization.  S,G&A also reflects substantial increases in
Elcom Systems'  expenses  required to support the actual and expected  growth of
this subsidiary. Other S,G&A expenses also increased as the Company continued to
invest in  administrative  infrastructure  to support its growth,  including the
ongoing  development,  augmentation,  and  implementation  of its new management
information  system.  The Company also maintained  various manual  processes and
associated  personnel to facilitate its actual and  anticipated  growth and will
continue  to  do so  until  its  new  management  information  system  is  fully
functioning.  Nonetheless, S,G&A expenses decreased as a percentage of net sales
for the year ended  December  31, 1996 to 9%, from 12% in 1995,  reflecting  the
substantial impact of the increase in net sales, as the Company transitioned out
from its development stage.

     Research  and  Development  Expense.   Research  and  development  expense
remained  relatively  constant between 1995 and 1996. The Company's research and
development  expense is  focused on  developing  incremental  functionality  and
features  for its  PECOS.net  technologies,  including  modifications  to  allow
communication  using  the  Internet,  the  continued  development  of a  browser
compliant version of its PECOS.net  technologies,  and the development of a Java
enabled version for license to other companies.

     Interest  Expense.  Interest  expense for the year ended December 31, 1996
increased to $3.8 million  from $2.2 million in 1995.  Interest  expense in both
years results from  borrowings in support of the Company's  accounts  receivable
and  inventory  balances  and  the  increase  for  1996  is  reflective  of  the
substantial increase in the Company's net sales referred to above and consequent
borrowings required to support the increased balances of accounts receivable and
inventory.

     Interest  Income and Other,  Net.  Interest income and other,  net for the
year ended  December 31, 1996  increased to $1.5 million from  $255,000 in 1995.
This increase is a direct result of investment income generated by investment of
available  net  proceeds  from the  sale of the  Company's  common  stock in its
initial public offering in December 1995 and upon exercise of the  underwriters'
over-allotment option in January 1996.

     Income  Tax  Provision.  The  income  tax  provisions  in 1995  and 1996
primarily  relate  to  foreign  income  taxes of AMA and  Lantec  and  certain
current United States state income tax provisions.

                                       19
<PAGE>

     Net Income (Loss). The Company reported net income of $5.6 million for the
year ended December 31, 1996 versus a net loss of $(904,000) in 1995 as a result
of the factors described herein.

Liquidity and Capital Resources

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

     Net cash used in operating activities for the year ended December 31, 1996
was $56.3  million,  including  $71.1 million  relating to increases in accounts
receivable,  resulting from the Company's increase in net sales during 1996. Net
cash used for investing  activities was $15.4 million,  consisting  primarily of
$6.5 million in additions to property,  equipment  and software and $8.1 million
related to  acquisitions.  Net cash provided by financing  activities  was $49.6
million,  including  $6.2 million in net  proceeds  from the  Company's  sale of
common stock to the underwriters of its initial public offering upon exercise of
their over-allotment option and a $43.0 million net increase in borrowings under
floor plan lines of credit.

     Net cash used in operating activities for the year ended December 31, 1995
was $39.4 million and included the net operating cash impact of Computerware and
Catalink  U.K.  after they were  acquired,  which  occurred in February and June
1995,  respectively.  Net cash used in operating  activities also included $34.6
million  relating to  increases  in accounts  receivable.  Net cash used in 1995
investing  activities was $12.3 million and included $6.5 million related to the
purchase of Catalink  U.K. and $5.9 million of additions to property,  equipment
and software.  The Company  received a net total of $91.4 million from financing
activities  in  1995,  $40.1  million  from the  Company's  sale of stock in its
initial public  offering and related  exercise of common stock  warrants,  $19.1
million from the sale of  Convertible  Preferred  Stock and $37.5 million from a
net  increase  in  borrowings  under the  Company's  floor plan lines of credit.
Financing activities in 1995 also reflect a $5 million repayment of Computerware
loans to the former shareholders of Computerware.

     At  December  31,  1997,  the  Company's  principal  sources of  liquidity
included  cash and cash  equivalents  of $33.2  million  and floor plan lines of
credit from Deutsche Financial Services Corporation ("DFSC").  The United States
DFSC facility provides for aggregate borrowings of up to $120 million, and as of
March 1,  1997,  the  interest  rate was  reduced  to the prime  rate  minus 1%.
Availability of United States borrowings is based on DFSC's  determination as to
eligible  accounts  receivable  and  inventory.  As of December  31,  1997,  the
Company's  borrowings  from DFSC on its United  States floor plan line of credit
were $113.0 million,  which  approximated  the Company's  availability  based on
eligible  accounts  receivable and inventory at that date. During the first half
of 1996,  interest was payable monthly at the prime rate plus 1%, and thereafter
at the prime rate,  although  approximately  one-half of the  Company's  initial
United States borrowings do not bear interest until after interest-free  periods
of 30 to 90 days have lapsed. As of March 1, 1997, the interest rate was reduced
to prime (8.5% at December  31,  1997) minus 1%. The United  States DFSC line of
credit is  secured  primarily  by the  Company's  United  States  inventory  and
accounts  receivable,  although  substantially all of the Company's other United
States assets also are pledged as collateral on the facility.  In December 1997,
the  Company  also  established  a United  Kingdom  DFSC credit  facility  which
provides for aggregate  borrowings of up to (pound)30 million,  or approximately
$49.5  million,  as  of  December  31,  1997.  Availability  of  United  Kingdom
borrowings is based upon DFSC's  determination of eligible  accounts  receivable
and amounts  outstanding bear interest at the Base Rate of National  Westminster
Bank plc (7.25% at  December  31,  1997) plus  1.25%.  The United  Kingdom  DFSC
facility replaced four separate facilities  previously  maintained in the United
Kingdom.  As of December 31, 1997,  the  Company's  borrowings  under its United
Kingdom DFSC facility were (pound)24 million or $39.7 million which approximated
the Company's availability thereunder.

                                       20
<PAGE>

      The  Company  is  dependent  upon the  DFSC  lines of  credit  to  finance
increases in its eligible accounts  receivable arising from sales of PC products
as well as its United States inventory  purchases and hence, the Company expects
that its  borrowings  under such  facilities  will need to  continue to increase
substantially in order to support the Company's anticipated growth. There can be
no  assurance,  however,  that the DFSC  lines of  credit  will  continue  to be
available, or be increased to support the Company's requirements. The DFSC lines
of credit limit borrowings to defined  percentages of eligible inventory (in the
United  States)  and  accounts  receivable  and  contains  customary  covenants,
including  financial  covenants  with  respect  to the  Company's  net worth and
debt-to-equity  ratios,  and customary default provisions related to non-payment
of principal and interest, default under other debt agreements and bankruptcy.

      The Company also has a $9.5 million floor plan  financing  agreement  with
IBM Credit Corporation ("IBMCC") to support purchases of IBM products. The IBMCC
borrowing   facility  is  secured  by  the  IBM  products  purchased  under  the
arrangement and relates to domestic  operations  only. At December 31, 1997, the
Company's  borrowings  from  IBMCC on its floor  plan  line of credit  were $1.2
million.

     As  of  December  31,  1997,  the  Company  had   borrowings   aggregating
approximately $153.9 million outstanding under these borrowing facilities, which
approximated  its  availability  thereunder.  The Company  also  included a note
payable  of  approximately  $0.8  million,  related to its  acquisition  of Data
Supplies Limited, in lines of credit. 

     Based upon ongoing analyses, and the requirement that it establish a direct
purchasing  relationship  with a major PC  manufacturer  to support  fulfillment
requirements  under a contract  awarded in 1996, the Company started  purchasing
selected  products  directly  from  manufacturers  in late  1996.  Although  the
Company's inventory investment imposes certain costs and risks and has increased
substantially since December 31, 1996, the Company believes that this investment
will  improve  its  delivery  time to  customers  and  the  quality  control  of
configured  systems  and,  over time,  may  increase  the  profitability  of the
Company.  These direct  purchasing  arrangements  have favorably  impacted gross
profit,  particularly in the third and fourth quarters of 1997, as the volume of
direct  purchases  increased  significantly  over prior quarters and the Company
earned substantial direct purchasing  rebates and incremental  discounts.  There
can be no  assurances  that these  manufacturer  rebates and  discounts  will be
available in the future, or if available, that the Company will be in a position
to purchase the necessary levels of products  necessary to receive comparable or
increased  levels of such rebates and  incremental  discounts.  The Company also
believes  that it can  substantially  mitigate  the  risks  associated  with its
additional  inventory  positions  by  limiting  the range of models it stocks to
those in demand and by carefully  monitoring  items on hand and their associated
net carrying costs,  relative to demand. The Company also intends to continue to
maintain  logistical and traditional  relationships  with selected  distributors
and/or aggregators.

     As of September  30, 1997,  the Company sold options to acquire its entire
equity  ownership  interest  in  ShopLink  Incorporated.  The  Company  received
$418,000 in payment for the options,  which may be exercised  through  March 31,
1999.  If exercised,  the Company could receive  payments of up to an additional
$4.2 million.  The Company has included the $418,000 received in payment for the
options in other deferred liabilities.

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

     The Company believes that its cash and cash equivalents, together with its
existing  sources of  liquidity  and cash  generated  from  operations,  will be
sufficient to meet its working capital and capital expenditure  requirements for
the next year, so long as its financing sources continue to make lines of credit
available.  However,  as the Company's business strategy includes growth through
acquisitions,  additional sources of financing may be required to accomplish the
Company's growth plans. 

                                       21
<PAGE>



SEASONALITY AND IMPACT OF INFLATION

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

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

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

STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT

      Except  for the  historical  information  contained  herein,  the  matters
discussed  in this  Annual  Report on Form 10-K  could  include  forward-looking
information. All statements other than statements of historical fact, including,
without limitation,  those with respect to the Company's  objectives,  plans and
strategies  set forth  herein and those  preceded  by or that  include the words
"believes,"    "expects,"    "anticipates,"   or   similar   expressions,    are
forward-looking   statements.   Although   the   Company   believes   that  such
forward-looking  statements  are  reasonable,  it can give no assurance that the
Company's   expectations  are,  or  will  be,  correct.   These  forward-looking
statements  involve a number of risks and  uncertainties  which  could cause the
Company's future results to differ materially from those anticipated, including:
the industry's acceptance and usage of electronic commerce software systems, the
impact of competitive  technologies,  products and pricing, control of expenses,
levels of gross margins,  revenue growth,  overall  business  conditions,  price
decreases of PC  products,  corporate  demand for PC  products,  the success and
timing  of  implementing  the  Company's  new  management   information  system,
availability of appropriate  financing,  risks  associated with  acquisitions of
companies,  the  consequent  results  of  operations  given  the  aforementioned
factors,  and other risks  detailed  from time to time in this Annual  Report on
Form  10-K and in the  Company's  other SEC  reports,  including  the  Company's
prospectus included as part of the S-1 Registration Statement declared effective
on December 19, 1995 under the Securities  Act of 1933.  Regarding the Company's
evaluation of possible strategic partners and financing alternatives,  including
for Elcom Systems,  there can be no assurance  that any strategic  alternatives,
including  any possible  arrangements  with a strategic  partner or the possible
sale,  merger or financing of the Company,  can be  successfully  identified  or
solicited,  negotiated,  or  consummated to the betterment of the Company or the
Company's stock price, or what the timing, terms, or ultimate impact of any such
arrangement might be.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

     None Required.

                                       22
<PAGE>



Item 8.  Financial Statements and Supplementary Data

      See  the  Consolidated   Financial   Statements  beginning  on  page  F-1.
Supplemental  earnings per share and  quarterly  financial  information  for the
Company  are  included  in  Notes  10 and  11,  respectively,  of the  Notes  to
Consolidated Financial Statements.

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

     During  the fourth quarter of 1997,  the Audit  Committee of the Company's
Board of Directors  decided to engage Arthur Andersen LLP to audit the Company's
1997  financial  statements  in both the United  States and the United  Kingdom.
Previously,  the financial statements of the Company's United Kingdom operations
were audited by the London  office of Deloitte & Touche.  The decision to change
was made to  increase  the  efficiency  and  coordination  of the  annual  audit
process,  and the Company has continued its relationship  with Deloitte & Touche
for tax services in the United Kingdom.

     Deloitte & Touche's  opinions with respect to the Company's United Kingdom
subsidiaries'  operations  in 1995 and 1996 were  unqualified  and there were no
disagreements between the Company and Deloitte & Touche concerning accounting or
financial disclosure matters. In conjunction with the change,  Deloitte & Touche
was requested to cooperate fully with Arthur Andersen LLP to ensure an effective
transition of the audit engagement.

     The  Company  reported  this change on a Form 8-K filed on March 11, 1998,
which was not timely filed.

                                    Part III

Item 10.  Directors and Executive Officers of the Registrant

      The  information  concerning  the directors of the Company is set forth in
the  definitive   Proxy  Statement  ("the  Proxy   Statement")  to  be  sent  to
stockholders   in  connection   with  the  Company's   1998  Annual  Meeting  of
Stockholders  to be  held  April  28,  1998,  under  the  heading  "Election  of
Directors",  which information is incorporated herein by reference.  Information
concerning  each  executive  officer  of the  Company  is set forth in the Proxy
Statement under the heading "Management - Executive Officers", which information
is incorporated herein by reference.

Item 11.  Executive Compensation

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

Item 12.  Security Ownership of Certain Beneficial Owners and Management

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

Item 13.  Certain Relationships and Transactions

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

                                       23
<PAGE>



                                     PART IV

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

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

      (a)(1) Consolidated Financial Statements:

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

         (2) Consolidated  Financial  Statement  Schedules for each of the Three
             Years in the Period Ended December 31, 1997:

             Report  of  Independent  Public  Accountants  on  Schedule  II
               Valuation and Qualifying Accounts
             Schedule II Valuation and Qualifying Accounts

            See Index to Schedule on page S-1

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

         (3) Index to Exhibits:

            The exhibits filed as part of this form 10-K are listed on the Index
to Exhibits  beginning  on page E-1,  which  Index to  Exhibits is  incorporated
herein by reference.  The Company's current  management  contracts and executive
compensation  plans  and  arrangements  are  listed  in the  Index to  Exhibits,
incorporated  herein by reference,  at exhibit numbers 10.1; 10.2; 10.3;  10.19;
10.20; 10.22; 10.23; 10.29; 10.36; 10.37, 10.38, 10.39 and 10.40.


      (b) Reports on Form 8-K:

          None.

      (c) Exhibits:

         See Index to Exhibits beginning on page E-1.


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

                                       24
<PAGE>



                                   SIGNATURES

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

                                                Elcom International, Inc.
                                                (Registrant)

Date:  March 13, 1998                           By:   /s/  Robert J. Crowell
                                                   -------------------------
                                                   Robert J. Crowell
                                                   Chairman and     
                                                   Chief Executive Officer

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

Signatures                              Title                       Date

/s/   Robert J. Crowell      Chairman of the                    March 13, 1998
Robert J. Crowell            Board of Directors
                             and Chief Executive Officer
                             (Principal Executive Officer)

/s/   Laurence F. Mulhern    Corporate Executive                March 13, 1998
Laurence F. Mulhern          Vice President,
                             Chief Financial Officer, Treasurer
                             and Secretary (Principal Financial
                             and Accounting Officer)

/s/   William W. Smith       Vice Chairman and Director         March 13, 1998
William W. Smith

/s/   James Rousou           Corporate Executive                March 13, 1998
James Rousou                 Vice President and Director

/s/  J. Richard Cordsen      Director                           March 13, 1998
J. Richard  Cordsen

/s/  Richard J. Harries, Jr. Director                           March 13, 1998
Richard J. Harries, Jr.

/s/  John W. Ortiz           Director                           March 13, 1998
John W. Ortiz


                                       25
<PAGE>


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

Exhibit No.             Description

2.1   Agreement  for the sale and  purchase  of shares in the capital of Prophet
      Group  Limited dated  December 6, 1996,  by and among Lantec  (Management)
      Limited (a  subsidiary  of the  Registrant)  and the  Vendors  (as defined
      therein). (3)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                      E-1
<PAGE>

Exhibit No.                   Description

10.1  Form of Indemnity Agreement for Executive Officers and/or Directors of the
      Registrant  (1), with attached list of Director and/or  Executive  Officer
      Indemnitees. (12) (*)

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

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

10.4  $120,000,000  Business  Credit and Security  Agreement Dated as of March
      1, 1997 among Catalink  Direct,  Inc.,  Catalink Direct  (Pennsylvania),
      Inc. and Deutsche Financial  Services  Corporation (9), and Amendment to
      Business Credit and Security Agreement. (12)

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

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

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

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

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

10.20 Employee  Benefits  Agreement  by and between  Elcom  Systems,  Inc. and
      Peter F. McAree dated August 1, 1997. (x) (*)

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

10.23 Employee  Benefits  Agreement by and between the  Registrant  and Andres
      Escallon dated August 1, 1997. (12) (*)

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

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

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

10.33 Guaranty  by the  Registrant  in  favor  of  Deutsche  Financial  Services
      Corporation,  dated November 6, 1995,  guarantying Catalink Direct, Inc.'s
      indebtedness to Deutsche (1), as ratified by a  Reaffirmation  of Guaranty
      dated September 2, 1997. (x)

                                      E-2
<PAGE>

Exhibit No.                   Description

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

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

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

10.39 Elcom  International,  Inc.  Executive Profit Performance Bonus Plan for
      Executive Officers dated September 4, 1997. (12) (*)

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

10.41 Engagement  letter  between the  Registrant  and Smith Barney Inc. dated
      July 21, 1997. (12)

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

23.1  Consent of Arthur Andersen  LLP. (x)

23.2  Consent of Deloitte & Touche. (x)

27    Financial Data Schedule. (x)

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

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

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

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

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

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

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

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

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

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

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

                                      E-3
<PAGE>

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

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

(x)  Filed herewith.

(*)  Management contract or compensatory plan or arrangement.


                                      E-4
<PAGE>

                       CONSOLIDATED FINANCIAL STATEMENTS

                   ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


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

                                                                       Page

Report of Independent Public Accountants                            F-2
Reports of Other Auditors                                           F-3 to F-4
Consolidated  Balance  Sheets as of December 31, 1996 and 1997      F-5  
Consolidated Statements of Operations  for the years ended  
   December 31, 1995,  1996 and 1997                                F-6 
Consolidated Statements of Stockholders' Equity for the 
   years ended December 31, 1995, 1996 and 1997                     F-7  
Consolidated  Statements of Cash Flows for the years ended 
   December 31, 1995,  1996 and 1997                                F-8 
Notes to  Consolidated Financial Statements                         F-9 to F-22


                                      F-1
<PAGE>



             REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS





To Elcom International, Inc.:

      We have  audited the  accompanying  consolidated  balance  sheets of Elcom
International, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1996  and  1997,  and  the  related   consolidated   statements  of  operations,
stockholders'  equity and cash  flows for each of the three  years in the period
ended  December  31,  1997.  These  consolidated  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial  statements based on our audits. We did not audit the
1995 and 1996 financial  statements of Elcom International  Limited and AMA (UK)
Limited, both of which are wholly-owned  subsidiaries,  which statements, in the
aggregate,  reflect total assets  constituting  $98,879,000  of the related 1996
consolidated financial statement totals, and which statements reflect net income
of  $1,224,000  and  $4,301,000  of the  1995 and  1996  consolidated  financial
statement totals, respectively.  Those statements were audited by other auditors
whose reports have been furnished to us, and our opinion,  insofar as it relates
to amounts  included  for Elcom  International  Limited and AMA (UK)  Limited is
based solely upon the reports of the other auditors.

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

      In our opinion,  based on our audits,  and the reports of other  auditors,
the consolidated  financial  statements referred to above present fairly, in all
material  respects,  the  financial  position of Elcom  International,  Inc. and
subsidiaries  as of December 31, 1996 and 1997 and the  consolidated  results of
its  operations  and its cash  flows for each of the three  years in the  period
ended  December 31, 1997,  in  conformity  with  generally  accepted  accounting
principles.


/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP



Boston, Massachusetts
February 17, 1998

                                      F-2
<PAGE>



                            REPORT OF OTHER AUDITORS



AUDITORS' REPORT TO THE DIRECTORS OF



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



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

Respective responsibilities of directors and auditors

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

Basis of opinion

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

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

Opinion

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



/s/  DELOITTE & TOUCHE

Chartered Accountants
London

21 March 1997

                                      F-3
<PAGE>



                            REPORT OF OTHER AUDITORS




AUDITORS' REPORT TO THE DIRECTORS OF

AMA (UK) LIMITED



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

Respective responsibilities of directors and auditors

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

 Basis of opinion

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

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

Opinion

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



/s/  DELOITTE & TOUCHE

Chartered Accountants
London

21 March 1997

                                      F-4


<PAGE>

                           ELCOM INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)

                                                               December 31,
                                                           --------------------
                                                             1996        1997
                                                           --------    --------
                                      ASSETS
CURRENT ASSETS:
  Cash and cash equivalents............................   $  23,259    $ 33,165
  Accounts receivable:
     Trade ............................................     134,617     154,223
     Other ............................................      21,039      32,200
                                                           --------    --------
                                                            155,656     186,423
     Less--Allowance for doubtful accounts ............       4,312       5,474
                                                           --------    --------
         Accounts receivable, net .....................     151,344     180,949
  Inventory ...........................................      34,718      60,437
  Prepaids and other current assets ...................         864       3,255
                                                            --------   --------
         Total current assets ..........................    210,185     277,806
                                                            --------   --------
PROPERTY, EQUIPMENT AND SOFTWARE, AT COST:
  Computer hardware and software .......................     17,577      22,118
  Land, buildings and leasehold improvements ...........      3,415       3,402
  Furniture, fixtures and equipment ....................      6,202       8,579
                                                           --------    --------
                                                             27,194      34,099
  Less -- Accumulated depreciation and amortization ....     13,308      17,649
                                                           --------    --------
                                                             13,886      16,450
                                                           --------    --------

GOODWILL AND OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION   36,698      37,812
                                                          =========   =========
                                                          $ 260,769   $ 332,068
                                                          =========   =========
                       LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Lines of credit ......................................  $  89,469   $ 154,714
  Accounts payable .....................................     36,987      43,271
  Accrued expenses and other current liabilities .......     34,405      19,557
  Current portion of capital lease obligations .........        252         680
  Current portion of long-term debt ....................         45          78
                                                          ---------   ---------
         Total current liabilities .....................    161,158     218,300
                                                          ---------   ---------
OTHER DEFERRED LIABILITIES .............................         32       2,213
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION ......        556         920
LONG-TERM DEBT, NET OF CURRENT PORTION .................        420         332
                                                          ---------   ---------
                                                              1,008       3,465
                                                          ---------   ---------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 par value; Authorized--10,000,000
       shares--Issued and outstanding- none ............        --          --
  Common stock, $.01 par value; Authorized -- 50,000,000
       shares--Issued--26,663,512 and 27,218,239 shares..       267         272
  Additional paid-in capital ...........................     98,483     100,726
  Retained earnings (accumulated deficit) ..............       (919)      9,369
   Treasury stock, at cost -- 37,546 and 56,319 shares .       (366)       (549)
  Cumulative translation adjustment ....................      1,138         485
                                                          ---------   ---------
         Total stockholders' equity ....................     98,603     110,303
                                                          =========   =========
                                                          $ 260,769   $ 332,068
                                                          =========   =========

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

                                      F-5

<PAGE>
                            ELCOM INTERNATIONAL, INC.
                                AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)


                                                 For the Year Ended December 31,
                                                   1995       1996       1997
                                                 ---------  ---------  ---------
Net sales ....................................  $ 311,423  $ 620,115  $ 760,136
Cost of sales ................................    272,041    550,076    669,742
                                                 ---------  ---------  ---------
Gross profit .................................     39,382     70,039     90,394
Expenses:
  Selling, general and administrative.........     36,016     57,551     70,200
  Research and development ...................      1,122      1,200      1,275
                                                 ---------  ---------  ---------
Total expenses ...............................     37,138     58,751     71,475
                                                 ---------  ---------  ---------
Operating profit .............................      2,244     11,288     18,919
Interest expense..............................     (2,164)    (3,837)    (5,203)
Interest income and other, net ...............        255      1,534      1,061
                                                 ---------  ---------  ---------
Net income before income taxes ...............        335      8,985     14,777
Provision for income taxes....................      1,239      3,410      4,489
                                                 ---------  ---------  ---------

Net income (loss).............................     $ (904)   $ 5,575    $10,288
                                                 =========  =========  =========

Basic net income (loss) per share.............     $(0.05)   $  0.21    $  0.38
                                                 =========  =========  =========
Basic weighted average shares outstanding.....     18,195     26,363     26,937
                                                 =========  =========  =========
Diluted net income (loss) per share...........    $ (0.05)    $ 0.19     $ 0.35
                                                 =========  =========  =========
Diluted weighted average shares outstanding...     18,195     29,739     29,461
                                                 =========  =========  =========

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

                                      F-6
<PAGE>
<TABLE>
                                                                       ELCOM INTERNATIONAL, INC.
                                                                           AND SUBSIDIARIES

                                                            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                                (in thousands, except number of shares)
<CAPTION>
                                              Convertible
                                            Preferred Stock   Common Stock                 Retained                          Total
                                           ----------------  ---------------- Additional   Earnings   Treasury  Cumulative  Stock-
                                           Number   $.01 Par  Number   $.01 Par Paid-in (Accumulated   Stock,  Translation  holders'
                                          of Shares  Value   of Shares   Value  Capital    Deficit)   at cost   Adjustment   Equity
                                          --------- -------- --------- -------- -------- -----------  -------- -----------  -------
<S>                                       <C>        <C>     <C>        <C>     <C>       <C>         <C>        <C>         <C>

BALANCE, DECEMBER 31, 1994 .............. 3,452,175  $  34   9,116,716  $  91   $ 13,527  $ (5,590)   $   --     $   61      $8,123
  Sale of Series B convertible
    preferred stock, net of offering
    costs of approximately $159.......... 1,482,736     15        --       --      5,200       --         --        --        5,215
  Sale of Series C convertible
    preferred stock, net of offering
    costs of approximately $651.......... 3,052,385     31        --       --     13,817       --         --        --       13,848
  Purchase of Computerware ..............    --         --   1,326,417     13      4,795       --         --        --        4,808
  Purchase of Lantec ....................    --         --   2,899,820     29     13,745       --         --        --       13,774
  Exercise of common stock options ......    --         --       9,963     --         12       --         --        --           12
  Conversion of Series B convertible
    preferred  stock into common stock ..(4,934,911)   (49)  4,934,911     49         --       --         --        --           --
  Conversion of Series C convertible
    preferred  stock into common stock ..(3,052,385)   (31)  3,052,385     31         --       --         --        --           --
  Proceeds from sale of common stock,
    net of offering costs of
    approximately $4,558 ................    --         --   4,000,000     40     39,402       --         --        --       39,442
  Exercise of warrants ..................    --         --     170,085      2        615       --         --        --          617
  Net loss ..............................    --         --        --       --         --      (904)       --        --         (904)
  Cumulative translation adjustment .....    --         --        --       --         --       --         --       (85)         (85)
                                           ------    ------ ----------   ----     ------    -------     ------   ------      -------
BALANCE, DECEMBER 31, 1995 ..............    --         --  25,510,297    255     91,113    (6,494)       --       (24)      84,850
  Proceeds from sale of common stock,
    net of offering costs
    of  approximately $200 ..............    --         --     629,489      6      6,234       --         --        --        6,240
  Exercise of common stock options ......    --         --     523,726      6        920       --        (366)      --          560
  Tax effect of AMA (U.K.) Limited
    pooling .............................    --         --        --       --        216       --         --        --          216
  Net income ............................    --         --        --       --         --     5,575        --        --        5,575
  Cumulative translation adjustment .....    --         --        --       --         --       --         --      1,162       1,162
                                           ------    ------ ----------   ----     ------     ------     ------    -----      -------
BALANCE, DECEMBER 31, 1996 ..............    --         --  26,663,512    267     98,483      (919)      (366)    1,138      98,603
  Exercise of common stock options,
     including related tax benefit of
     approximately $450..................    --         --     505,447      5      1,954        --       (183)      --        1,776
  Purchase of procurement technology ....    --         --      49,280     --        289        --         --       --          289
  Net income ............................    --         --        --       --         --    10,288         --       --       10,288
  Cumulative translation adjustment .....    --         --        --       --         --        --         --      (653)       (653)
                                           ------    ------ ----------  ------  --------    ------      ------   ------    ---------
BALANCE, DECEMBER 31, 1997 ..............    --      $  --  27,218,239  $ 272   $100,726    $9,369      $(549)    $ 485    $110,303
                                           ======    ====== ==========  ======  ========    ======      ======   ======    =========
                                           

</TABLE>


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

                                      F-7
<PAGE>
                           ELCOM INTERNATIONAL, INC.
                                AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                                For the Years Ended December 31,
                                                    ---------------------------
                                                      1995      1996      1997
CASH FLOWS FROM OPERATING ACTIVITIES:               -------   -------   -------
  Net income (loss)................................ $ (904)  $ 5,575   $ 10,288
  Adjustments to reconcile net income (loss)
    to net cash used in operating activities -
       Depreciation and amortization...............  3,101     6,704      8,795
       Provision for doubtful accounts.............    472     2,586      3,058
    Changes in current assets and liabilities, net
      of purchase acquisitions --
         Accounts receivable.......................(34,596)  (71,095)   (30,168)
         Inventory.................................  4,357   (13,955)   (26,088)
         Prepaids and other current assets......... (1,011)    1,064     (1,995)
         Accounts payable.......................... (1,181)   (6,858)     5,088
         Accrued expenses and other
           current liabilities..................... (9,675)   19,695    (15,356)
    Increase (decrease) in other deferred
      liabilities..................................    --        (11)     2,183
                                                    -------   -------   -------
            Net cash used in operating activities..(39,437)  (56,295)   (44,195)
                                                    -------   -------   -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, equipment and software ...... (5,880)   (6,506)    (7,723)
Increase in other assets and deferred costs .......   (105)     (795)      (321)
Purchase of Computerware, net of cash acquired.....    153       --         --
Purchase of Lantec ................................ (6,452)      --         --
Tax effect of AMA (U.K.) Limited pooling ..........    --        216        --
Purchase of Prophet Group, net of cash acquired....    --     (8,331)      (625)
Purchase of Data Supplies, net of cash acquired....    --       --       (2,660)
                                                    -------   -------   -------
      Net cash used in investing activities........(12,284)  (15,416)   (11,329)
                                                    -------   -------   -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings under lines of credit ............ 37,457    43,009     64,570
  Sale of common stock, net of offering costs...... 39,442     6,240        --
  Sale of preferred stock.......................... 19,063       --         --
  Repayment of capital lease obligations
    and long-term debt.............................   (153)     (215)      (731)
  Exercise of common stock options including
    related tax benefit ...........................     12       560      1,776
  Exercise of common stock warrants ...............    617        --         --
  Repayment of Computerware stockholders' loans.... (5,000)       --         --
                                                    -------   -------   -------
      Net cash provided by financing activities.... 91,438    49,594     65,615
                                                    -------   -------   -------
FOREIGN EXCHANGE EFFECT ON CASH ...................    (60)      399       (185)
                                                    -------   -------   -------
NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS ..................................... 39,657   (21,718)     9,906
CASH AND CASH EQUIVALENTS,
  BEGINNING OF PERIOD .............................  5,320    44,977     23,259
                                                   --------  -------    -------
CASH AND CASH EQUIVALENTS, END OF PERIOD ......... $44,977   $23,259    $33,165
                                                   =======   =======    =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Interest paid .................................. $ 1,964   $ 3,711     $5,141
                                                   =======   =======    =======
  Income taxes paid .............................. $   526   $   523     $1,620
                                                   =======   =======    =======
SUPPLEMENTAL DISCLOSURE OF NONCASH
  INVESTING AND FINANCING ACTIVITIES:
  Increase in capital lease obligations........... $  --     $   787    $ 1,488
                                                   =======   =======    =======
  Purchase of procurement technology ............. $  --     $  --      $   289
                                                   =======   =======    =======
 Acquisition of businesses (Note 2):
     Fair value of assets acquired ............... $59,611   $16,931    $ 6,332
     Less cash paid ..............................   6,400     8,600      1,600
                                                   -------   -------    -------
        Liabilities assumed ...................... $53,211    $8,331    $ 4,732
                                                   =======   =======    =======
                 The accompanying notes are an integral part of these
                       consolidated financial statements.
                                      F-8
<PAGE>


                            ELCOM INTERNATIONAL, INC.
                                AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

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

(a) Principles of Consolidation

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

(b) Use of Estimates

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

(c) Cash and Cash Equivalents

      Cash equivalents at December 31, 1996 and 1997 generally consisted of U.S.
Government   obligations   with  maturities  of  three  months  or  less.  These
securities,  classified  as  held-to-maturity,  are carried at cost plus accrued
interest,  which  approximates  fair  value  in  accordance  with  Statement  of
Financial   Accounting   Standards  (SFAS)  No.  115,   Accounting  for  Certain
Investments in Debt and Equity Securities. Since held-to-maturity securities are
short-term  in  nature,  changes  in  market  interest  rates  would  not have a
significant impact on the fair value of these securities. Interest earned on all
cash  equivalents  is  included  in  interest  income  and  other,  net  in  the
Consolidated Statements of Operations.

(d) Inventory

      Inventory consists of purchased  personal computer  products,  peripherals
and  accessories  available for resale.  Inventories  are stated at the lower of
cost  (first-in,  first-out)  or market.  The Company  periodically  reviews its
inventory for potential excess,  slow-moving,  nonsalable or obsolete inventory.
To date, the Company has not provided any material inventory reserves.

(e) Prepaids and Other Current Assets

      Consistent  with the  provisions  of the  American  Institute of Certified
Public  Accountants'   Statement  of  Position  (SOP)  No.  93-7,  Reporting  on
Advertising  Costs,  the  costs of  maintaining,  reproducing  and  mailing  the
Company's PECOS front-end software, which constitute direct-response advertising
costs, are deferred and charged to operations over the estimated  periods during
which related  sales are expected to be realized,  which is estimated to be five
months. Such net capitalized costs totaled $521,000 and $114,000 at December 31,
1996 and  1997,  respectively.  For each  year in the  three-year  period  ended
December 31, 1997,  the Company  charged  approximately  $767,000,  $839,000 and
$590,000,  respectively, of these costs to operations, none of which represented
write-downs to net realizable value of the capitalized costs.

                                      F-9
<PAGE>

(f) Depreciation and Amortization

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

(g) Goodwill and Other Assets

      The  excess  of the  purchase  price  over  the fair  value of net  assets
acquired  in each  acquisition  accounted  for as a purchase  is  classified  as
goodwill and included in the accompanying  consolidated balance sheets. Goodwill
is amortized on a straight-line basis over an estimated useful life of 15 years.
Goodwill (net of  accumulated  amortization  of $3,021,000 and  $5,715,000)  was
$34,649,000 and $35,526,000 at December 31, 1996 and 1997,  respectively.  Other
intangible  assets (net of accumulated  amortization of $724,000 and $1,231,000)
associated with acquisitions  amounted to $ 1,517,000 and $1,321,000 at December
31,  1996 and 1997,  respectively,  and have  been  assigned  a five year  life.
Amortization  of goodwill  and such other  intangibles  amounted to  $1,461,000,
$2,210,000 and $3,252,000 for the years ended December 31, 1995,  1996 and 1997,
respectively.

      In  accordance  with  SFAS  No.  121,  Accounting  for the  Impairment  of
Long-Lived  Assets and for  Long-Lived  Assets to Be  Disposed  Of, the  Company
evaluates the  realizability  of goodwill based on  profitability  expectations,
using the undiscounted  cash flow method,  for each subsidiary having a material
goodwill balance.  Based on its most recent analysis,  the Company believes that
no impairment of goodwill exists at December 31, 1997.

       The  Company  generally   expenses  research  and  development  costs  as
incurred.  However,  in  accordance  with SFAS No. 86,  Accounting  for Costs of
Computer  Software  to Be  Sold,  Leased  or  Otherwise  Marketed,  the  Company
capitalizes  certain  software   development  costs,   consisting  primarily  of
personnel costs,  subsequent to the  establishment of technological  feasibility
until the product is available for general product release. Costs incurred prior
to the  establishment  of  technological  feasibility are charged to operations.
Development costs associated with product  enhancements that extend the original
product's life or significantly improve the original product's marketability are
also capitalized, as incurred, after technological feasibility has been achieved
as is  the  cost  to  acquire  complementary  technology.  Capitalized  software
development  costs  are  amortized  over an  estimated  useful  life of 24 to 30
months.  Net  capitalized  costs amounted to $461,000 and $1,853,000  (including
approximately $1.2 million related to the purchase of a procurement  technology)
as of December 31, 1996 and 1997, respectively. Amortization expense amounted to
$62,000,  $195,000  and $325,000 for each of the three years in the period ended
December 31, 1997, respectively.

      The Company has  capitalized  certain costs that are  associated  with the
organization  of  the  corporation  totaling  $152,000.  Such  costs  have  been
amortized over an estimated useful life of five years and are fully amortized as
of December  31, 1997.  Amortization  expense for each of the three years in the
period ended December 31, 1997 amounted to  approximately  $29,000,  $35,000 and
$29,000, respectively.

(h) Revenue Recognition

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

      The Company  recognizes  software  license  revenue in accordance with the
provisions  of SOP No.  91-1,  Software  Revenue  Recognition.  Revenue from the
licensing of software is  recognized  upon shipment of the software if there are
no significant  post-delivery  obligations and  collectibility of the revenue is
assured.  If an acceptance period is required,  revenues are recognized upon the
earlier of customer  acceptance  or the  expiration  of 

                                      F-10
<PAGE>

the acceptance period,  unless an additional  performance target is mandated, in
which case revenue is recognized upon satisfaction of that target, in each case,
as defined in the applicable  software license  agreement.  In October 1997, the
American  Institute of Certified Public Accountants issued Statement of Position
("SOP") 97-2,  Software Revenue  Recognition.  The Company intends to adopt this
pronouncement  in fiscal 1998, as required by the SOP. The Company believes that
its revenue  recognition  practices are  consistent  with those  required by SOP
97-2.

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

(i) Postretirement Benefits

      The Company has no material obligations for postretirement  benefits.  The
Company  and  an  indirect  UK  subsidiary   each  maintain   separate   defined
contribution  benefit plans  covering all eligible  employees,  as defined.  The
plans  contain  provisions  allowing for  discretionary  Company  contributions.
Discretionary  Company contributions to the UK defined contribution plan for the
years  ended  December  31,  1995,  1996 and 1997 were  $306,000,  $266,000  and
$263,000 respectively.

(j) Foreign Currency Translation

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

(k) Income Taxes

     The Company  provides  for income  taxes in  accordance  with SFAS No. 109,
Accounting for Income Taxes.  Under the liability  method  specified by SFAS No.
109, a deferred  tax asset or liability is  determined  based on the  difference
between the  financial  statement  and tax bases of assets and  liabilities,  as
measured by the enacted tax rates in effect when these  differences are expected
to reverse. (See Note 8.)

(l)  Stock Options

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

(m) Net Income (Loss) Per Share

      Net income  (loss) per share is based on the  weighted  average  number of
common and common  equivalent shares  outstanding  during each period presented,
calculated in accordance with SFAS No. 128,  Earnings Per Share.  This statement
establishes  revised  standards  for  computing  earnings  per share  ("EPS") by
replacing  the  presentation  of primary EPS with a  presentation  of basic EPS.
Basic EPS  excludes  dilution  and is computed by dividing  income  available to
common  stockholders by the weighted average number of common shares outstanding
for the period.  SFAS No. 128 also requires  presentation  of diluted EPS on the
face of the statement of  operations.  Diluted EPS gives effect to all potential
common  shares  outstanding  during  the  period.  As a result,  all  previously
reported earnings per share have been restated.  (See Note 10.)

                                      F-11
<PAGE>

(n)    Fair Value of Financial Instruments

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

(o)    Other Accounting Pronouncements

   The Financial  Accounting  Standards  Board issued two new statements in June
1997. SFAS No. 130, Reporting  Comprehensive  Income,  establishes standards for
reporting and displaying of  comprehensive  income and its components.  SFAS No.
131,  Disclosures  about  Segments of an  Enterprise  and  Related  Information,
establishes  standards  for the way  that  public  business  enterprises  report
information and operating  segments in annual financial  statements and requires
reporting of selected information in interim financial reports.  Both statements
are effective for fiscal years  beginning  after December 15, 1997. The required
disclosures for SFAS No. 130 will be included in the Company's  quarterly report
on Form 10-Q for the first quarter of 1998.  The required  disclosures  for SFAS
No. 131 will be included in the Company's 1998 annual report on Form 10-K.

(2) ACQUISITIONS

      The Company has consummated the following acquisitions:
                                                                       Method
                                                                         of
          Entity            Date          Consideration              Accounting
       -----------------  ---------   ---------------------          ----------
         Computer          October        510,345 shares of            Pooling
       Specialties, Inc.    1994            common stock                 of
                                                                      Interests

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

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

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

       Prophet Group      December     $8.9 million of cash           Purchase
       Limited              1996

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

      For the  acquisitions  accounted for as poolings of interests,  previously
issued financial  information,  including the financial  position and results of
the operations of the Company,  have been  retroactively  restated for all prior
periods  presented  to give  effect  to  those  acquisitions.  For  acquisitions
accounted for as purchases, the purchase prices were allocated based on the fair
value of the tangible and intangible  assets acquired and  liabilities  assumed.
(See Note 1(g)).  Results of  operations  of those  companies  are included from
their respective dates of acquisition.  Unaudited proforma financial information
for Data  Supplies  Limited is not  presented  as the amounts  involved  are not
material to the financial statements.

                                      F-12
<PAGE>



(3) LINES OF CREDIT

      At December 31, 1997,  the Company had a $120 million U.S.  floor plan and
accounts  receivable line of credit available from Deutsche  Financial  Services
Corporation  ("DFSC").  The U.S. DFSC line of credit expires in March,  1999 and
provides for direct  payment by the lender to certain  Company  vendors.  In the
case  of  certain  U.S.   product   purchases,   the  borrowings  bear  interest
immediately, and the borrowings related to the remaining purchases bear interest
after the lapse of the applicable  interest-free  periods,  which vary generally
from 30 to 90 days.  The U.S.  DFSC  line of credit  limits  the  borrowings  to
defined percentages of eligible  inventories and accounts  receivable.  The U.S.
DFSC line of credit  agreement also contains certain  covenants  relating to net
income  and  debt-to-equity  ratios.  The U.S.  DFSC line of  credit is  secured
primarily by the  Company's  U.S.  inventory and accounts  receivable,  although
substantially  all of the  Company's  other  U.S.  assets  also are  pledged  as
collateral  on the  facility.  As of  December  31,  1997,  the  Company  was in
compliance  with all such  covenants.  Interest is payable  monthly at the prime
rate (8.5% at December 31,  1997) less 1%. As of December 31, 1997,  the Company
had $110.0 million outstanding under this line of credit, which approximated the
Company's  availability  as of that date.  As of December 31, 1997,  the Company
also had a $3,000,000  unsecured demand note outstanding under its facility with
DFSC on which  interest  is  payable  monthly,  at a rate of prime  plus 1%.  In
January 1998, the unsecured demand note was paid off.

      The Company also has a $9.5 million floor plan  financing  agreement  with
IBM Credit  Corporation  to support  purchases of IBM  products.  The  Company's
purchases  under  this  arrangement  bear  interest  at the prime  rate (8.5% at
December 31, 1997) plus 6.25% after the lapse of  interest-free  periods,  which
vary generally from 30 to 90 days.  The Company  typically  repays this facility
upon the lapse of the interest-free  periods. As of December 31, 1997, there was
approximately $1.2 million outstanding under this line of credit.

      At December 31, 1997,  Elcom Group Ltd. had a financing  arrangement  with
Deutsche  Financial  Services (UK) Ltd.  which  provides for borrowings of up to
(pound)30  million  (approximately  $49.5  million  based on  December  31, 1997
exchange  rates)  based upon DFSC  U.K.'s  determination  of  eligible  accounts
receivable. The financing arrangement expires in December, 1998. Borrowings bear
interest at a rate of 1.25% above the National Westminster Bank base rate (7.25%
at December 31, 1997), and are limited to defined percentages of and are secured
primarily by U.K. accounts receivable.  The DFSC U.K. facility  incorporates the
reporting and compliance covenants of the U.S. DFSC facility. As of December 31,
1997, there was  approximately  $39.7 million  ((pound)24  million)  outstanding
under this financing arrangement,  which approximated the Company's availability
as of that date.

(4)    LONG-TERM DEBT

Long-term debt consists of the following:
                                                               December 31,
                                                             1996       1997
                                                           -------     -------
Mortgage  payable to a bank,  interest  at the  
greater of the bank's  base rate (7.25% at 
December 31, 1997) plus 3% or 10.25%,  due in 
monthly  installments of principal plus interest 
through June 2005, secured by certain land and buildings   $465,000    $410,000

Less current portion                                         45,000      78,000
                                                           ========    ========
                                                           $420,000    $332,000
                                                           ========    ========


                                      F-13
<PAGE>



(5) STOCKHOLDERS' EQUITY

(a) Common Stock

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

(b) Preferred Stock

      The Company has authorized  10,000,000  shares of $.01 par value preferred
stock.  The  Company  had  designated  5,000,000  of such  shares  as  Series  B
convertible  preferred  stock (Series B preferred  stock) and in June 1995,  the
Company  designated  3,150,000  shares as Series C convertible  preferred  stock
(Series C  preferred  stock).  All  Series B and  Series C  preferred  stock was
converted into common stock prior to or upon completion of the Company's initial
public  offering in December,  1995. The Company has amended its  Certificate of
Incorporation to restore all previously issued preferred stock to authorized and
unissued  status,  with the Board of  Directors  authorized  to fix the  rights,
privileges,  preferences  and  restrictions  of  any  series  thereof  as it may
designate.

      All holders of preferred stock prior to conversion to common stock entered
into stock purchase  agreements with the Company.  Pursuant to the terms of such
preferred  stock  purchase  agreements,  holders of common stock  resulting from
conversion of preferred stock maintain limited registration rights.

(c) Stock Options

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

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

      On April 29, 1997, the Board of Directors adopted and on February 17, 1998
it amended, The 1997 Stock Option Plan of Elcom  International,  Inc. (the "1997
Plan").  The 1997 Plan provides  that an aggregate of up to 2,000,000  ISO's and
nonqualified options to acquire the Company's common stock may be granted to key
personnel,  directors  and  consultants  of the  Company  as  determined  by the
Compensation  Committee.  Under the terms of the 1997 Plan, ISO's are granted at
not less than the fair market value of the Company's common stock on the date of
grant.  The 1997 Plan also provides that the options are  exercisable at varying
dates, as determined by the Compensation Committee, and have terms not to exceed
ten  years.  To the  extent  the  1997  Plan is not  ratified  by the  Company's
stockholders at its 1998 Annual Meeting,  all ISO's granted  theretofore will be
deemed to be non-qualified options, and only nonqualified options may be granted
under the 1997 Plan thereafter.

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

                                      F-14
<PAGE>

      Information  relating to the  Company's  stock option plans during each of
the three years in the period ended December 31, 1997 is as follows:

                                                                        
                                                     Option        Weighted
                                       Number         Price         Average
                                      of Shares     per Share    Exercise Price
                                     ----------   -------------  -------------- 
Outanding, December 31, 1994.......   2,084,487   $ .11 -  3.63       $0.99
  Granted..........................   2,170,485    3.63 - 10.28        4.70
  Terminated.......................     (70,683)    .11 -  5.99        4.12
  Exercised........................      (9,963)    .39 -  3.63        1.22
                                     -----------   -------------   ----------
Outstanding, December 31, 1995.....   4,174,326    $.11 - 10.28       $3.17
  Granted..........................   3,101,975    5.31 - 14.25        6.63
  Terminated.......................    (323,461)    .11 - 10.28        5.90
  Exercised........................    (523,726)    .11 -  5.99        1.77
                                     -----------   -------------   ----------
Outstanding, December 31, 1996.....   6,429,114    $.11 - 14.25       $4.64
  Granted..........................   2,073,275    5.03 -  8.80        5.84
  Terminated.......................    (266,517)   4.00 - 14.25        7.19
  Exercised........................    (505,447)    .11 -  6.57        2.98
                                     -----------   -------------   ----------
Outstanding, December 31, 1997....    7,730,425    $.11 -  8.80       $4.73
                                     ===========   =============   ==========

Exercisable, December 31, 1995.....   1,321,739    $.11 -  3.63       $0.92
                                     ============  =============   ==========
Exercisable, December 31, 1996.....   2,032,325    $.11 - 10.28       $2.72
                                     ============  =============   ==========
Exercisable, December 31, 1997.....   3,665,547    $.11 -  8.80       $3.86
                                     ============  =============   ==========

      The following table summarizes information about stock options outstanding
as of December 31, 1997:

                                                              Options
                        Options Outstanding                  Exercisable
                -----------------------------------    -----------------------

                              Weighted                 
                               Average     Weighted                   Weighted
 Range of                     Remaining     Average                    Average
 Exercise          Number    Contractual   Exercise      Number       Exercise
  Prices        Outstanding     Life         Price     Exercisable      Price
------------    -----------  -----------    -------    -----------    --------
$0.11 - 0.39      926,335     5.15 years    $ 0.13       926,335        $0.13
 1.22 - 3.63      423,108     5.33 years      2.64       421,158         2.63
        4.00    1,099,389     7.13 years      4.00       897,362         4.00
        4.75      203,800     7.47 years      4.75       106,275         4.75
        5.03    1,547,300     9.33 years      5.03            -            -
 5.06 - 5.75      666,000     8.56 years      5.37       363,011         5.25
        5.81    1,099,130     8.67 years      5.81       306,171         5.81
 5.88 - 6.53      164,538     8.91 years      6.14        17,987         5.99
        6.57    1,064,575     8.29 years      6.57       411,748         6.57
 6.75 - 8.80      536,250     8.58 years      7.75       215,500         7.60
               ==========                              ==========       ======
                7,730,425                              3,665,547        $3.86
               ==========                              ==========       ======

      As of  December  31,  1997,  8,610,864  shares of common  stock  have been
reserved for issuance under the Company's  stock option plans and 750,000 shares
have been reserved for issuance  pursuant to warrants  issued in connection with
the Lantec purchase as described below.

                                      F-15
<PAGE>



      As  described  in  Note  1,  the  Company   adopted  the  disclosure  only
alternative under SFAS No. 123. Had compensation  costs for awards in 1995, 1996
and 1997 under the  Company's  stock-based  compensation  plans been  determined
based on the fair value at the grant dates  consistent with the method set forth
in SFAS No. 123, the effect on the  Company's  net income and earnings per share
would have been as follows:

                                     1995       1996      1997
                                    ------    -------    -------
                             (in thousands, except per share data)
 Net income (loss):
            As reported            $  (904)    $5,575    $10,288
            Pro forma              $(1,581)    $3,330    $ 5,981

 Net income (loss) per share:
            As  reported - basic   $ (0.05)    $ 0.21    $  0.38
            Pro  forma - basic     $ (0.08)    $ 0.13    $  0.22
            As  reported - diluted $ (0.05)    $ 0.19    $  0.35
            Pro  forma - diluted   $ (0.08)    $ 0.11    $  0.20
                     

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

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

                                1995     1996     1997
                               -------  ------   -------
Volatility                      53.52%   53.52%   60.25%
Risk-free interest rate          6.25%    6.2%     5.94%
Expected life of options       5 years  5 years  5 years
Expected  dividend yield         0%       0%       0%


      The weighted  average fair value per share of options granted during 1995,
1996 and 1997 were $2.57, $3.48 and $3.28 respectively.

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

      The Company's wholly owned  technology  subsidiary,  Elcom Systems,  Inc.,
also  maintained a stock  option plan  pursuant to which  187,500  shares of its
common stock were reserved for issuance. On April 30, 1997, the Company canceled
the Elcom Systems, Inc. Stock Option Plan under which no stock options were then
issued or outstanding.

(d) Warrants

      In  conjunction  with the  conversion of Series A preferred  stock and the
sale of  Series B  preferred  stock in 1994,  the  Company  issued  warrants  to
purchase  170,085  shares of the Company's  common stock at $3.63 per share.  In
conjunction  with the  Company's  initial  public  offering  of common  stock in
December, 1995, all such warrants were exercised.

      In June 1995,  the Company issued  warrants to purchase  750,000 shares of
the Company's common stock at $4.75 per share in connection with the purchase of
Lantec  (see  Note 2).  As of  December  31,  1997,  all of these  warrants  are
outstanding and exercisable.

                                      F-16
<PAGE>

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

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

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

(f) Open Market Stock Purchase Plan

      On February 23, 1996, the Board of Directors of the Company authorized the
purchase of up to an aggregate  of 600,000  shares of common stock to be held as
treasury  stock  specifically  for reissuance in connection  with  acquisitions.
Subject to legal  requirements,  the  purchases may be made from time to time in
the open market based on  then-existing  market  conditions.  As of December 31,
1997,  the  Company  has  not  acquired  any  treasury  stock  pursuant  to this
authorization.

(6) LEASES AND OTHER COMMITMENTS AND CONTINGENCIES

(a)  Leases

      The  Company  has  entered  into  capital  leases  for  various  software,
furniture,  computer,  telephone and other equipment. The lease terms range from
three to four years and, upon expiration, all leases provide purchase options at
a nominal price. Property,  equipment and software includes assets under capital
leases of $1,369,000  and  $2,200,000 and related  accumulated  amortization  of
$617,300  and  $881,885  as  of  December  31,  1996  and  1997,   respectively.
Amortization of leased assets is included in depreciation expense.

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

      Future minimum rental payments as of December 31, 1997, are as follows:

                                                  Capital     Operating
                                                  Leases        Leases
       Year Ending December 31,                  --------     ----------
       1998..................................    $774,000     $3,954,000
       1999..................................     776,000      3,537,000
       2000..................................     198,000      3,237,000
       2001..................................       --         1,920,000
       2002..................................       --           861,000
       Thereafter............................       --         7,532,000
                                               ----------    -----------
       Total minimum lease payments            $1,748,000    $21,041,000
                                                             ===========
         Less - Amounts representing interest     148,000
                                               ----------
         Present value of net minimum lease
           payments                            $1,600,000
         Current portion                          680,000
                                               ===========
        Long term portion                      $  920,000
                                               ===========

      Rent  expense  for  operating  leases  for each of the three  years  ended
December  31,  1995,  1996  and  1997  amounted  to  approximately   $1,654,000,
$2,808,000 and $4,042,000, respectively.

                                      F-17

<PAGE>

(b) Employment Contracts

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

(c) Contingencies

      On May 30, 1996,  the Company  filed a complaint in the Civil  Division of
the  Court of  Common  Pleas of Bucks  County  Pennsylvania  (Civil  Action  No.
96004108-22-05)  against John R. Kovalcik,  Sr., John R. Kovalcik, Jr., James R.
Kovalcik, Thomas M. Kovalcik and David E. Kovalcik (collectively the "Kovalciks"
or the "Defendants"), the principal former owners of Computerware Business Trust
("Computerware"), which the Company acquired by a merger in February 1995. As of
May 29, 1996, none of the Kovalciks,  certain of whom had been terminated by the
Company, were employed by the Company, including John R. Kovalcik, Jr., a former
Corporate  Executive Vice President and President of Catalink Direct,  Inc., who
resigned from the Company's  Board of Directors  effective  April 24, 1996.  The
Company's  complaint,  which was  subsequently  amended,  sought to: (1) enforce
confidentiality  agreements/obligations  and  prevent  the  misappropriation  of
proprietary Company  information and Company property,  (2) obtain a declaration
from the  Court  that  certain  of the  Kovalciks'  rights  under  stock  option
agreements  were limited;  (3) enforce the covenants of the merger  agreement to
determine  the  final  amount of the  purchase  price of  Computerware,  and (4)
recover  damages   arising  from  various  causes,   including  the  Defendant's
fraudulent misrepresentations, and certain breaches of the merger agreement.

      The Defendants  counterclaimed against the Company seeking to: (1) rescind
the merger  agreement on the purported  grounds that it was not legal, or in the
alternative to receive unspecified additional purchase price consideration;  (2)
receive unspecified damages for: fraud,  breaches of the merger agreement and of
employment  and  stock  option  agreements,  wrongful  termination,  conversion,
misappropriation  of trade secrets,  unfair competition and defamation;  and (3)
have the Court declare the status of the rights of certain Kovalciks under their
stock option agreements as being more favorable than the Company contended.

      On March 26,  1997,  the Company and certain of its  subsidiaries  entered
into a Final  Agreement  of  Settlement  and  Mutual  Release  of All Claims and
Demands with the former owners of  Computerware,  including the dismissal of all
litigation  pending  against the Defendants  and of their related  counterclaims
against the Company.  The essence of the settlement  includes, a confirmation of
the merger  transaction and confirms that the 1,326,417  shares of the Company's
common stock issued in 1995 is the appropriate and final amount of the stock due
and payable in connection with the transaction.  In addition, the Kovalciks have
agreed to certain volume and manner of sale limitations on their ability to sell
their shares of the Company's common stock. The settlement of these disputes and
related litigation did not have a significant impact on the Company's results of
operations.

                                      F-18
<PAGE>



(7) FINANCIAL INFORMATION BY GEOGRAPHIC AREA

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

                      
                       
      Year Ended
     December 31,      United      United
         1995          States      Kingdom   Eliminations   Consolidated
    ---------------   ---------   ---------   ----------     ----------
    Net sales         $ 219,396   $  92,027   $     --       $ 311,423 
                      =========   =========   ==========     ==========

    Net income(loss)  $  (2,128)  $   1,224   $     --       $    (904)
                      =========   =========   ==========     ========== 
    Identifiable                                                            
      assets          $ 119,675   $  56,625   $  (2,069)     $  174,231
                      =========   =========   ==========     ==========
      Year Ended
     December 31,
         1996
    ---------------
    Net sales         $ 435,133   $ 184,982    $    --       $  620,115
                      =========   =========    =========     ==========

    Net income        $   1,274   $   4,301    $    --       $    5,575 
                      =========   =========    =========     ==========
    Identifiable       
      assets          $ 161,890   $  98,879    $    --       $  260,769
                      =========   =========    =========     ==========
     Year Ended
     December 31,
         1997
    ---------------
    Net sales         $ 473,806   $ 286,330    $    --       $ 760,136 
                      =========   =========    =========     ========= 
   
    Net income        $   5,627   $   4,661    $    --       $  10,288
                      =========   =========    =========     =========
               
    Identifiable      
      assets          $ 224,718   $ 107,350    $    --       $ 332,068
                      =========   =========    =========     =========

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

(8)  INCOME TAXES

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

                 1995      1996      1997
                -------   ------    ------

       U.S.     $(1,978)  $1,992    $6,977
       Foreign    2,313    6,993     7,800
                =======   ======   =======
                $   335   $8,985   $14,777
                =======   ======   =======


                                      F-19
<PAGE>



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

                          1995     1996     1997
                         ------   ------   ------
Current tax provision
   U.S. Federal          $  --    $  --      $250
                                     
   State                    150      718      375
   Foreign                1,089    2,692    2,400
                         ------   ------   ------
     Total current tax   $1,239   $3,410   $3,025
      provision          ------   ------   ------
                         
Deferred tax provision (benefit)
   U.S. Federal             --       --      468
   State                    --       --      257
   Foreign                  --       --      739
                         ------   ------   ------
     Total deferred         --       --    $1,464
       tax provision     ------   ------   ------
Provision for income     $1,239   $3,410   $4,489
 taxes                   ======   ======   ======
                         

The  following  table  summarizes  the  significant  differences  between the US
Federal  statutory tax rate and the  Company's  effective tax rate for financial
statement purposes:

                                                    1995    1996   1997
                                                   ------  ------ ------
Statutory tax rate                                  34.0%   34.0%  34.0%
State taxes, net of U.S. federal tax benefit        29.6     5.3    2.8
Foreign taxes                                       (6.9)   (0.8)  (1.6)
Utilization of net operating                          
  loss carryforwards                                  --   (29.5) (21.0)
Non deductible goodwill and other                  313.2    29.0   16.2
                                                   ------  ------ ------
                                                   369.9%   38.0%  30.4%
                                                   ------  ------ ------

Deferred tax assets (liabilities)consisted of the
following as of December 31,(in thousands):
                                               1995        1996       1997
                                              ------      ------     ------
Deferred tax assets
   Depreciation                              $   -       $  228     $    -
   Nondeductible reserves                       724         358          -
   Capitalized inventory costs                   -           -          497
   State income taxes                            -           -          101
   Accrued expenses                              -           -          632
   Other temporary differences                  400       1,121         522
   Foreign net operating loss carryforwards     659          -           -
   Net federal and state operating 
     loss carryforwards                       2,746       1,619          - 
                                             ======      ======    ========
                                              4,529       3,326       1,752
                                             ======      ======    ========
Deferred tax liabilities
   Depreciation                                 170          -          374
   Other intangible assets                       -           -          620
   Catalog costs                                 -           -        1,067
   Other temporary differences                   -          671         834
                                             ------      ------    --------
                                                170         671       2,895
                                             ------      ------    --------
Valuation allowance                           4,359       2,655        -
                                             ------      ------    --------
Net deferred tax liabilities                 $    -      $   -     $(1,143)
                                             ======      ======    ========

                                      F-20
<PAGE>

      Prior to 1997, due to the  uncertainty  surrounding the realization of the
benefit of its  favorable  tax  attributes  in future tax  returns,  the Company
placed a full valuation  allowance against its net deferred tax asset.  Prior to
its February 1995 acquisition, Computerware (See Note 2) had elected to be taxed
as an S corporation under Section 1362 of the Internal Revenue Code.  Therefore,
prior to its  acquisition,  Computerware's  taxable  income was  reported on its
stockholders' tax returns.

      The Federal and State net  operating  loss  carryforwards  relative to the
Company's  operations as a C corporation  cumulatively  amount to  approximately
$3,300,000  at December 31, 1997.  Such net  operating  loss  carryforwards  are
attributable  to  deductions  for  nonqualifying   stock  option  exercises  and
disqualifying  dispositions  of  common  stock  acquired  upon the  exercise  of
incentive stock options.  The Federal and State net operating loss carryforwards
will begin to expire in 2008.

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

(9)RELATED PARTY TRANSACTIONS

(a)     Transactions with Affiliated Company

      As of December 31, 1997,  the Company owns  approximately  22% of ShopLink
Incorporated  ("ShopLink"),  a development stage company that licensed the PECOS
electronic  commerce system to service the home grocery and consumables  market.
The Company  accounts  for this  investment  under the equity  method,  with its
losses  limited to its  $4,000  initial  investment.  Accounts  receivable  from
ShopLink at December 31, 1996 and 1997 were $326,135, and $185,250 respectively.

      As of September  30, 1997,  the Company sold options to acquire its entire
equity ownership interest in ShopLink.  The Company received $418,000 in payment
for the options,  which may be exercised  through  March 31, 1999. If exercised,
the Company could  receive  payments of up to an  additional  $4.2 million.  The
Company has included  the $418,000  received in payment for the options in other
deferred liabilities, in the accompanying consolidated balance sheets.

(b)  Employee Loans

      In certain instances,  the Company  periodically makes loans to certain of
its officers and employees.  These loans are included in accounts  receivable in
the  accompanying  consolidated  balance  sheets and amounted to $1,625,000  and
$1,082,000 at December 31, 1996 and 1997, respectively.  Generally,  these loans
are  collateralized  by the  employees'  shares of common  stock or  options  to
acquire  common stock,  and accrue  interest  either at a fixed rate of 8% or at
rates of prime or prime plus 1%.

                                      F-21
<PAGE>



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

Basic and diluted earnings per share were calculated as follows:

Basic                                       1995     1996     1997
-------------------------                 -------  -------  -------
                           
Net income (loss)                          $(904)  $5,575   $10,288
                                          =======  ======   =======

Weighted  average shares outstanding      18,195   26,363    26,937
                                          =======  ======   =======

Basic net income  (loss) per share        $(0.05)   $0.21     $0.38
                                          =======  ======   =======

Diluted
-------------------------
Net income (loss)                          $(904)  $5,575   $10,288
                                          =======  ======   =======

Weighted  average shares outstanding      18,195   26,363    26,937


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

Weighted  average shares as adjusted      18,195   29,739    29,461
                                          =======  ======    ======

Diluted net income (loss) per share       $(0.05)   $0.19     $0.35
                                          =======  ======    ======

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

(11) QUARTERLY INFORMATION FINANCIAL DATA (UNAUDITED)

(in thousands, except per
share data)
                                 First   Second    Third     Fourth
                                Quarter  Quarter   Quarter   Quarter    Year
Year Ended December 31, 1996   -------- --------  --------  --------  --------
Net sales....................  $141,416 $146,305  $156,851  $175,543  $620,115
Gross profit.................    16,345   17,040    17,332    19,322    70,039
Operating profit.............     2,240    2,514     2,736     3,798    11,288
Net income ..................     1,124    1,152     1,310     1,989     5,575
Basic net income per share...      $.04     $.04      $.05      $.08      $.21
Basic weighted average        
  shares outstanding.........    26,022   26,363    26,495    26,568    26,363
Diluted net income per share.      $.04     $.04      $.04      $.07      $.19
Diluted weighted average      
  shares outstanding.........    29,142   30,079    29,435    29,950    29,739

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

                                      F-22

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

                                                                         Page
                                                                      Reference

Report of Independent Public Accounts on Schedule                         S-2

Schedule II - Valuation and Qualifying Accounts for the Years Ended
         December 31, 1995, 1996 and 1997                                 S-3


                                      S-1

<PAGE>






              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE




To Elcom International, Inc.

         We  have  audited,  in  accordance  with  generally  accepted  auditing
standards,  the  consolidated  balance sheets of Elcom  International,  Inc. and
subsidiaries  as of  December  31, 1996 and 1997,  and the related  consolidated
statements of  operations,  stockholders'  equity and cash flows for each of the
three years in the period ended  December 31, 1997,  included in this Form 10-K,
and have issued our report thereon dated February 17, 1998. Our audits were made
for the  purpose  of forming  an  opinion  on the basic  consolidated  financial
statements taken as a whole. The schedule listed in the index to schedule is the
responsibility of the Company's  management and is presented for the purposes of
complying with the Securities and Exchange  Commission's  rules and are not part
of the basic consolidated financial statements. This schedule has been subjected
to the  auditing  procedures  applied  in our  audits of the basic  consolidated
financial  statements  and,  in our  opinion,  fairly  states  in  all  material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.


/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP



Boston, Massachusetts
February 17, 1998

                                      S-2



<PAGE>

                                                                    SCHEDULE II


                   ELCOM INTERNATIONAL, INC. AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS
              For the years ended December 31, 1995, 1996 and 1997
                                 (in thousands)


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

Year ended December 31, 1995    $  360       $  472      $  877         $1,709
                                =======      =======     =======        ======


Year ended December 31, 1996    $1,709       $2,586      $   17         $4,312
                                =======      =======     =======        ======


Year ended December 31, 1997    $4,312       $3,058     $(1,896)        $5,474
                                =======      =======    ========        ======

(1) Includes allowances for doubtful accounts acquired through acquisition,  net
of write-offs.


                                 Balance                               Balance
Deferred Tax                    Beginning                                End
Valuation Accounts              of Period   Additions  Utilization    of Period
----------------------------    ---------   ---------   ---------     ---------
Year ended December 31, 1995    $  1,973     $ 2,386     $    --        $4,359
                                ========     =======     =======        =======


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


Year ended December 31, 1997    $  2,655     $   --      $(2,655)       $   --
                                ========     =======     ========       =======


                                      S-3