form10-k.htm

10-K 1 form10-k.htm FORM 10-K form10-k.htm

UNITED STATES

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 March 31, 2006

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from ___to___.

Commission file number: 0-28926

ePlus inc.

(Exact name of registrant as specified in its charter)

	Delaware		54-1817218
	(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

13595 Dulles Technology Drive, Herndon, VA 20171-3413

(Address, including zip code, of principal offices)

Registrant’s telephone number, including area code: (703) 984-8400

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act.

Yes ¨ No x

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 (§ 229.405 of this chapter) 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. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”

in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

The aggregate market value of the common stock held by non-affiliates of ePlus, computed by reference to the closing price at which the stock was sold as of September 30, 2005 was $59,854,541. The outstanding number of shares of common stock of ePlus as of July 31, 2007, was 8,231,741.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference into the indicated parts of this Form 10-K:

None

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			Page

Cautionary Language About Forward-Looking Statements			2
Explanatory Note			3


Part I

Item 1.	Business	12
Item 1A.	Risk Factors	21
Item 1B.	Unresolved Staff Comments	27
Item 2.	Properties	27
Item 3.	Legal Proceedings	29
Item 4.	Submission of Matters to a Vote of Security Holders	30

Part II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	31
Item 6.	Selected Financial Data	33
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	63
Item 8.	Financial Statements and Supplementary Data	63
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	63
Item 9A.	Controls and Procedures	63
Item 9B.	Other Information	67

Part III

Item 10.	Directors and Executive Officers of the Registrant	68
Item 11.	Executive Compensation	71
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	74
Item 13.	Certain Relationships and Related Transactions	76
Item 14.	Principal Accounting Fees and Services	77

Part IV

Item 15.	Exhibits and Financial Statement Schedules	78

Signatures		84

CAUTIONARY LANGUAGE ABOUT FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are made in reliance upon the protections provided by such acts for forward-looking statements. Such statements are not based on historical fact, but are based upon numerous assumptions about future conditions that may not occur. Forward-looking statements are generally identifiable by use of forward-looking words such as “may,” “will,” “should,” “intend,” “estimate,” “believe,” “expect,” “anticipate,” “project,” and similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements made by or on our behalf. Any such statement speaks only as of the date the statement was made. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware. Actual events, transactions and results may materially differ from the anticipated events, transactions, or results described in such statements. Our ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, the matters set forth below.

Although we have been offering information technology (“IT”) financing since 1990 and direct marketing of IT products since 1997, our comprehensive set of solutions—the bundling of our direct IT sales, professional services, and financing with our proprietary software—has been available since 2002. Consequently, we may encounter some of the challenges, risks, difficulties, and uncertainties frequently faced by companies providing new and/or bundled solutions in an evolving market. Some of these challenges relate to our ability to:

manage the diverse product set of rapidly-evolving solutions in highly-competitive markets;

increase the total number of users of bundled services by cross-selling within our customer base and gain new customers;

adapt to meet changes in markets and competitive developments;

maintain and increase advanced professional services by retaining highly-skilled personnel and vendor certifications;

integrate with external IT systems including those of our customers and vendors; and

continue to update our software and technology to enhance the features and functionality of our products.

We cannot be certain that our business strategy will be successful or that we will successfully address these and other challenges, risks, and uncertainties. For a further list and description of various risks, relevant factors and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this document.

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Explanatory Note

This Annual Report on Form 10-K contains the restatement of our Consolidated Balance Sheet as of March 31, 2005 and our Consolidated Statements of Operations, Stockholders’ Equity and Cash Flows for each of the years ended March 31, 2005 and 2004, for each of the four quarters in the fiscal year ended March 31, 2005 and for the first three quarters in the fiscal year ended March 31, 2006 for the effects of errors in accounting for stock options and other items. See Note 2, “Restatement of Consolidated Financial Statements” to the Consolidated Financial Statements contained elsewhere in this document.

This Annual Report also presents the effects of the restatement on our Selected Consolidated Financial Data in Item 6, “Selected Financial Data” as of and for the years ended March 31, 2005, 2004, 2003 and 2002, and the amendment of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” presented in our Form 10-K for the fiscal year ended March 31, 2005 as it related to the fiscal years ended March 31, 2005 and 2004.

Management has determined that we did not maintain effective control over (1) the granting of stock options and the related recording and disclosure of share-based compensation expense under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations issued by the Financial Accounting Standards Board (“FASB”) and Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” and (2) the proper classification of amounts on the Statements of Cash Flows. The control deficiencies identified constituted material weaknesses in internal control over financial reporting as of March 31, 2006. See Item 9A, “Controls and Procedures,” for a description of these material weaknesses.

Stock Option Accounting Restatement

Background

As previously disclosed, our Chief Executive Officer (“CEO”) received a letter, dated June 20, 2006, from a stockholder raising concerns about 450,000 options awarded in 2004 to our four senior officers (“2004 Options”). On June 21, 2006, our CEO forwarded the letter to the Chairman of the Audit Committee. On June 23, 2006, the Audit Committee commenced a voluntary investigation (the “Audit Committee Investigation” or “Investigation”) of the issues raised concerning the 2004 Options. Subsequently, the Audit Committee Investigation was expanded to cover all of our stock option grants since our initial public offering (“IPO”) in 1996 through August 10, 2006 (the “Relevant Period”), and the historical practices related to stock option grants. The Audit Committee retained independent legal counsel, who in turn retained forensic accountants, to assist in the Investigation.

With the assistance of independent counsel, the Audit Committee obtained and reviewed corporate books and records relating to option grants since our IPO, including relevant stock option plans, option agreements, minutes and written consents of our Board of Directors (“Board”) and Compensation Committee, relevant public filings and other available documentation. In addition, independent counsel for the Audit Committee reviewed a large volume of potentially relevant emails and electronic documents and interviewed 28 individuals, many on multiple occasions. The Audit Committee’s independent counsel developed an exhaustive search term list, which was applied to electronic data retrieved. Approximately 79 gigabytes of electronic data was located and reviewed. The Audit Committee met frequently throughout the course of its Investigation.

On August 11, 2006, we filed a Form 8-K which disclosed that based on its review and assessment, the Audit Committee preliminarily concluded that the appropriate measurement dates for determining the accounting treatment for certain stock options we granted differ from the recorded measurement dates used in preparing our Consolidated Financial Statements. The Audit Committee further determined that certain stock option grants or modifications of stock option grants that were not in accordance with our stock-based compensation plans should have been accounted for using variable plan accounting for the duration of the options. As a result, non-cash stock-based compensation expense should have been recorded with respect to these stock option grants. Accordingly, it was further disclosed that we would restate our previously issued financial statements for the fiscal years ended March 31, 2004 and 2005, as well as previously reported interim financial information, to reflect additional non-cash charges for stock-based compensation expense and the related tax effects in certain reported periods. We further disclosed that for the above-stated reasons, certain of our prior financial statements and the related reports from our independent registered public accountants, earnings statements and press releases, and similar communications issued by us should no longer be relied upon.

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Summary of the Restatement

As stated above, through our fiscal year ended March 31, 2006, we accounted for share-based compensation granted under our stock option plans using the recognition and measurement provisions of APB 25 and related interpretations and follow the disclosure requirements under SFAS No. 123. Under APB 25, a company was not required to recognize compensation expense for stock options issued to employees if the exercise price of the stock options was at least equal to the quoted market price of the company’s common stock on the “measurement date.” APB 25 defined the measurement date as the first date on which both the number of shares an individual employee was entitled to receive and the option or purchase price, if any, were known.

The restatement in this Form 10-K principally reflects additional non-cash stock-based compensation expense and related tax effects under APB 25 and related interpretations, our historical accounting method, relating to our historic stock option practices. The total impact of the restatement, net of tax effects, through March 31, 2005, was $3.6 million.

As a result of the Audit Committee Investigation, the Audit Committee determined that:

subsequent to July 1998, the Stock Incentive Committee (“SIC”) was not formally approved to administer the stock option plans. Nonetheless, the SIC continued to grant stock options as disclosed in the proxy statements. We intend to honor the awards made to employees by the SIC;

the 2004 Options, which were the initial subject of the Audit Committee Investigation, were effectively awarded (i.e., all necessary granting actions were completed) by the Compensation Committee in April 2004. The Compensation Committee, believing that the options had not been effectively awarded in April 2004, approved a new award of the same options in November 2004, at the then fair market value of the stock, which was lower than the April value. Because the original award of options was determined to be effective in April 2004, the November 2004 approval constituted a modification of the earlier awards to provide for a lower exercise price. Such modification was not in accordance with the governing stock option plan. As described elsewhere herein, these options have been cancelled. Because the awards were determined to be originally approved and granted as of April 2004, the Forms 4 filed by our four senior officers with respect to these options and the Form 8-K filed by us inaccurately describe the options. Moreover, the Forms 4 were not timely filed;

on one occasion in 1997, two occasions in 1998, and in each of the quarters from late 2000 to early 2003 in which options were granted, the date and exercise price of certain stock options were determined with hindsight to provide a more favorable exercise price for such grants. These options were priced at the lowest closing price during the prior quarter, and not, as required by the applicable stock option plans, at the closing price on the date the options were actually awarded. Recipients of such quarterly low priced options included employees, management and directors. Two members of management, who were not involved in the accounting function, as well as our then head of Human Resources, were involved in implementing this practice;

certain grants to non-employee directors were not made on the dates specified by the then-applicable stock option plans;

the measurement date we used for accounting purposes for certain stock option grants was not accurate because all the required granting actions were not completed as of the original grant date. In addition, for several option grants, the accounting consequences of modifications to the original awards, or the presence of employee performance criteria, were not properly applied;

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our internal controls, system of reporting, application of accounting principles generally accepted in the United States (“U.S. GAAP”) and documentation with respect to option awards were inadequate. See Item 9A, “Controls and Procedures;” and

there was no evidence of falsified corporate records of meetings, consents or “phantom” options. Nor was there any evidence of the destruction of documents.

We performed a review of the treatment of stock option grants as part of our internal review referred to above for financial reporting purposes. Based on the individual facts and circumstances, we concluded that the exercise price for a number of option grants during the Relevant Period were below the fair market value of our common stock on the revised measurement date of the grant. This resulted from certain option grant dates having been established prior to the completion of all the final granting actions necessary for those grants. In some cases, the exercise price and date of the grant was determined with hindsight to provide a more favorable exercise price for such grants at quarterly or monthly low stock prices. The grants in question included grants made to newly hired employees, annual director grants, grants made to employees in connection with certain acquisitions, and discretionary grants made to officers, non-employee and employee directors, and rank and file employees. Applying the revised measurement dates to the impacted stock option grants resulted in a stock-based compensation charge if the fair market value of our common stock as of the revised measurement date exceeded the exercise price of the option grant, in accordance with APB 25.

We determined revised measurement dates for those option grants with incorrect measurement dates and recorded stock-based compensation expense to the extent that the fair market value of our stock on the revised measurement date exceeded the exercise price of the stock option, in accordance with APB 25 and related FASB interpretations. As such, we recorded stock-based compensation expense in our historical financial statements through March 31, 2005 totalling $5.2 million, as well as the tax-related impact resulting from the stock-based compensation adjustments of $1.6 million. Additionally, we restated both basic and diluted weighted average shares outstanding for changes in measurement dates resulting from the Investigation. The combination of recording stock-based compensation expense and restating our weighted average shares outstanding has resulted in restated basic and diluted earnings per share (“EPS”).

We adopted a methodology for determining the most likely appropriate accounting measurement dates for all stock option grants. We reviewed all available documentation and considered all facts and circumstances for each award and attempted to identify the date at which the award was most likely authorized and approved and the recipient, number of shares and price were approved and determined with finality. As such, we adopted the following framework for determining the revised historical measurement dates of our employee stock option grants and have applied this framework based on the facts, circumstances and availability of the documentation for each grant.

Step 1

We reviewed, as available, the documents noted below for sufficient evidence that the approval and terms of the stock options were determined with finality:

Board meeting minutes, resolutions and written consent actions;

Compensation Committee and SIC meeting minutes and resolutions;

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offer letters signed by an authorized approver and the recipient and stating the number of shares and exercise price;

internal communications from an authorized approver stating the recipient, number of shares and exercise price;

executed acquisition agreements stating the number of shares and the option price;

historical stock prices as reflected on Nasdaq to determine when stock price based performance vesting occurred;

public filings as they relate to awards granted in connection with the IPO; and

all stock option plans in place over the Relevant Period.

We reviewed minutes, consents, resolutions, offer letters and other corporate records for the purpose of validating their accuracy, and at no time determined that any of the records were altered or appeared to have not occurred as recorded. While we considered the above documents in order, all documents and all facts and circumstances were considered when determining the revised measurement date. Measurement dates for approximately 52.3% of the total number of grants made during the Relevant Period were determined based on the documentation listed in Step 1 above. In instances where the above documentation was not available or provided ambiguous information, we proceeded to Step 2.

Step 2

If after review of the available documents as listed in Step 1, there was insufficient documentation to select the date at which the recipient, number of shares and price were determined with finality, we attempted to select the most likely date at which the terms were determined with finality. In considering the most likely date, we considered all available documentation and all facts and circumstances.

In addition to the documents listed in Step 1, we examined the following documents:

all internal and external communications including emails, offer letters, memos, faxes, letters and handwritten notes;

acquisition agreements that do not contain recipients, exercise price and number of shares;

outside stock option administrator transaction data (e.g. data from First Union, Wachovia, or AST Equity Plan Solutions (“AST”));

management practice regarding the annual non-employee director grants; and

stock option agreements hand dated or not hand dated.

In conjunction with all available documentation, we considered the following facts and circumstances:

our stock option granting practices;

acquisition dates;

new hires start dates;

effective dates of non-employee director appointments to the Board;

our stock performance; and

all other available information.

Selecting the date at which the most likely granting actions occurred with finality required a significant amount of judgment. While we considered all the documents and facts in the order noted above, the level of reliance on each type of document depended on the facts and circumstances surrounding each award. In some instances, we grouped awards based on similar characteristics and similar underlying facts and circumstances. In these instances, we treated all of the grouped awards in a uniform manner. Measurement dates for approximately 40.1% of the total number of grants made during the Relevant Period were determined based on the documentation listed in Step 2 above.

Step 3

If there was insufficient evidence, after reviewing all available documentation and all facts and circumstances listed in Step 1 and Step 2, to select a specific date at which the recipient, number of shares and price were approved and determined with finality, we used the earliest of the dates below. We believe that the required granting actions would have occurred with finality ‘no later than’ at each of the following dates:

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stock option agreement signed by a member of the SIC and hand dated by the optionee unless other facts and circumstances exist that present ambiguity as to the accuracy of the hand date;

the legible ‘run date’ of the stock option administrator report; and

subsequent Form 10-Q or 10-K filing date. As of this date and pursuant to our stock option granting process, an authorized approver would have approved the awards which would have resulted in the administration of the awards to include input into the stock option administration software. Quarterly reports were run from the stock option administration software and reconciled to the general ledger and the stock registrar’s reports and the EPS calculation. This reconciliation resulted in the stock-based compensation and the EPS disclosures, which included the awarded shares as filed in the Form 10-Q or Form 10-K.

Measurement dates for approximately 7.6% of the total number of grants made during the Relevant Period were determined based on the documentation listed in Step 3 above.

We also determined that we should have recorded stock-based compensation expense associated with the modification of certain stock option grants which resulted in the application of variable accounting under FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation” (“FIN 44”). The modified grants included certain grants made to newly hired employees, annual director grants, grants made to employees in connection with an acquisition, and discretionary grants made to officers, employee directors, and rank and file employees. For these grants, documentation exists that supports the completion of all the final granting actions necessary for an original grant and measurement date. However, certain of the the terms of the awards were subsequently modified.

Income and Payroll Tax Related Matters

In certain instances where a revised measurement date was applied to those stock options classified as incentive stock options (“ISO”), in accordance with United States tax rules it had the effect of disqualifying the ISO tax treatment of those stock options, causing those stock options to be recharacterized as non-qualified options. For purposes of assessing the tax impact of the accounting change, we concluded that the grant date for tax purposes is the same as the measurement date for financial reporting purposes. The recharacterization of the ISOs to non-qualified status resulted in a failure to withhold certain employee payroll taxes and consequently we have recorded an adjustment to salaries and benefits, along with an adjustment for penalties, based on the period of exercise. In subsequent periods in which the liabilities were legally extinguished due to statutes of limitations, the payroll taxes and penalties were reversed, and recognized as a reduction in the related functional expense category in our consolidated statements of operations. The fluctuations in the table below for payroll taxes and related penalties are the result of (1) the timing of stock option exercises, and (2) the reversals of expenses previously recorded due to the expiration of these statutes of limitations.

In addition, we have recorded a net income tax benefit of approximately $2.0 million in connection with the stock-based compensation related expense during the period from fiscal years 1997 to 2005. This tax benefit has resulted in an increase of our deferred tax assets for all affected stock options prior to the exercise or cancellation of the related options. Upon exercise or cancellation of the underlying options, the excess or deficiency in deferred tax assets is written-off to either expense or additional paid-in capital in the period of exercise or cancellation.

The table below under “Summary of Impact of Restatement Adjustments for Historical Option Grants” shows income tax benefits recorded in relation to the non-cash stock-based compensation adjustments.

Restatement Adjustments for Historical Option Grants

With the completion of the Audit Committee Investigation, previously discussed, we determined that errors had occurred in the accounting for share-based compensation. Specifically, we determined that 661 of the total 759 individual grants made from our IPO through August 10, 2006 used incorrect measurement dates or were modified in such a way as to cause variable plan accounting. We recorded pre-tax compensation expense of $5.2 million in the aggregate over the fiscal years March 31, 1997 through March 31, 2005, as presented in the table below:

Summary of Impact of Restatement Adjustments for Historical Option Grants

Fiscal Year	Share-Based			Payroll			Payroll			Income Tax			Total
	Compensation			Tax Due			Withholding			Provision			Adjustments,
	Expense			On			Tax			(Benefit)			Net of Tax
				Options			Penalty			Related to
							On			Share-Based
							Exercises			Compensation
										and Payroll
										Taxes
(in thousands)
1997	$	81		$	-		$	-		$	(31	)	$	50
1998		137			-			-			(53	)		84
1999		149			-			-			(57	)		92
2000		962			568			121			(564	)		1,087
2001		990			57			12			(364	)		695
2002		1,602			-			-			(622	)		980
2003		465			34			8			(138	)		369
Cumulative effect on April 1,2003 opening retained earnings		4,386			659			141			(1,829	)		3,357
2004		810			213			48			(409	)		662
2005		(20	)		(503	)		(104	)		209			(418	)
Total	$	5,176		$	369		$	85		$	(2,029	)	$	3,601

See Note 2, “Restatement of Consolidated Financial Statements,” to our Consolidated Financial Statements for a detailed summary of adjustments.

Of the gross $5.2 million of incremental compensation expense for fiscal years 1997 through 2005, approximately $3.8 million was related to options granted to employees who were neither our executive officers nor our directors at the time the grants were made and approximately $1.4 million related to various options granted to individuals who were our executive officers or directors at the time the grants were made.

Our Process for Granting Stock Options

Stock Incentive Committee

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Beginning in 1996, two employee directors, Bruce Bowen and Phillip G. Norton, began awarding options to employees under the authority of the SIC as prescribed by the provisions of our then current stock compensation plans (in its original form and as amended, collectively, the “1996 Plans”).

Under the terms of the 1996 Plans, a majority of the members of the SIC was required to approve each stock option grant. In practice, Mr. Bowen and Mr. Norton discussed each stock option award prior to instructing the human resources manger to administer the awards. Accordingly, for purposes of selecting revised measurement dates, we considered documentation demonstrating approval by either Mr. Bowen or Mr. Norton as sufficient evidence of approval during the Relevant Period.

Under the terms of our 1998 Long Term Incentive Plan (the “LTIP”), the Compensation Committee was required to approve any awards. In practice, however, the SIC continued to administer the awards under our current stock compensation plan, the Amended and Restated 1998 Long Term Incentive Plan (the “Amended LTIP,” and together with the LTIP, the “1998 Plans”). The LTIP and Amended LTIP permit a delegation of authority to one or more employee-directors to issue options in certain cases. While we have been unable to locate a document such as Board minutes or a unanimous written consent reflecting a delegation of such authority, our public disclosures provided that the SIC was authorized to award stock, and various stock options and rights and other stock-based compensation grants under the 1998 Plans.

Even if the SIC did not have actual authority to grant awards, we have historically honored and intend to continue to honor the stock options. Moreover, since (1) the SIC was comprised of two employee directors, who could have been given delegated authority pursuant to the amended terms of the LTIP, (2) the directors were our two top executives, (3) we actually administered the stock options, (4) we instructed our transfer agent to issue the stock options, (5) our proxy statement stated that the SIC had authority, and (6) the employees were able to exercise the stock options, we believe that the SIC had the implicit authority to grant stock option awards.

The SIC met on an ad hoc basis to determine to which employees to grant stock options. In addition to one occasion in which all employees were awarded options, the SIC considered awarding options to (1) employees of companies we acquired in order to enhance employee retention, (2) key ePlus employees in order to provide incentives and enhance retention, and (3) new employees in connection with their hiring.

Administration and Tracking of Stock Options

Historically, our human resources manager prepared the stock option agreements and either administered the stock options internally or communicated with outside stock option administrators who maintained the detail records of outstanding stock options. Our human resources manager was primarily responsible for retrieving the executed agreements from the employees.

Our human resources manager would receive instruction from Mr. Bowen or Mr. Norton for all grants prior to entering them in our internal stock option system or communicating with outside stock option administrators, as applicable. For those awards that required Board or Compensation Committee approval, such as options granted to the SIC members, Mr. Bowen or Mr. Norton usually provided the applicable Board or Compensation Committee minutes to our human resources manager.

The stock options were tracked on a spreadsheet administered by the accounting department for the period from our IPO in 1996 through 1997. In late 1997 to early 1998, we licensed stock option administration software (“SOA Software”) that was used internally by our human resources manager to enter and track all the stock option information. This software was used through April 2000.

In April of 2000, we solicited the services of First Union to process the stock option administration externally. First Union utilized the same SOA Software to maintain the stock option data. The stock option files from our SOA Software were exported and sent to First Union in May of 2000 to upload into their system. Our human resources manager sent the stock option update information to First Union primarily by email, but sometimes by fax and on occasion by phone. The data sent to First Union, usually no less than quarterly, consisted of any stock options that were granted, employee terminations and employee address changes. First Union eventually merged with Wachovia. Effective June 30, 2006, the shareholder services business at Wachovia was purchased by AST.

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Types of Awards

Annual Non-Employee Director Grants

These are grants relating to the annual awards made to non-employee directors in the Relevant Period. The stock option awards to outside directors were provided for as automatic grants under the terms of the 1996 Plans and the 1998 Plans. The administration of awards to outside directors was not consistently performed in accordance with the provisions of the applicable plans until 2003. The 1996 Plans provided that stock option grants were to be awarded on the anniversary date of a director’s admission to the Board. This provision changed in the 1998 Plans to provide for the stock option grants to be awarded on the date following the annual stockholder meeting. A certain number of the awards issued after the change in the provision in the stock plans were administered after the change in the stock option plan as if the appropriate grant date was the anniversary date of our IPO, November 20. In addition, certain awards were issued on the director’s new appointment anniversary date or the date following the annual stockholders meeting.

Until 2003, management believed that the annual awards should be given on the anniversary of the IPO, November 20. We believe this thought process came about because the initial two directors were appointed as of the IPO date, November 20, 1996. Consequently, for two years, management awarded the options appropriately on November 20 which was also the anniversary of the IPO. This process was correct for the initial two directors until the adoption of the 1998 Plans which provided for the options to be granted the day after the annual meeting. However, under the 1996 Plans, as other directors were appointed, management continued to grant the awards on the IPO anniversary even though the plan required that they be granted on the anniversary of the director’s appointment. For purposes of determining the revised measurement date for the awards incorrectly issued at the IPO anniversary date instead of the day after the annual meeting, we selected the approach of relying on the process in which management believed was correct, which was the IPO anniversary date, as that was the genesis of the granting action for options granted prior to 2003. Beginning in 2003, management began processing the annual grants on the day after the annual meeting pursuant to the 1998 Plans.

Acquisition Grants

These are grants relating to options awarded to new employees who joined us by way of an acquisition. These options were not replacement options for options that existed prior to the acquisition. In our acquisitions prior to 2002, often times, the prior owners of the selling company would negotiate employment benefits for their key employees to induce them to stay during the acquisition. Many times, stock options were negotiated prior to acquisition and the specific optionees and number of shares awarded to each optionee were documented in a letter of intent or other documentation created during the acquisition process. In some cases, the request was brought before the Compensation Committee to be voted upon in conjunction with the overall presentation of the acquisition opportunity.

For purposes of the granting process, we grouped acquisition-related grants together and approved and administered them on an acquisition-by-acquisition basis. In some cases, the stock option agreements contained handwritten signature dates by the recipients. Because we processed and administered these grants as a group, it is reasonable to rely upon the earliest handwritten signature date in the group as the ‘no later than’ date on which the recipients, number of shares and exercise price were approved with finality for the entire tranche. Therefore, we believe that the earliest handwritten signature date of a stock option agreement in a tranche represents a reliable level of evidence for the entire tranche on which to base the revised measurement date. In cases where there was a spread of dates between the stock option agreement handwritten signature dates by recipients, we believe that, because of the characteristics of the acquisition-type grants and the process by which we administer the grants, the reliability of the earliest handwritten signature date is not diminished.

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New Hire Grants

These are grants relating to options awarded to new employees who did not join us as a result of an acquisition. Candidates for hire received an offer letter, which contained, among other things, the candidate’s name, title of the position, tentative start date, salary and information regarding a grant of stock options, if any. Most offer letters contained the number of options to be granted but did not specify when the options would be granted or the price of the options. There are several instances, occurring in 2001, in which the offer letter specifies that the strike price will be set for the lowest closing price between the date of hire and the end of the quarter.

Prior to March 2003, some offer letters were signed by executives of the subsidiary whom did not have the authority to grant stock options. In these instances, the subsidiary executives contacted either Mr. Bowen or Mr. Norton, primarily by phone, in order to obtain approval to grant the options. Once approval was obtained, Mr. Bowen or Mr. Norton would instruct our human resources manager to issue the awards.

There are instances in which an incorrect measurement date had been used for the accounting of certain of these grants as not all of the required granting actions had been completed as of the original grant date or as the stock option administration did not occur consistent with the underlying documentation. As such, we applied our three-step methodology, as described above, to determine the most likely appropriate accounting measurement dates for the stock option grants.

Discretionary Grants

These grants include all other stock option awards not otherwise included in the director, acquisition or new hire grants. Discretionary grants were awarded to employee directors, non-employee directors, officers, and rank-and-file employees. Discretionary awards were communicated to our human resources manager through the Board or Compensation Committee minutes or a member of the SIC.

Employee Directors (SIC Members). On three occasions, other than the IPO awards, discretionary grants were made to the members of the SIC, Mr. Norton and Mr. Bowen. Members of the SIC did not have the authority to grant options to themselves. Mr. Norton and Mr. Bowen would work with the Board or Compensation Committee and would receive written approval in the form of a memo or meeting minutes.

Non-Employee Directors, Officers and Rank-and-File Employees. The specific facts and circumstances surrounding these discretionary awards vary from grant to grant. We did not have a written policy other than the plans regarding the issuance and administration of stock option awards and, due to the lack of contemporaneous documentation, we are unable to definitively state the specific policies and practices surrounding these awards. We believe the common practice was to obtain an authorized approval from the Board, the Compensation Committee or the SIC members. Once approval was obtained and the number of shares and price were determined, Mr. Bowen or Mr. Norton would communicate the information to our human resources manager who would administer the award.

Additional Information

Note 2, “Restatement of Consolidated Financial Statements” of the Notes to Consolidated Financial Statements in this Form 10-K sets forth the impact under APB 25 of recognizing additional stock-based compensation expense and related tax effects as a result of historic stock option practices.

Because determining the revised measurement date is subjective and uncertain, we performed a sensitivity analysis to determine the impact of using alternate revised measurement dates for grants for which determining the appropriate measurement date involved significant judgment. See “—Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies,” presented in Item 7 of this Form 10-K, for information regarding the incremental stock-based compensation expense that would result from using alternate measurement date determination methodologies. See Item 1A, “Risk Factors” for a discussion of certain risk factors related to our historic stock option practices

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On May 11, 2007, we entered into separate stock option cancellation agreements with our four senior officers pursuant to which the four senior officers agreed to the cancellation of their respective 2004 Options. Cancellation of the 2004 Options will result in an acceleration of the associated compensation expense. As a result, we will record non-cash stock-based compensation expense in the quarter ended June 30, 2007 of approximately $1.5 million for these cancellations.

Summary of the Restatement — Other Items

In addition to the stock option errors described above, we have also restated our Consolidated Balance Sheet as of March 31, 2005 and our Consolidated Statements of Cash Flows for the years ended March 31, 2005 and 2004 for the following reasons:

We use floor planning agreements for dealer financing of products purchased from distributors and resold to end-users. Historically, we classified the cash flows from our floor plan financing agreements in operating activities in our Consolidated Statements of Cash Flows. We previously treated the floor plan facility as an outsourced accounts payable function, and, therefore, considered the payments made by our floor plan facility as cash paid to suppliers under Financial Accounting Standards No. 95, “Statement of Cash Flows.”

We have now determined that when an unaffiliated finance company remits payments to our suppliers on our behalf, we should show this transaction as a financing cash inflow and an operating cash outflow. In addition, when we repay the financing company, we should present this transaction as a financing cash outflow. As a result, we have restated the accompanying fiscal years 2005 and 2004 Consolidated Financial Statements to correct this error.

The restatement also includes a separate line item on our Consolidated Balance Sheets for the accounts payable related to our floor plan financing agreements which had previously been included in accounts payable—trade.

Also, payments made by our lessees directly to third-party, non-recourse lenders were previously reported on our Consolidated Statements of Cash Flows as repayments of non-recourse debt in the financing section and a decrease in our investment in leases and leased equipment—net in the operating section. As these payments were not received or disbursed by us, management determined that these amounts should not be shown as cash used in financing activities and cash provided by operating activities on our Consolidated Statements of Cash Flows. Rather, these payments are now disclosed as a non-cash financing activity on our Consolidated Statements of Cash Flows.

In addition, certain corrections were made for errors noted on our Consolidated Statements of Cash Flows between the line items reserves for credit losses and changes in accounts receivable, both of which are in the operating section. See the impact of corrections in Note 2, “Restatement of Consolidated Financial Statements” to our Consolidated Financial Statements contained elsewhere in this document.

Prior Reports

All financial information contained in this Annual Report on Form 10-K gives effect to the restatements of our Consolidated Financial Statements as described above. We have not amended, and we do not intend to amend, our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for each of the fiscal years and fiscal quarters of 1997 through 2005. Financial information included in reports that we previously filed or furnished for the periods from April 1, 1996 through March 31, 2005 should not be relied upon and are superseded by the information in this Annual Report on Form 10-K.

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PART I

ITEM 1. BUSINESS

ePlus inc. CORPORATE STRUCTURE

ePlus inc. (“ePlus” or “we”), a Delaware corporation, was formed in 1996. We changed our name from MLC Holdings, Inc. to ePlus inc. on October 19, 1999. We engage in no other business other than serving as the parent holding company for the following companies:

ePlus Group, inc.;

ePlus Technology, inc.;

ePlus Government, inc.;

eManaged Solutions, inc.;

ePlus Canada Company;

ePlus Capital, inc.;

ePlus Systems, inc.;

ePlus Content Services, inc.;

ePlus Document Systems, inc.;

ePlus Information Holdings, inc.;

ePlus Government Services, inc.;

ePlus Jamaica, inc.; and

ePlus Iceland, inc.

On March 31, 2003, the former entities ePlus Technology of PA, inc. and ePlus Technology of NC, inc. were merged into ePlus Technology, inc. This combination created one national entity through which our IT reseller and technical support conducts business. ePlus Systems, inc. and ePlus Content Services, inc. were incorporated on May 15, 2001 and are the entities that hold certain assets and liabilities originally acquired from ProcureNet, Inc. ePlus Capital, inc. owns 100 percent of ePlus Canada Company, which was created on December 27, 2001 to transact business within Canada. ePlus Government, inc. was incorporated on September 17, 1997 to handle business servicing the Federal government marketplace, which includes financing transactions that are generated through government contractors. ePlus Document Systems, inc. was incorporated on October 15, 2003 and is the entity that holds certain assets and liabilities originally acquired from Digital Paper Corporation. On January 6, 2004, ePlus Information Holdings, inc. was incorporated; however, to date, the entity has conducted no business and has no employees or business locations. In October 2005, the stock of ePlus Information Holdings was reissued to ePlus Technology, inc. On April 2, 2004, ePlus Government Services, inc. was incorporated; however, to date, the entity has conducted no business and has no employees or business locations.

ePlus Jamaica, inc. was incorporated on April 8, 2005 and ePlus Iceland, inc. was incorporated on August 10, 2005. Both companies are subsidiaries of ePlus Group, inc. and were created to transact business in their respective country; however, neither entity has conducted any significant business, or has any employees or business locations outside the United States.

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ACQUISITIONS

We have acquired the following material entities or assets since 2002. The following is a summary of the acquisitions, presented in chronological order.

Date Acquired	Acquisition	Major Business Locations	Accounting Method	Consideration

May 28, 2004	Certain assets and liabilities from Manchester Technologies, Inc. (merged into ePlus Technology, inc. upon acquisition; subsequently moved the consulting group to ePlus Systems, inc.)	Metro New York, South Florida and Baltimore, MD	Purchase	$5,000,000 in cash and assumptions of certain liabilities

October 10, 2003	Certain assets and liabilities from Digital Paper Corporation	Herndon, VA	Purchase	$1,601,632 in cash plus the assumption of certain liabilities

March 29, 2002	Certain assets and liabilities from Elcom International, Inc.’s IT fulfillment and professional service business (merged into ePlus Technology, inc. upon acquisition)	Boston, MA, Philadelphia, PA, San Diego, CA and New York, NY	Purchase	$2,150,000 in cash plus the assumption of certain liabilities

OUR BUSINESS

We have evolved our product set by intermixing our historical leasing and IT product sales business with our proprietary software and business process services over the past five years. Our primary focus is to deliver strategic business value through the use of technology and services. Our current offerings include:

direct marketing of information technology equipment and third-party software;

advanced professional services;

leasing and business process services; and

proprietary software, including procurement, asset management, document management and distribution software, and electronic catalog content management software and services.

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We have been in the business of selling, leasing, financing, and managing information technology and other assets for more than 15 years and have been providing software for more than six years. We currently derive the majority of our revenues from IT product sales, professional services, and leasing. We sell primarily by using our internal sales force and through vendor relationships to commercial customers; federal, state and local governments; K-12 schools; and higher education institutions. We also lease and finance equipment, and supply software and services directly and through relationships with vendors and equipment manufacturers.

Our broad product offerings provide customers with a highly-focused, end-to-end, turnkey solution for purchasing, lifecycle management, and financing for the indirect supply chain. In addition, we offer asset-based financing and leasing of capital assets and lifecycle management solutions for the assets during their useful life, including disposal. For the customer, we can offer a multi-disciplinary approach for implementing, controlling, and maintaining cost savings throughout an organization, allowing customers to simplify their administrative processes, gain data transparency and visibility, and enhance internal controls and reporting.

The key elements of our business are:

Direct IT Sales: We are a direct marketer and authorized reseller of leading IT products via our direct sales force and web-based ordering solutions, such as OneSource^®.

Advanced Professional Services: We provide an array of internet telephony and internet communications, network design and implementation, storage, security, business continuity, maintenance, and implementation services to support our customer base as part of our consolidated service offering.

Leasing, Lease and Asset Management, and Lifecycle Management: We offer a wide range of competitive and tailored leasing and financing options for primarily IT, medical, and capital assets. These include operating and direct finance leases, lease process automation and tracking, asset tracking and management, risk management, disposal of end-of-life assets, and lifecycle management.

Proprietary Software: We offer proprietary software, which can be used as stand-alone solutions or be a component of a bundled solution. These include eProcurement, asset management, document management, and product content management software.

Consulting Services: ePlus Consulting provides business process consulting, solution definition and implementation, and customer software application design.

Our proprietary software and associated business process services are key functions of supporting and retaining customers for our sales and finance businesses. We have developed and acquired these products and services to distinguish us from our competition by providing a comprehensive offering to customers.

Our primary target customers are middle-market and larger companies in the United States of America with annual revenues between $25 million and $2.5 billion. We believe there are more than 70,000 target customers in this market. Our target customer has one or more of the following business characteristics that we believe qualify us as a preferred solution:

desires an integrated provider of products, services, and business processes for the entire indirect supply chain that can be customized to the customer’s specific needs and requirements;

would benefit from the cost savings and efficiency gains of an integrated solution, including eProcurement, asset management, catalog content functionality, document management and distribution software, electronic bill presentment and payment, and financing;

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seeks a comprehensive solution for its entire supply chain from selection to requisition, purchase, settlement, ownership, financing, and disposal of assets;

uses leasing to reduce its total cost of ownership of fixed assets and/or proactively manage its fixed asset base over the life of the asset; and

seeks a lower cost alternative to licensing enterprise software solutions while preserving the investment in legacy IT infrastructures.

BUSINESS SEGMENTS

See Note 14, “Segment Reporting” in the attached Consolidated Financial Statements. We have two basic business segments. Our first segment is our financing business unit that consists of the equipment and financing business to both commercial and government-related entities and the associated business process outsourcing services. Our second segment is our technology sales business unit that includes all the technology sales and related services, including procurement, asset management, and catalog software sales and services.

INDUSTRY BACKGROUND

Prior to late 2000, the IT industry experienced strong growth rates as a result of Y2K spending and the emerging Internet industry. Sales of IT products in the following years decreased due to sluggish economic growth, the September 11, 2001 terrorist act, and an overall lengthening of IT replacement cycles. The slowdown in IT spending appeared to begin in the fourth quarter of 2000, and recovery was first evident in the latter half of 2003, which continued in 2004 and 2005. In the leasing business, low historical interest rates combined with healthy corporate earnings from 2003 to late 2005 caused a decline in lease origination volumes throughout the industry. We believe that changing customer behaviors will make bundled offerings a more desirable approach to managing costs, and we are continuing to reposition our offerings to meet changing marketplace requirements. For example, financial officers are increasingly playing greater roles in the purchasing decisions for IT equipment. We believe that demand is no longer primarily driven by technology replacement cycles, but by the need to replace worn equipment, thus reducing the total cost of ownership and increasing the return on investment of IT expenditures and the adoption of the Internet and internetworking technologies. Furthermore, we believe customers are seeing single-solution providers that can provide IT products and services with the automated business services and process such as those provided by us. Therefore, direct marketers are increasing efforts to include professional services, managed services, and order automation in their solutions. We have continuously evolved our advanced professional service and software capabilities. We believe that we are distinctively positioned to take advantage of this shift in client purchasing as evidenced by our development of our various integrated solutions beginning in 1999 (earlier than many other direct marketers) and we continue to believe that our bundled solution set is unsurpassed in the marketplace because of its breadth and depth of offerings.

We believe that we will continue to benefit from industry changes as a cost-effective provider of a full range of IT products and services with the added competitive advantage of in-house proprietary software. In addition, our ability to provide financing for capital assets to our clients and our lifecycle management solutions, provides an additional benefit and differentiator in the marketplace. While purchasing decisions will continue to be influenced by product selection and availability, price, and convenience, we believe that our comprehensive set of solutions will become the differentiator that businesses will look for to reduce the total cost of ownership.

COMPETITION

The market for IT sales and professional services is intensely competitive, subject to economic conditions and rapid change, and significantly affected by new product introductions and other market activities of industry participants. We expect to continue to compete in all areas of our business against local, regional, and national firms, including manufacturers; other direct marketers; national and regional resellers; and regional, national, and international services providers. In addition, many computer manufacturers may sell or lease directly to our customers, and our continued ability to compete effectively may be affected by the policies of such manufacturers.

We believe that we offer enhanced solution capability, broader product selection and availability, competitive prices, and greater purchasing convenience than traditional retail stores or value-added resellers. In addition, our dedicated account executives offer the necessary support functions (e.g., software, purchases on credit terms, leasing, and efficient return processes) that Internet-only sellers do not usually provide. We are not aware of any competitors in the United States with both the breadth and depth of solution offerings that we have.

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The market for leasing is intensely competitive and subject to changing economic conditions and market activities of industry participants. We expect to continue to compete in all areas of business against local, regional, and national firms, including banks, specialty finance companies, hedge funds, vendor’s captive finance companies, and third-party leasing companies. Banks and large specialty financial services companies sell directly to business clients, particularly larger enterprise clients, and may provide other financial or ancillary services that we do not provide. Vendor captive leasing companies may utilize internal transfer pricing to effectively lower lease rates and/or bundle equipment sales and leasing to provide highly competitive packages to customers. Third-party leasing companies may have deep customer and contractual relationships that are difficult to displace. However, these competitors typically do not offer the breadth of product, service, and software offerings that we offer our clients.

We believe that we offer an enhanced leasing solution to our customers which provides a business process services approach that can automate the leasing process and reduce our clients’ cost of doing business with us. The solution incorporates value-added services at every step in the leasing process, including:

front end processing, such as eProcurement, order aggregation, order automation, vendor performance measurement, ordering, reconciliation, dispute resolution, and payment;

lifecycle and asset ownership services, including asset management, change management, and property tax filing; and

end-of-life services such as equipment audit, removal, and disposal.

In addition, we are able to bundle equipment sales and professional services to provide a turnkey leasing solution. This allows us to differentiate ourselves with a client service strategy that spans the continuum from fast delivery of competitively priced products to end-of-life disposal services, and a selling approach that permits us to grow with clients and solidify those relationships.

The software market is in a constant state of change due to overall market acceptance and economic conditions. There are a number of companies developing and marketing business-to-business electronic commerce solutions targeted at specific vertical markets. Other competitors are also attempting to migrate their technologies to an Internet-enabled platform. Some of these competitors and potential competitors include enterprise resource planning system vendors and other major software vendors that are expected to sell their procurement and asset management products along with their application suites. These enterprise resource planning vendors have a significant installed customer base and have the opportunity to offer additional products to those customers as additional components of their respective application suites. We also face indirect competition from potential customers’ internal development efforts and have to overcome potential customers’ reluctance to move away from existing legacy systems and processes.

We believe that the principal competitive factors for the solution are scalability, functionality, ease-of-use, ease-of-implementation, ability to integrate with existing legacy systems, experience in business-to-business supply chain management, and knowledge of a business’ asset management needs. We believe we can compete favorably with our competitors in these areas within our framework that consists of Procure+^®, Manage+^®, Content+^®, ePlus Leasing, strategic sourcing, document management software, and business process outsourcing.

In all of our markets, some of our competitors have longer operating histories and greater financial, technical, marketing, and other resources than us. In addition, some of these competitors may be able to respond more quickly to new or changing opportunities, technologies, and client requirements. Many current and potential competitors also have greater name recognition and engage in more extensive promotional marketing and advertising activities, offer more attractive terms to clients, and adopt more aggressive pricing policies than we do.

For a discussion of risks associated with the actions of our competitors, see “Risk Factors” in Item 1A of this Form 10-K.

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STRATEGY

Our goal is to become a leading provider of bundled solution offerings in the IT supply chain. The key elements of our strategy include the following:

selling additional products and services to our existing client base;

expanding our client base;

making strategic acquisitions;

expanding our professional services offerings;

strengthening vendor relationships; and

expanding the functionality of our Internet offerings, especially OneSource®.

Selling Additional Products and Services to Our Existing Client Base

We seek to become the primary provider of IT solutions for our customers by delivering the best customer service, pricing, availability, and professional services in the most efficient manner. We continue to focus on improving our sales efficiency by providing on-going training, targeted incentive compensation, and by implementing better automation processes to reduce costs and improve productivity. Our account executives are being trained on our broad solutions capabilities and to sell in a consultative manner that increases the likelihood of cross-selling our solutions. We believe that our bundled offering is an important differentiating factor from our competitors.

In 2006, we rolled out a new software portal called OneSource®, which is an integrated order entry platform that we expect will enhance product sales, increase incremental sales, and reduce costs by eliminating touch-points for order automation.

Expanding Our Client Base

We intend to increase our direct sales and targeted marketing efforts in each of our geographic and vertical industry areas. We actively seek to acquire new account relationships through a new outbound telesales effort, face-to-face field sales, electronic commerce (especially OneSource®), and targeted direct marketing, to increase awareness of our solutions.

Making Strategic Acquisitions

Based on our prior experience, capital structure and business systems and processes, we believe we are well positioned to take advantage of strategic acquisitions that broaden our client base, expand our geographic reach, scale our existing operating structure, and/or enhance our product and service offerings. It is part of our growth strategy to evaluate and consider strategic acquisition opportunities if and when they become available.

Expand Advanced Professional Service Offerings

Since 2004, we have focused on gaining engineering certifications and advanced professional services expertise in advanced technologies of strategic vendors, such as Cisco Systems, IBM, HP, and Network Appliance. We are especially focused on internetworking, security, and storage technologies that are currently in high demand. We believe our ability to deliver advanced professional services provides benefits in two ways. First, we gain recognition and mindshare of our strategic vendor partners and become the “go-to” partner in selected regional and national markets. This significantly increases direct and referral sales opportunities to provide our products and services, and allows us to achieve optimal pricing levels. Second, within our own existing and potential customer base, our advanced professional services is a key differentiator against competitors who cannot provide services or advanced services for these key technologies.

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Strengthening Vendor Relationships

We believe it is important to maintain relationships with key manufacturers such as HP, IBM, Cisco, and Network Appliances on both a national level, for strategic purposes, and at the local level, for tactical objectives. Strategically, national relationships with key manufacturers give us increased visibility and legitimacy, and authenticate our services. In addition, by maintaining a number of high level engineering certifications, we are promoted as a high level solutions provider and are cited in numerous case studies and external marketing venues by the manufacturers. On the tactical level, by having more than 29 locations, we are able to maintain direct relationships with key sales and marketing personnel, who provide referral sales opportunities that are unavailable to Internet-only and catalog-based direct marketers.

Expand the functionality of our Internet-based solutions, especially OneSource

We will continue to improve and expand the functionality of our integrated, Internet-based solutions to better serve our customers’ needs. We intend to use the flexibility of our platform to offer additional products and services when economically feasible. As part of this strategy, we may also acquire technology companies to expand and enhance the platform of solutions to provide additional functionality and value-added services.

RESEARCH AND DEVELOPMENT

Our software has been acquired from third-party vendors or has been developed by us. In earlier stages of our development, we relied heavily on licensed software and outsourced development, but with the acquisition of the software products and the hiring of the employees obtained from the acquisition of ProcureNet, Inc. on May 15, 2001, Digital Paper Corporation on October 10, 2003, and the consulting arm of Manchester Technologies, Inc. on May 28, 2004, much of our current software development is handled by us. We have also outsourced certain programming tasks to a highly specialized offshore development company. We market both software that we own and software that we have obtained perpetual license rights and source code from a third party. Subject to certain exceptions, we generally retain the source code and intellectual property rights of the customized software.

To successfully implement our business strategy and service the disparate requirements of our customers and potential customers, we have a flexible delivery model, which includes:

traditional enterprise licenses;

on-demand, hosted, or subscription; and

software-as-a-service, or a services model, where our personnel may utilize our software to provide one or more solutions to our customers.

We expect that competitive factors will create a continuing need for us to improve and add to our technology platform. The addition of new products and services will also require that we continue to improve the technology underlying our applications. We expect to continue to make significant investments in systems, personnel, and offshore development costs to maintain a competitive advantage in this market.

SALES AND MARKETING

We focus our marketing efforts on lead generation activities and converting our existing customer base to our bundled solution set. The target market for our customer base is primarily middle and large market companies with annual revenues between $25 million and $2.5 billion. We believe there are over 70,000 potential customers in our target market. We undertake many of our direct marketing campaigns and target certain markets in conjunction with our primary vendor partners, who may provide financial reimbursement, outsourced services, and personnel to us in these efforts.

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Our sales representatives are compensated primarily on a commission basis. To date, the majority of our customers have been generated from direct sales. We market to different areas within a customer’s organization depending on the products or services we are selling.

As of March 31, 2006, our sales force was organized regionally in 29 office locations throughout the United States. See Item 2, “Properties” of this Form 10-K for additional office location information. As of March 31, 2006 our sales organization included 247 sales and sales support personnel.

INTELLECTUAL PROPERTY RIGHTS

Our success depends in part upon proprietary business methodologies and technologies that we have licensed and modified. We own certain software programs or have entered into software licensing agreements to provide services to our customers. We rely on a combination of copyright, trademark, service mark, trade secret protection, confidentiality and nondisclosure agreements and licensing arrangements to establish and protect intellectual property rights. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection.

For example, we have three electronic sourcing systems patents, two catalog management patents, and two image transmission management patents in the United States, among others. We have a counterpart of the electronic sourcing system patents in nine European countries, and of the image transmission management patents in Israel, Mexico, and China. In 2005, the three U.S. patents for electronic sourcing systems were determined to be valid and enforceable by a jury at trial; however, in 2006, a trial in defense of the same patents ended in a mistrial. Therefore, we cannot provide any assurance that any patents, as issued, will prevent the development of competitive products or that our patents will not be successfully challenged by others or invalidated through the administrative process or litigation. We also have the following registered service/trademarks: ePlus, ePlusSuite, Procure+, Manage+, Service+, Finance+, ePlus Leasing, International Computer Networks, Docpak, Simply Faster, Viewmark, Digital Paper, Intranetdocs, OneSource, Content+, eECM, Directsight, ICN, and ePlus Enterprise Cost Management. We also have over twenty registered copyrights and additional common-law trademarks and copyrights.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our software products exists, software piracy can be expected to be a persistent problem. Our means of protecting our proprietary rights may not be adequate and our competitors may independently develop similar technology, duplicate our products or design around our proprietary intellectual property.

SALES AND FINANCING ACTIVITIES

We have been in the business of selling, leasing, financing, providing procurement, document management and asset management software and managing information technology and various other assets for over ten years and currently derive the majority of our revenues from such activities.

IT Sales and Professional Services. We are an authorized reseller of, or have the right to resell products and services from, over 400 manufacturers. Our larger manufacturer relationships include HP, IBM, Cisco, and Microsoft Corporation. Tech Data and Ingram Micro, Inc. are our largest distributors. We have multiple vendor engineering certifications that authorize us to market their products and enable us to provide advanced professional services. Our flexible platform and customizable catalogs facilitate the addition of new vendors with a minimal incremental effort. Using the distribution systems available, we usually sell products that are shipped from the distributors or suppliers directly to our customer location, which allows us to keep our inventory of any product to a minimum. The products we sell typically have payment account terms ranging from due upon delivery up to a maximum 90 days to pay, depending on the customer’s credit and payment structuring.

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Leasing and Financing. Our leasing and financing transactions generally fall into two categories: direct financing and operating leases. Direct financing transfers substantially all of the benefits and risks of equipment ownership to the customer. Operating leases consist of all other leases that do not meet the criteria to be direct financing or sales-type leases. Our lease transactions include true leases and installment sales or conditional sales contracts with corporations, non-profit entities and municipal and federal government contractors. Substantially all of our lease transactions are net leases with a specified non-cancelable lease term. These non-cancelable leases have a provision which requires the lessee to make all lease payments without offset or counterclaim. A net lease requires the lessee to make the full lease payment and pay any other expenses associated with the use of equipment, such as maintenance, casualty and liability insurance, sales or use taxes and personal property taxes. We primarily lease computers, associated accessories and software, communication-related equipment, medical equipment, industrial related machinery and equipment, office furniture and general office equipment, transportation equipment, and other general business equipment.

In anticipation of the expiration of the initial term of a lease, we initiate the remarketing process for the related equipment. Our goal is to maximize revenues on the remarketing effort by either (1) releasing or selling the equipment to the initial lessee, (2) renting the equipment to the initial lessee on a month-to-month basis, or (3) selling or leasing the equipment to an equipment broker or a different customer. The remarketing process is intended to enable us to recover or exceed the residual value of the leased equipment. Any amounts received over the estimated residual value less any commission expenses become profit margin to us and can significantly impact the degree of profitability of a lease transaction.

We aggressively manage the remarketing process of our leases to maximize the residual values of our leased equipment portfolio. To date, we have realized a premium over our original recorded residual assumption or the net book value.

Financing and Bank Relationships. We have a number of bank and finance company relationships that we use to provide working capital for all of our businesses and long-term financing for our lease financing businesses. Our finance department is responsible for maintaining and developing relationships with a diversified pool of commercial banks and finance companies with varying terms and conditions. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Risk Management and Process Controls. It is our goal to minimize the financial risks of our balance sheet assets. To accomplish this goal, we use and maintain conservative underwriting policies and disciplined credit approval processes. We also have internal control processes, including contract origination and management, cash management, servicing, collections, remarketing and accounting. Whenever possible and financially prudent, we use non-recourse financing (which is limited to the underlying equipment and the specific lessee and not our general assets) for our leasing transactions and we try to obtain lender commitments before acquiring the related assets.

When desirable, we manage our risk in assets by selling leased assets, including the residual portion of leases, to third parties rather than owning them. We try to obtain commitments for these asset sales before asset origination in a financing transaction. We also use agency purchase orders to procure equipment for lease to our customers as an agent, not a principal, and otherwise take measures to minimize our inventory. Additionally, we use fixed-rate funding and issue proposals that adjust for material adverse interest rate movements as well as material adverse changes to the financial condition of the customer.

We have an executive management review process and other internal controls in place to protect against entering into lease transactions that may have undesirable financial terms or unacceptable levels of risk. Our lease and sale contracts are reviewed by senior management for pricing, structure, documentation, and credit quality. Due in part to our strategy of focusing on a few types of equipment categories, we have product knowledge, historical re-marketing information and experience on many of the items that we lease, sell and service. We rely on our experience or outside opinions in the process of setting and adjusting our sale prices, lease rate factors and the residual values.

Default and Loss Experience. During the fiscal year ended March 31, 2005, we reserved for $1.1 million in credit losses and incurred actual credit losses of $0.5 million. During the fiscal year ended March 31, 2006 we reserved for $1.0 million in credit losses and incurred actual credit losses of $0.8 million.

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EMPLOYEES

As of March 31, 2006, we employed 680 full-time and part-time employees who operated through 29 office locations, including our principal executive offices and regional sales offices. No employees are represented by a labor union and we believe that we have a good relationship with our employees. The functional areas of our employees are as follows:

		Number of Employees
Sales and Marketing		247
Technical Support		142
Administration		198
Software and Implementations		85
Executive		8

U.S. SECURITIES AND EXCHANGE COMMISSION REPORTS

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, filed with or furnished to the U.S. Securities and Exchange Commission (“SEC”), are available free of charge through our internet website, www.eplus.com, as soon as reasonably practical after we have electronically filed such material with, or furnished it to, the SEC. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing. Further, our references to the URLs for these websites are intended to be inactive textual references only.

ITEM 1A. RISK FACTORS

We Have Received Inquiries Related to Our Historical Stock Option Grant Practices.

As described elsewhere herein, we are involved in a shareholder derivative action and a SEC informal inquiry in connection with certain historical stock option grants. We are currently preparing a response to plaintiff’s amended complaint. With respect to the SEC informal inquiry, we have cooperated and intend to continue to cooperate with the SEC. The inquiry of the SEC may look at the accuracy of the stated dates of our historical option grants, our disclosures regarding executive compensation, whether all proper corporate and other procedures were followed, and whether our historical financial statements are materially accurate and other issues. Counsel for the Audit Committee also received an inquiry from the Office of the United States Attorney for the Eastern District of Virginia. To date, there have been no further communications with the United States Attorney’s Office. We are currently being audited by the Internal Revenue Service (“IRS”). In connection with this audit, the IRS has requested information concerning stock options. Regardless of the outcome of these inquiries and the derivative action, we may continue to incur substantial costs, which could have a material adverse effect on our financial condition and results of operations. In addition, it is possible that other governmental or regulatory agencies may undertake inquiries with respect to our historical option grants. Such inquiries could lead to formal proceedings against us, as well as our officers and/or directors. While we believe we have made appropriate judgments in determining the financial and tax impacts of our historic stock option practices, we cannot provide assurance that the SEC or the IRS will (i) agree with the manner in which we have accounted for and reported, or not reported, the financial and tax impacts, or (ii) not find inappropriate activity in connection with our historical stock option practices. If the SEC or the IRS disagrees with our financial or tax adjustments and such disagreement results in material changes to our historical financial statements, we may have to further restate our prior financial statements, amend prior filings with the SEC, or take other actions not currently contemplated.

The Matters Relating To the Investigation by the Audit Committee of the Board and the Restatement of Our Consolidated Financial Statements May Result in Additional Litigation and Governmental Enforcement Actions, Which Could Have a Material Adverse Effect on Us.

Based on management’s internal review and that of our Audit Committee, it was determined that incorrect measurement dates were used for financial accounting purposes for many stock option grants made since our IPO in 1996. As a result, we have recorded additional share-based compensation expense, and related tax effects, with regard to certain past stock option grants, and we have restated certain previously issued financial statements included in this Annual Report on Form 10-K. We have also restated our financial statements for fiscal years ended March 31, 2005 and 2004 in connection with the presentation of dealer floor plan financing arrangements and other items. See Explanatory Note immediately preceding Part I, Item 1, “Business;” Part II, Item 7, “—Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Audit Committee Review; Restatement of Consolidated Financial Statements” and Note 2, “Restatement of Consolidated Financial Statements” in the Notes to Consolidated Financial Statements.

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Our historical stock option granting practices and the restatement of our prior financial statements have exposed us to greater risks associated with litigation, regulatory proceedings and government enforcement actions. As described in Part I, Item 3, “Legal Proceedings,” we are a party to a lawsuit containing allegations relating to stock option grants. We have fully cooperated with the inquiry by the SEC, and we intend to continue to fully cooperate. We cannot provide assurance that any determinations made in the current litigation, the SEC inquiry or any future litigation or regulatory action will reach the same conclusions on these issues that we have reached. The conduct and resolution of these matters will be time consuming, expensive and distracting from the conduct of our business. Furthermore, if we are subject to adverse findings in any of these matters, we could be required to pay damages or penalties or have other remedies imposed upon us which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Material Weaknesses in Internal Control Over Financial Reporting Resulted in a Restatement of, or Adjustments To, Our Financial Statements, and the Transitional Changes To Our Control Environment May Be Insufficient to Effectively Remediate These Deficiencies.

We have identified material weaknesses in our internal control over financial reporting, and we have restated our Consolidated Financial Statements for the years ended March 31, 2005 and 2004, as included in this Form 10-K. Specifically, we did not maintain effective controls over the determination of the accounting measurement dates for our granting of stock option awards and the classification of certain cash flows. We have taken steps to remediate these weaknesses by implementing changes to our control environment, which include plans for additional procedures as well as additional controls over financial reporting. Any ineffectiveness of these remedial measures, or a delay in their implementation, could affect the accuracy or timing of our future filings with the SEC or other regulatory authorities. See Item 9A, “Controls and Procedures.”

Because We Did Not File Our Periodic Reports With the SEC on a Timely Basis, Our Common Stock Was Delisted From The Nasdaq Global Market.

Due to the findings of the Audit Committee Investigation and the resulting restatement, we did not file any of our periodic reports with the SEC on a timely basis since we last filed our Quarterly Report on Form 10-Q for the quarter ended December 31, 2005. When we file our Forms 10-Q for the periods ended June 30, 2006, September 30, 2006, and December 31, 2006, and our Forms 10-K for the fiscal years ended March 31, 2007 and 2006, we will be current with SEC reporting requirements. On July 18, 2007, we received a letter from Nasdaq advising that the Board of Directors of Nasdaq had decided to withdraw its call for review of the May 10, 2007 decision of the Listing Council to suspend our securities from trading on the Nasdaq Stock Market. Consequently, our common stock was delisted from the Nasdaq Global Market on July 20, 2007. As a result, the price of our stock and the ability of our stockholders to trade in our stock may be adversely affected. In addition, we cannot determine how long it will take for us to regain compliance with the Nasdaq listing requirements and reapply for listing of our common stock. Since we are not current in our filings with the SEC, we are subject to a number of restrictions regarding the registration of our stock under federal securities laws, and we may not be able to issue stock options or other equity awards to our employees or allow them to exercise their outstanding options, which could adversely affect retention of executive management and our business and results of operations.

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Our Assessment As To the Adequacy of Our Internal Control Over Financial Reporting As Required by Section 404 of the Sarbanes-Oxley Act of 2002 May Cause Our Operating Expenses to Increase. If We Are Unable to Certify the Adequacy of Our Internal Controls, Investors Could Lose Confidence in the Reliability of Our Financial Statements, Which Could Result in a Decrease in the Value of Our Common Stock.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report from management on internal control over financial reporting in their annual reports on Form 10-K. We expect that these rules will first apply to us with respect to our fiscal year ending March 31, 2008. To comply with the Sarbanes-Oxley Act and the SEC’s new rules and regulations, we are evaluating our internal control systems and taking remedial actions to allow management to report on, and our independent auditors to attest to, our internal control over financial reporting. As a result, we have incurred expenses, and expect to incur additional expenses, and diversion of management’s time and attention from the daily operations of the business, which may increase our operating expenses and impair our ability to sustain profitability based on U.S. GAAP. While we are endeavoring to implement the requirements relating to internal controls and all other aspects of Section 404 in a timely manner, there can be no assurance that we will be able to maintain our schedule to complete all assessment and testing in a timely manner and, if we do not, that we will have the resources available to complete necessary assessment and reporting on internal controls on a timely basis. Further, we cannot be certain that our testing of internal control and resulting remediation actions will yield adequate internal control over financial reporting as required by Section 404. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, there could be an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline.

We Depend on Having Creditworthy Customers.

Our leasing and technology sales business requires sufficient amounts of debt and equity capital to fund our equipment purchases. If the credit quality of our customer base materially decreases, or if we experience a material increase in our credit losses, we may find it difficult to continue to obtain the capital we require and our business, operating results and financial condition may be harmed. In addition to the impact on our ability to attract capital, a material increase in our delinquency and default experience would itself have a material adverse effect on our business, operating results and financial condition.

We May Not Reserve Adequately for Our Credit Losses.

We maintain a consolidated reserve for credit losses on receivables. Our consolidated reserve for credit losses reflects management’s judgment of the loss potential. Our management bases its judgment on the nature and financial characteristics of our obligors, general economic conditions and our bad debt experience. It also considers delinquency rates and the value of the collateral underlying the finance receivables. We cannot be certain that our consolidated reserve for credit losses will be adequate over time to cover credit losses in our portfolio because of unanticipated adverse changes in the economy or events adversely affecting specific customers, industries or markets. If our reserves for credit losses are not adequate, our business, operating results and financial condition may suffer.

We Rely on Inventory and Accounts Receivable Financing Arrangements.

We have two credit facilities for our business. The loss of the leasing credit facility could have a material adverse effect on our future results as we may have to use this facility for daily working capital and liquidity for our leasing business. The loss of the technology sales credit facility could have a material adverse effect on our future results as we currently rely on this facility and its components for daily working capital and the operational function for our accounts payable process.

We May Not Adequately Protect Ourselves Through Our Contract Vehicles.

We may not properly create contracts to protect ourselves against the risks inherent in our business including, but not limited to, warranties, limitations of liability, human resources and subcontractors, patent and product liability, and financing activities.

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Despite the non-recourse nature of the loans financing our activities, non-recourse lenders have in the past brought suit when the underlying transaction turns out poorly for the lenders. We have vigorously defended such cases in the past and will do so in the future and believe investors should be aware that such suits are normal risks, and the cost of defense are normal costs of our business.

Costs to Protect Our Intellectual Property May Affect Our Earnings.

The legal and associated costs to protect our intellectual property may have a material adverse effect on our business, operating results and financial condition. We may deem it necessary to protect our intellectual property rights and significant expenses could be incurred with no certainty of the results of these potential actions. Costs relative to lawsuits are usually expensed in the periods incurred and there is no certainty in recouping any of the amounts expended regardless of the outcome of any action. Additionally, recent Supreme Court decisions could make patents harder to obtain and enforce, and could limit the availability of damages, especially in the software industry.

We Face Risks of Claims From Third Parties for Intellectual Property Infringement That Could Harm Our Business.

Although we believe that our intellectual property rights are sufficient to allow us to market our existing products without incurring liability to third parties, we cannot provide assurance that our products and services do not infringe on the intellectual property rights of third parties.

In addition, because patent applications in the United States are not publicly disclosed until the patent is issued, we may not be aware of applications that have been filed which relate to our products or processes. We could incur substantial costs in defending ourselves and our customers against infringement claims. In the event of a claim of infringement, we and our customers may be required to obtain one or more licenses from third parties. We cannot provide assurance that such licenses could be obtained from third parties at a reasonable cost or at all. Defense of any lawsuit or failure to obtain any such required license could harm our business, operating results and financial condition. In addition, in certain instances, third parties licensing software to us have refused to indemnify us for possible infringement claims.

Capital Spending by Our Customers May Decrease.

We rely on our customers to purchase capital equipment from us to maintain or increase our earnings. If there is a downward turn in the economy, or an increase in competition, sales of capital equipment may decrease, thus adversely affecting our earnings.

We Face Substantial Competition From Larger Companies As Well As Our Vendor and Financial Partners.

In our leasing business, we face competition from many sources including much larger companies with greater financial resources. Our competition may even come from some of our vendor or financial partners who choose to market directly to customers. Our competition may lower lease rates in order to gain additional business. Our business is also subject to customer demand which is affected by economic conditions, liquidity and capital spending.

In our reseller business, direct marketing to end-users, rather than through resellers such as us, by manufacturers may adversely affect future sales. Many competitors compete principally on the basis of price and may have lower costs than us and, therefore, current gross margins may not be maintainable. In addition, we do not have guaranteed commitments from our customers and, therefore, our sales volume may be volatile.

We May Not Be Able to Hire and Retain Personnel That We Need to Succeed.

To increase market awareness and sales of our offerings, we may need to expand our sales operations and marketing efforts in the future. Our products and services require a sophisticated sales effort and significant technical support. Competition for qualified sales, marketing and technical personnel fluctuates depending on market conditions and we might not be able to hire or retain sufficient numbers of such personnel to maintain and grow our business.

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We Do Not Have Long-term Supply or Guaranteed Price Agreements With Our Vendors.

The loss of a key vendor or manufacturer or changes in their policies could adversely impact our ability to sell. In addition, violation of a contract that results in either the termination of our ability to sell the product or a decrease in our certification with the manufacturer could adversely impact our earnings.

We May Not Have Designed Our Information Technology Systems to Support Our Business Without Failure.

We are dependent upon the reliability of our information, telecommunication and other systems, which are used for sales, distribution, marketing, purchasing, inventory management, order processing, customer service and general accounting functions. Interruption of our information systems, Internet or telecommunications systems could have a material adverse effect on our business, financial condition, cash flows or results of operations.

Our Earnings May Fluctuate.

Our earnings are susceptible to fluctuations for a number of reasons, including the seasonal and cyclical nature of our customers’ procurement patterns. Our earnings will continue to be affected by fluctuations in our historical business, such as lower sales of equipment, increased direct marketing by manufacturers rather than through distributors, reductions in realized residual values, fluctuations in interest rates, and lower overall sales activity. In the event our revenues or earnings are less than the level expected by the market in general, such shortfall could have an immediate and significant adverse impact on our common stock’s market price.

We May Not Be Able to Realize Our Entire Investment in the Equipment We Lease.

We lease various types of equipment to customers through two distinct types of transactions: capital leases and operating leases. The duration of an operating lease is shorter relative to the equipment’s useful life. We bear a greater risk in operating leases in that we may not be able to remarket the equipment on terms that will allow us to fully recover our investment.

At the inception of each lease, we estimate the fair market value of the item as a residual value for the leased equipment based on the terms of the lease contract. A decrease in the market value of such equipment at a rate greater than the rate we expected, whether due to rapid technological obsolescence or other factors, would adversely affect the residual values of such equipment. Any such loss, which is considered by management to be other than temporary in nature, would be recognized in the period of impairment in accordance with SFAS No. 13, “Accounting for Leases.” Consequently, there can be no assurance that our estimated residual values for equipment will be realized. Our lease portfolio has recently expanded to new types of equipment under lease of which we may not experience the same residual realization economics.

We May Not Perform Adequate Due Diligence or Integration of an Acquisition.

We have the potential to acquire entities with unknown liabilities, fraud, cultural or business environment issues or that may not have adequate internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002. In addition, we may not fully understand their business or adequately integrate their employees into our organization.

Treating Stock Options As a Compensation Expense Could Significantly Impair Our Ability to Maintain Profitability.

FASB has begun requiring companies to record compensation expense based on fair-value determination for stock options and participation in employee stock purchase plans, in accordance with SFAS No. 123R. We grant stock options to our employees, officers and directors and we administered an employee stock purchase plan (“ESPP”) which ended December 31, 2002. Information on our stock option plan and ESPP, including the shares reserved for issuance under those plans, the terms of options granted, and the shares subject to outstanding stock options, is included in Note 12, “Benefit and Stock Option Plans” of the Notes to Consolidated Financial Statements. The current FASB guidance is that, effective for our fiscal year starting April 1, 2006, we will have to begin expensing stock options based on fair-value determination, in accordance with SFAS No. 123R, rather than intrinsic value as has been recorded historically, under APB 25. When we are required to record an expense based on a fair value determination for our stock-based compensation plans, we could incur a significant compensation expense, and any such expense could significantly impair our ability to return to and maintain profitability on a U.S. GAAP basis. That impact on our ability to maintain profitability on a U.S. GAAP basis could have a material adverse effect on the market price of our common stock.

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If We Are Unable to Protect Our Intellectual Property, Our Business Will Suffer.

The success of our business strategy depends, in part, upon proprietary technology and other intellectual property rights. To date, we have relied primarily on a combination of copyright, trademark, patent and trade secret laws and contractual provisions with our subcontractors to protect our proprietary technology. It may be possible for unauthorized third parties to copy certain portions of our products or reverse engineer or obtain and use information that we regard as proprietary. Some of our agreements with our customers and technology licensors contain residual clauses regarding confidentiality and the rights of third parties to obtain the source code for our products. These provisions may limit our ability to protect our intellectual property rights in the future that could seriously harm our business, operating results and financial condition. We cannot provide assurance that our means of protecting our intellectual property rights will be adequate. If any of these events happen, our business, operating results and financial condition could be harmed.

The Limited Operating History of Our e-Commerce Related Products and Services Makes It Difficult to Evaluate Our Business and Our Prospects.

Our comprehensive set of solutions, introduced in May 2002, has had a limited operating history. As a result, we expect to encounter some of the challenges, risks, difficulties and uncertainties frequently encountered by early-stage companies using new and unproved business models in rapidly evolving markets. Some of these challenges relate to our ability to:

increase the total number of users of our services;

adapt to meet changes in our markets and competitive developments; and

continue to update our technology to enhance the features and functionality of our suite of products.

We cannot be certain that our business strategy will be successful or that it will successfully address these and other challenges, risks and uncertainties.

The Electronic Commerce Business-to-business Solutions Market Is Highly Competitive and We Cannot Provide Assurance That We Will Be Able to Compete Effectively.

The market for Internet-based, business-to-business electronic commerce solutions is extremely competitive. We expect competition to intensify as current competitors expand their product offerings and new competitors enter the market. We cannot provide assurance that we will be able to compete successfully against current or future competitors, or that competitive pressures faced by us will not harm our business, operating results or financial condition. In addition, the market for electronic procurement solutions is relatively new and evolving. Our strategy of providing an Internet-based electronic commerce solution may not be successful, or we may not execute it effectively. Accordingly, our solution may not be widely adopted by businesses.

Because there are relatively low barriers to entry in the electronic commerce market, competition from other established and emerging companies may develop in the future. Increased competition is likely to result in reduced margins, longer sales cycles and loss of market share, any of which could materially harm our business, operating results or financial condition. The business-to-business electronic commerce solutions offered by our competitors now or in the future may be perceived by buyers and suppliers as superior to ours. Our current or future competitors may have more experience developing Internet-based software and end-to-end purchasing solutions. They may also have greater technical, financial, marketing and other resources than we do. As a result, competitors may be able to develop products and services that are superior, achieve greater customer acceptance or have significantly improved functionality as compared to our products and services.

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Over the long term, we expect to derive more revenues from our software, which is unproven. We expect to incur expenses that may negatively impact profitability. We also expect to incur significant sales and marketing, research and development, and general and administrative expenses in connection with the development of this area of our business. These expected expenses may have a material adverse effect on our future operating results as a whole.

If Our Products Contain Defects, Our Business Could Suffer.

Products as complex as those used to provide our electronic commerce solutions often contain known and undetected errors or performance problems. Many serious defects are frequently found during the period immediately following introduction of new products or enhancements to existing products. Although we attempt to resolve all errors that we believe would be considered serious by our customers, our products are not error-free. Undetected errors or performance problems may not be discovered in the future and errors considered by us to be minor may be considered serious by our customers. This could result in lost revenues, delays in customer acceptance or unforeseen liabilities that would be detrimental to our reputation and to our business.

If We Publish Inaccurate Catalog Content Data, Our Business Could Suffer.

Any defects or errors in catalog content data could harm our customers or deter businesses from participating in our offering, damage our business reputation, harm our ability to attract new customers, and potentially expose us to legal liability. In addition, from time to time some participants in bundled services could submit to us inaccurate pricing or other catalog data. Even though such inaccuracies are not caused by our work and are not within our control, such inaccuracies could deter current and potential customers from using our products and could harm our business, operating results and financial condition.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

As of March 31, 2006, we operated from 29 office locations. Our total leased square footage as of March 31, 2006, was approximately 150,600 square feet for which we incurred rent expense of approximately $212,000 per month. Some of our companies operate in shared office space to improve sales, marketing and cost efficiency. We do not own any real estate. Some sales and technical service personnel operate from either residential offices or space that is provided for by another entity or are located on a customer site. The following table identifies our largest locations, the number of current employees as of March 31, 2006, the square footage and the general office functions.

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Location	Company	Employees	Square Footage	Function
Herndon, VA	ePlus Group, inc. ePlus Technology, inc. ePlus Government, inc. ePlus Document Systems, inc.	255	50,232	Corporate and subsidiary headquarters, sales office, technical support and warehouse

Pittsford, NY	ePlus Systems, inc.	61	9,155	Sales office and technical development

Pottstown, PA	ePlus Technology, inc.	46	12,853	Sales office, technical support and warehouse

Sunnyvale, CA	ePlus Technology, inc.	38	11,200	Sales office, technical support and warehouse

Hauppauge, NY	ePlus Technology, inc.	33	8,370	Sales office, technical support and warehouse

Hamilton, NJ	ePlus Technology, inc.	23	8,000	Sales office and technical support

Canton, MA	ePlus Technology, inc.	30	6,228	Sales office and technical support

New York, NY	ePlus Technology, inc.	25	5,121	Sales office and technical support

Wilmington, NC	ePlus Technology, inc.	23	4,000	Sales office and technical support

Elkridge, MD	ePlus Technology, inc.	19	5,092	Sales office and technical support

Raleigh, NC	ePlus Group, inc. ePlus Technology, inc.	18	8,428	Sales office-shared, technical support and warehouse

Houston, TX	ePlus Content Services, inc.	16	4,000	Subsidiary headquarters, sales office and technical support

Avon, CT	ePlus Systems, inc.	11	2,345	Subsidiary headquarters, sales office and technical development

Boca Raton, FL	ePlus Technology, inc.	8	3,214	Sales office and technical support

Other Office Locations		36	12,330	Sales offices and technical support

Home Offices/Customer Sites		38

The largest location is Herndon, VA, which has a lease expiration date of December 31, 2009.

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ITEM 3. LEGAL PROCEEDINGS

Cyberco Related Matters

We have been involved in several matters described below, arising from four separate installment sales to a customer named Cyberco Holdings, Inc. (“Cyberco”). Two of the lawsuits arising from this matter have been resolved. According to the United States Attorney for the Western District of Michigan, the Cyberco principals were allegedly perpetrating a scam, which victimized several dozen leasing and lending institutions. Three Cyberco principals have pled guilty to criminal conspiracy and other charges including bank fraud, mail fraud and money laundering. At least two additional Cyberco principals or employees have been indicted. Cyberco, related affiliates, and at least one principal are in Chapter 7 bankruptcy. No future payments are expected from Cyberco, and at this time, the bankruptcy estate is anticipated to have insignificant funds.

In a bankruptcy adversarial complaint filed on December 7, 2006 in the United States Bankruptcy Court for the Western District of Michigan, the bankruptcy trustee filed a claim against ePlus Group, inc. seeking payments of approximately $775,000 as alleged preferential transfers. We retained none of those payments, and instead forwarded them to the appropriate assignees of the underlying leases. Of the $775,000 in payments, approximately $200,000 was forwarded to Banc of America Leasing and Capital, LLC (“BoA”) and the remainder was forwarded to GMAC Commercial Finance, LLC (“GMAC”). Subsequent to its filing suit against us, the trustee added BoA and GMAC as defendants. We intend to vigorously defend these claims.

On January 4, 2005 we filed suit in the United States District Court for the Southern District of New York against our insurance carrier, Travelers Property Casualty Company of America (“Travelers”), seeking a declaratory judgment that any potential liability for claims made against us by GMAC or BoA, which are described below, is covered by our insurance policy with Travelers. On February 9, 2006, the court granted summary judgment for Travelers, determining that our claim was not covered by our insurance policies. A final judgment was entered on or about October 25, 2006, and we timely appealed to the United States Court of Appeals for the Second Circuit. The ultimate decision on insurance coverage will apply to the claims filed against us by both underlying lenders, GMAC and BoA. We believe that our position asserting insurance coverage is correct, but we cannot predict the outcome of our appeal.

On January 4, 2005, GMAC filed suit, which we removed to the United States District Court for the Southern District of New York, against ePlus Group, inc. seeking repayment of three promissory notes underlying our non-recourse assignment of Cyberco’s loan payments. GMAC’s suit sought approximately $10,646,000, plus interest. The suit was settled on July 24, 2006 for $6,000,000 in cash, which we paid on July 25, 2006.

On May 10, 2005, BoA filed a lawsuit against ePlus Group, inc. in the Circuit Court for Fairfax County, Virginia. BoA funded one of the Cyberco sales in exchange for assignment of the payment stream. After Cyberco went into bankruptcy, BoA sought to recover its loss of approximately $3,062,792 plus interest. On September 14, 2006, a jury awarded BoA $3,025,000 plus interest. On or about February 6, 2007, a final judgment was entered, which also awarded BoA $871,232 in attorneys’ fees. We paid the total judgment, including interest and fees, of $4,258,237 in two payments, the last of which was made on June 15, 2007.

In addition, BoA filed a lawsuit against ePlus inc. on November 3, 2006 in the Circuit Court for Fairfax County, Virginia, seeking to enforce a guaranty in which ePlus inc. guaranteed ePlus Group, inc.’s obligations to BoA relating to the Cyberco transaction. ePlus Group has already paid to BoA the judgment in the Fairfax County lawsuit referenced above. We are vigorously defending the suit. We cannot predict the outcome of this suit.

On January 12, 2007, ePlus Group, inc. filed a complaint against BoA in the Superior Court of California, County of San Diego, seeking relief on matters not adjudicated in the Virginia state court action described above. While we believe that we have a basis for our claims to recover certain of our losses related to the Cyberco matter, we cannot predict whether we will be successful in our claim for damages, whether any award ultimately received will exceed the costs incurred to pursue this matter or how long it will take to bring this matter to resolution.

On June 22, 2007, ePlus Group, inc. and two other entities victimized by Cyberco filed suit in the United States District Court for the Western District of Michigan against The Huntington National Bank. The complaint alleges counts of aiding and abetting fraud, aiding and abetting conversion, and statutory conversion. While we believe that we have a basis for our claims to recover certain of our losses related to the Cyberco matter, we cannot predict whether we will be successful in our claim for damages, whether any award ultimately received will exceed the costs incurred to pursue this matter or how long it will take to bring this matter to resolution.

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Other Matters

On January 18, 2007 a shareholder derivative action related to stock option practices was filed in the United States District Court for the District of Columbia. The complaint names ePlus inc. as nominal defendant, and personally names eight individual defendants who are directors and/or executive officers of ePlus. The complaint alleges violations of federal securities law and state law claims for breach of fiduciary duty, waste of corporate assets and unjust enrichment. We are currently preparing a response to the plaintiff’s amended complaint.

On December 11, 2006, ePlus inc. and SAP America, Inc. and its German parent, SAP AG (collectively, “SAP”) entered into a Patent License and Settlement Agreement (the “Agreement”) to settle a patent lawsuit between the companies which we filed on April 20, 2005. Under the terms of the Agreement, we will license to SAP our existing patents, together with those developed and/or acquired by us within the next five years, in exchange for a one-time cash payment of $17,500,000, which was paid by SAP on January 16, 2007. In addition, SAP has agreed not to pursue legal action against us for patent infringement as to any of our current lines of business on any of SAP’s patents for a period of five years. The Agreement also provides for general release, indemnification for its violation, and dismisses the existing litigation with prejudice.

We are currently engaged in a dispute with the government of the District of Columbia (“DC”) regarding personal property taxes on property we financed for our customers. DC is seeking approximately $508,000, plus interest and penalties, relating to property we financed for our customers. We believe the tax is owed by our customers, and are seeking resolution in DC’s Office of Administrative Hearings. We cannot predict the outcome of this matter. While management does not believe this matter will have a material effect on our financial condition and results of operations, resolution of this dispute is ongoing.

There can be no assurance that these or any existing or future litigation arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION

During the two fiscal years ended March 31, 2006, our common stock traded on The Nasdaq Global Market under the symbol “PLUS.” The following table sets forth the range of high and low sale prices for our common stock during each quarter of the two fiscal years ended March 31, 2006.

Quarter Ended	High		Low

Fiscal Year 2005
June 30, 2004	$	12.98	$	9.97
September 30, 2004	$	11.58	$	8.80
December 31, 2004	$	12.80	$	9.32
March 31, 2005	$	17.14	$	11.01

Fiscal Year 2006
June 30, 2005	$	14.00	$	10.26
September 30, 2005	$	13.89	$	11.23
December 31, 2005	$	14.94	$	12.61
March 31, 2006	$	14.94	$	13.25

On July 31, 2007, the closing price of our common stock was $9.25 per share. On July 31, 2007, there were 161 shareholders of record of our common stock. We believe there are over 400 beneficial holders of our common stock.

Effective at the opening of business on Friday, July 20, 2007, our common stock was delisted from The Nasdaq Global Market. Our common stock was delisted because we were out of compliance with Nasdaq Rule 4310(c)(14), which requires the timely filing of reports with the SEC. Our inability to file our reports with the SEC was due to the matters discussed in this Form 10-K in the “Explanatory Note.” We are committed to regaining compliance with all filing requirements and obtaining relisting of our common stock on Nasdaq as soon as possible. Currently, our common stock is quoted Over-the-Counter.

DIVIDENDS

We have never paid a cash dividend to stockholders. We have retained our earnings for use in the business. There is also a contractual restriction in our ability to pay dividends. Our leasing business credit facility restricts dividends to 50% of net income accumulated after September 30, 2000. Therefore, the payment of cash dividends on our common stock is unlikely in the foreseeable future. Any future determination concerning the payment of dividends will depend upon the elimination of this restriction and the absence of similar restrictions in other agreements, our financial condition, results of operations and any other factors deemed relevant by our Board

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PURCHASES OF OUR COMMON STOCK

The following table provides information regarding our purchases of ePlus inc. common stock during the fiscal year ended March 31, 2006:

Period	Total number of shares purchased (1)		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Maximum number of shares that may yet be purchased under the plans or programs

April 1, 2005 through April 30, 2005		30,000	$	11.20		30,000		621,212	(2)
May 1, 2005 through May 31, 2005		25,000	$	11.97		25,000		557,577	(3)
June 1, 2005 through June 30, 2005		-	$	12.45		-		536,342	(4)
July 1, 2005 through July 31, 2005		49,300	$	12.70		49,300		476,890	(5)
August 1, 2005 through August 31, 2005		20,000	$	12.86		20,000		450,693	(6)
September 1, 2005 through September 30, 2005		46,000	$	12.76		46,000		409,293	(7)
October 1, 2005 through October 31, 2005		230,685	$	13.27		230,685		166,335	(8)
November 1, 2005 through November 17, 2005		19,051	$	13.76		19,051		141,384	(9)
November 18, 2005 through November 30, 2006		2,800	$	14.27		2,800		873,163	(10)
December 1, 2005 through December 31, 2005		24,220	$	13.99		24,220		866,318	(11)
January 1, 2006 through January 31, 2006		23,966	$	14.20		23,966		829,354	(12)
February 1, 2006 through February 28, 2006		30,568	$	14.15		30,568		802,166	(13)
March 1, 2006 through March 31, 2006		42,500	$	13.99		42,500		768,950	(14)

(1) All shares acquired were in open-market purchases.

(2) The share purchase authorization in place for the month ended April 30, 2005 had purchase limitations on both the number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of April 30, 2005, the remaining authorized dollar amount to purchase shares was $6,960,058 and, based on April’s average price per share of $11.204, 621,212 represents the maximum shares that may yet be purchased.

(3) The share purchase authorization in place for the month ended May 31, 2005 had purchase limitations on both the number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of May 31, 2005, the remaining authorized dollar amount to purchase shares was $6,675,308 and, based on May’s average price per share of $11.972, 557,577 represents the maximum shares that may yet be purchased.

(4) The share purchase authorization in place for the month ended June 30, 2005 had purchase limitations on both the number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of June 30, 2005, the remaining authorized dollar amount to purchase shares was $6,675,308 and, based on June’s average per share of $12.446, 536,342 represents the maximum shares that may yet be purchased.

(5) The share purchase authorization in place for the month ended July 31, 2005 had purchase limitations on both the number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of July 31, 2005, the remaining authorized dollar amount to purchase shares was $6,056,503 and, based on July’s average price per share of $12.700, 476,890 represents the maximum shares that may yet be purchased.

(6) The share purchase authorization in place for the month ended August 31, 2005 had purchase limitations on both the number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of August 31, 2005, the remaining authorized dollar amount to purchase shares was $5,796,808 and, based on August’s average price per share of $12.862, 450,693 represents the maximum shares that may yet be purchased.

(7) The share purchase authorization in place for the month ended September 30, 2005 had purchase limitations on both the number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of September 30, 2005, the remaining authorized dollar amount to purchase shares was $5,221,348 and, based on September’s average price per share of $12.757, 409,293 represents the maximum shares that may yet be purchased.

(8) The share purchase authorization in place for the month ended October 31, 2005 had purchase limitations on both the number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of October 31, 2005, the remaining authorized dollar amount to purchase shares was $2,207,597 and, based on October’s average price per share of $13.272, 166,335 represents the maximum shares that may yet be purchased.

(9) The share purchase authorization in place during the period of November 1–17, 2005 had purchase limitations on both the number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of November 17, 2005, the remaining authorized dollar amount to purchase shares was $1,945,422 and, based on this period’s average price per share of $13.761, 141,384 represents the maximum shares that may yet be purchased.

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(10) The Board authorized a share purchase authorization effective November 18, 2005 which had purchase limitations on both the number of shares (3,000,000) as well as a total dollar cap ($12,500,000). For the period of November 18–30, 2005, the remaining authorized dollar amount to purchase shares was $12,460,034 and, based on this period’s average price per share of $14.274, 873,163 represents the maximum shares that may yet be purchased.

(11) The share purchase authorization in place for the month ended December 31, 2005 had purchase limitations on both the number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of December 31, 2005, the remaining authorized dollar amount to purchase shares was $12,119,788 and, based on December’s average price per share of $13.990, 866,318 represents the maximum shares that may yet be purchased.

(12) The share purchase authorization in place for the month ended January 31, 2006 had purchase limitations on both the number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of January 31, 2006, the remaining authorized dollar amount to purchase shares was $11,780,149 and, based on January’s average price per share of $14.204, 829,354 represents the maximum shares that may yet be purchased.

(13) The share purchase authorization in place for the month ended February 28, 2006 had purchase limitations on both the number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of February 28, 2006, the remaining authorized dollar amount to purchase shares was $11,349,850 and, based on February’s average price per share of $14.149, 802,166 represents the maximum shares that may yet be purchased.

(14) The share purchase authorization in place for the month ended March 31, 2006 had purchase limitations on both the number of shares (3,000,000) as well as a total dollar cap ($12,500,000). As of March 31, 2006, the remaining authorized dollar amount to purchase shares was $10,756,072 and, based on March’s average price per share of $13.988, 768,950 represents the maximum shares that may yet be purchased.

The timing and expiration date of the stock repurchase authorizations are included in Note 11, “Stock Repurchase” to our Consolidated Financial Statements.

ITEM 6. SELECTED FINANCIAL DATA

The Selected Consolidated Financial Data set forth below should be read in conjunction with our Consolidated Financial Statements and related Notes thereto and the information included under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1, “Business.”

The information presented in the following tables has been adjusted to reflect the restatement of our financial results, which is more fully described in the “Explanatory Note” immediately preceding Part I, Item 1, “Business;” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 2, “Restatement of Consolidated Financial Statements” to our Consolidated Financial Statements contained elsewhere in this Form 10-K.

We have not amended our previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by the restatement. The financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Annual Report on Form 10-K, and the financial statements and related financial information contained in those previously filed reports should no longer be relied upon.

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ePLUS INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)

	Year Ended March 31,
	2002		2003		2004		2005			2006
	As Restated		As Restated		As Restated		As Restated
*CONSOLIDATED STATEMENTS OF OPERATIONS*
Revenues:
Sales of product and services	$	133,008	$	228,770	$	267,899	$	480,970		$	583,068
Sales of leased equipment		9,353		6,096		-		-			1,727
Lease revenues		48,850		50,520		51,254		46,344			49,161
Fee and other income		13,774		14,260		11,405		48,485	(1)		13,363
Total revenues		204,985		299,646		330,558		575,799			647,319
Costs and Expenses:
Cost of sales, product and services		114,554		201,277		236,283		432,838			524,967
Cost of sales, leased equipment		9,044		5,892		-		-			1,690
Direct lease costs		9,579		6,582		10,561		11,445			16,695
Professional and other fees		2,718		3,188		3,701		9,417			6,696
Salaries and benefits		31,767		43,927		42,349		54,335			62,308
General and administrative expenses		12,193		14,499		14,631		18,253			18,603
Litigation settlement and judgment		-		-		-		-			10,176
Interest and financing costs		11,810		8,316		6,894		5,877			7,250
Total costs and expenses		191,665		283,681		314,419		532,165			648,385

Earnings (loss) before provision for income taxes		13,320		15,965		16,139		43,634			(1,066	)
Provision for (benefit from) income taxes		5,388		6,622		6,647		17,928			(545	)
Net earnings (loss)	$	7,932	$	9,343	$	9,492	$	25,706		$	(521	)

Net earnings (loss) per common share—Basic	$	0.77	$	0.93	$	1.02	$	2.89		$	(0.06	)
Net earnings (loss) per common share—Diluted	$	0.76	$	0.92	$	0.95	$	2.73		$	(0.06	)

Weighted average shares outstanding—Basic		10,235,155		10,060,179		9,333,388		8,898,296			8,347,727
Weighted average shares outstanding—Diluted		10,448,021		10,108,211		9,976,822		9,409,119			8,347,727

(1) Includes proceeds from a patent-infringement litigation settlement of $37.0 million for the year ended March 31, 2005.

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ePLUS INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands)

	As of March 31,
	2002		2003		2004		2005		2006
	As Restated		As Restated		As Restated		As Restated
*CONSOLIDATED BALANCE SHEETS*
Assets:
Cash and cash equivalents	$	28,224	$	27,784	$	25,155	$	38,852	$	20,697
Accounts receivable—net		41,397		38,385		51,189		93,555		103,060
Notes receivable		228		53		52		115		330
Inventories		872		1,373		900		2,117		2,292
Investment in leases and leased equipment—net		169,006		181,659		185,545		188,856		205,774
Other assets		39,188		29,177		30,239		36,633		41,792
Total assets	$	278,915	$	278,431	$	293,080	$	360,128	$	373,945

Liabilities:
Accounts payable	$	15,909	$	28,314	$	39,404	$	55,499	$	73,657
Salaries and commissions payable		492		620		584		771		4,124
Recourse notes payable		4,660		2,736		6		6,265		6,000
Non-recourse notes payable		129,977		116,255		117,857		114,839		127,973
Other liabilities		20,704		19,938		22,777		49,428		33,615
Total liabilities		171,742		167,863		180,628		226,802		245,369
Stockholders’ equity		107,173		110,568		112,452		133,326		128,576
Total liabilities and stockholders’ equity	$	278,915	$	278,431	$	293,080	$	360,128	$	373,945

Certain liabilities presented for prior periods have been reclassified to conform to the March 31, 2006 presentation.

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ePLUS INC. AND SUBSIDIARIES

SELECTED CONSOLIDATED FINANCIAL DATA

(Dollar amounts in thousands, except per share data)


	Year Ended March 31,
	2002									2003
	As Previously Reported		Stock-Based Compensation and Tax-Related Adjustments			As Restated		As Previously Reported		Stock-Based Compensation and Tax-Related Adjustments			As Restated
*CONSOLIDATED STATEMENTS OF OPERATIONS*
Revenues:
Sales of product and services	$	133,008	$	-		$	133,008	$	228,770	$	-		$	228,770
Sales of leased equipment		9,353		-			9,353		6,096		-			6,096
Lease revenues		48,850		-			48,850		50,520		-			50,520
Fee and other income		13,774		-			13,774		14,260		-			14,260
Total revenues		204,985		-			204,985		299,646		-			299,646
Costs and Expenses:
Cost of sales, product and services		114,554		-			114,554		201,277		-			201,277
Cost of sales, leased equipment		9,044		-			9,044		5,892		-			5,892
Direct lease costs		9,579		-			9,579		6,582		-			6,582
Professional and other fees		2,718		-			2,718		3,188		-			3,188
Salaries and benefits		30,165		1,602			31,767		43,428		499			43,927
General and administrative expenses		12,193		-			12,193		14,499		-			14,499
Interest and financing costs		11,810		-			11,810		8,308		8			8,316
Total costs and expenses		190,063		1,602			191,665		283,174		507			283,681

Earnings before provision for income taxes		14,922		(1,602	)		13,320		16,472		(507	)		15,965
Provision for income taxes		6,010		(622	)		5,388		6,760		(138	)		6,622
Net earnings	$	8,912	$	(980	)	$	7,932	$	9,712	$	(369	)	$	9,343

Net earnings per common share—Basic	$	0.87	$	(0.10	)	$	0.77	$	0.97	$	(0.04	)	$	0.93
Net earnings per common share—Diluted	$	0.85	$	(0.09	)	$	0.76	$	0.96	$	(0.04	)	$	0.92

Weighted average shares outstanding—Basic		10,235,129		26			10,235,155		10,061,088		(909	)		10,060,179
Weighted average shares outstanding—Diluted		10,458,235		(10,214	)		10,448,021		10,109,809		(1,598	)		10,108,211

See comparable information for the years ended March 31, 2004 and 2005 in Note 2 to our Consolidated Financial Statements.

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ePLUS INC. AND SUBSIDIARIES

SELECTED CONSOLIDATED FINANCIAL DATA

(Dollar amounts in thousands)

	As Previously Reported		Stock-based Compensation Adjustments			Other Adjustments			As Restated
*CONSOLIDATED BALANCE SHEETS*
As of March 31, 2002
Assets:
Cash and cash equivalents	$	28,224	$	-		$	-		$	28,224
Accounts receivable—net		41,397		-			-			41,397
Notes receivable		228		-			-			228
Inventories		872		-			-			872
Investment in leases and leased equipment—net		169,087		-			(81	)		169,006
Other assets		39,188		-			-			39,188
Total assets	$	278,996	$	-		$	(81	)	$	278,915

Liabilities:
Accounts payable	$	18,122	$	-		$	(2,213	)	$	15,909
Salaries and commissions payable		492		-			-			492
Recourse notes payable		4,660		-			-			4,660
Non-recourse notes payable		129,977		-			-			129,977
Other liabilities		19,456		(884	)		2,132			20,704
Total liabilities		172,707		(884	)		(81	)		171,742
Stockholders’ equity		106,289		884			-			107,173
Total liabilities and stockholders’ equity	$	278,996	$	-		$	(81	)	$	278,915

As of March 31, 2003
Assets:
Cash and cash equivalents	$	27,784		-			-			27,784
Accounts receivable—net		38,385		-			-			38,385
Notes receivable		53		-			-			53
Inventories		1,373		-			-			1,373
Investment in leases and leased equipment—net		182,169		-			(510	)		181,659
Other assets		29,177		-			-			29,177
Total assets	$	278,941	$	-		$	(510	)	$	278,431

Liabilities:
Accounts payable	$	31,550		-			(3,236	)		28,314
Salaries and commissions payable		620		-			-			620
Recourse notes payable		2,736		-			-			2,736
Non-recourse notes payable		116,255		-			-			116,255
Other liabilities		18,163		(951	)		2,726			19,938
Total liabilities		169,324		(951	)		(510	)		167,863
Stockholders’ equity		109,617		951			-			110,568
Total liabilities and stockholders’ equity	$	278,941	$	-		$	(510	)	$	278,431

As of March 31, 2004
Assets:
Cash and cash equivalents	$	25,155		-			-			25,155
Accounts receivable—net		51,189		-			-			51,189
Notes receivable		52		-			-			52
Inventories		900		-			-			900
Investment in leases and leased equipment—net		186,667		-			(1,122	)		185,545
Other assets		30,239		-			-			30,239
Total assets	$	294,202	$	-		$	(1,122	)	$	293,080

Liabilities:
Accounts payable	$	42,134	$	-		$	(2,730	)	$	39,404
Salaries and commissions payable		584		-			-			584
Recourse notes payable		6		-			-			6
Non-recourse notes payable		117,857		-			-			117,857
Other liabilities		22,037		(868	)		1,608			22,777
Total liabilities		182,618		(868	)		(1,122	)		180,628
Stockholders’ equity		111,584		868			-			112,452
Total liabilities and stockholders’ equity	$	294,202	$	-		$	(1,122	)	$	293,080

See comparable information as of March 31, 2005 in Note 2 to the Consolidated Financial Statements.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF AUDIT COMMITTEE REVIEW; RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

In this Annual Report for the year ended March 31, 2006, we have restated our Consolidated Balance Sheet as of March 31, 2005, and the related Consolidated Statements of Operations, Stockholders’ Equity and Cash Flows for each of the fiscal years ended March 31, 2005 and 2004, and quarterly data for each of the four quarters in the fiscal year ended March 31, 2005, and for the first three quarters in the fiscal year ended March 31, 2006, for the effects of errors in accounting for stock options. Our Consolidated Balance Sheet as of March 31, 2005 and our Consolidated Statements of Cash Flows for the years ended March 31, 2005 and 2004 were also restated to correct errors related to cash flows from dealer floor plan financing arrangements and the cash flow statement presentation of payments made by our lessees directly to our third-party, non-recourse lenders. See Note 2, “Restatement of Consolidated Financial Statements” and Note 15, “—Quarterly Data — Restated and Unaudited” in the Notes to the Consolidated Financial Statements for further discussion of the effects of the restatement.

As part of the restatement, we have recorded additional pre-tax share-based compensation expense (recovery) with regard to past stock option grants of approximately $(20) thousand and $810 thousand for our fiscal years ended March 31, 2005 and 2004, respectively. The total additional cumulative pre-tax share-based compensation expense for fiscal years prior to 2004 was $4.4 million. In addition, the reclassification of cash flows related to our direct financing and sales-type lease transactions decreased net cash used in operating activities and increased net cash used in financing activities by $19.5 million for the fiscal year ended March 31, 2005 and $19.9 million for the fiscal year ended March 31, 2004.

Previously filed Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q affected by the restatement will not be amended. Accordingly, previously issued financial statements and related reports of our independent registered public accounting firm should not be relied on.

As discussed in Note 2, “Restatement of Consolidated Financial Statements” to our Consolidated Financial Statements, the restatement reflected in this Form 10-K corrects certain items related to:

(i)

stock-based compensation adjustments related to revised measurement dates under APB 25;

(ii)

stock-based compensation adjustments related to previously unrecorded modifications under FIN 44;

(iii)

tax-related adjustments resulting from the above errors in stock option accounting;

(iv)

reclassification of our dealer floor plan financing agreements within the Consolidated Balance Sheets and Statements of Cash Flows; and

(v)

reclassification of payments made by lessees to third-party non-recourse lenders within the Statements of Cash Flows.

Our decision to restate the previously issued Consolidated Financial Statements for the effects of errors in accounting for stock options was based on the findings of the Audit Committee Investigation of our historical stock option granting practices and related accounting.

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Stock Option Accounting Restatement

Internal Review and Audit Committee Investigation

On June 21, 2006, our CEO received a letter, dated June 20, 2006, from a shareholder raising concerns about 450,000 options awarded to our four senior officers in 2004. Our CEO forwarded the letter to the Chairman of the Audit Committee. On June 23, 2006, the Audit Committee commenced a voluntary investigation of the issues raised in the June 20, 2006 letter concerning the 2004 Options. Subsequently, the Audit Committee Investigation was expanded to cover all grants issued by us, since our IPO in 1996. The Audit Committee retained outside legal counsel, who in turn retained forensic accountants, to assist in the Investigation.

With the assistance of independent counsel, the Audit Committee Investigation obtained and reviewed corporate books and records relating to option grants since our IPO in 1996, including relevant stock option plans, option agreements, minutes and consents of the Board and Compensation Committee, relevant public filings and other available documentation. In addition, independent counsel for the Audit Committee reviewed a large volume of potentially relevant emails and electronic documents, and interviewed 28 individuals, many on multiple occasions. The Audit Committee’s independent counsel developed an exhaustive search term list, which was applied to the electronic data received. Approximately 79 gigabytes of electronic data was located and reviewed. The Audit Committee met frequently throughout this course of its Investigation.

As a result of the Audit Committee Investigation, the Audit Committee determined that:

subsequent to July 1998, the SIC was not formally approved to administer the stock option plans. Nonetheless, the SIC continued to grant stock options as disclosed in the proxy statements. We intend to honor the awards made to employees by the SIC;

certain grants to non-employee directors were not made on the dates specified by the then-applicable stock option plans;

the measurement date we used for accounting purposes for certain stock option grants were not accurate because all the required granting actions were not completed as of the original grant date. In addition, for several option grants, the accounting consequences of modifications to the original awards, or the presence of employee performance criteria, were not properly applied;

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our internal controls, system of reporting, application of U.S. GAAP and documentation with respect to option awards were inadequate. See Item 9A, “Controls and Procedures;” and

there was no evidence of falsified corporate records of meetings, consents or “phantom” options. Nor was there any evidence of the destruction of documents.

As a result of the Audit Committee Investigation, the Audit Committee and ePlus determined that the appropriate measurement dates for determining the accounting treatment for certain stock options we granted from September 1, 1996 through August 10, 2006 differ from the recorded measurement dates used in preparing our Consolidated Financial Statements. As a result, non-cash stock-based compensation expense should have been recorded with respect to these stock option grants. The Audit Committee further determined that certain stock option grants or modifications of stock option grants that were not in accordance with our stock-based compensation plans should have been accounted for using variable plan accounting for the duration of the options. The restatement in this Form 10-K principally reflects additional stock-based compensation expense and related tax effects under APB 25 and related interpretations issued by the FASB, which was our historical accounting method, relating to our historic stock option practices.

Restated Accounting for Historical Stock Option Grants

In connection with the Audit Committee Investigation, we performed a review of stock option grant measurement dates for all options we issued during the Relevant Period. The accounting literature in effect during the Relevant Period was primarily APB 25, and the related FASB interpretations. This guidance focused on the establishment of a “measurement date” for purposes of determining compensation expense relating to stock option awards. Under APB 25, “measurement date” is defined as the first date on which both of the following are known (1) the number of shares that an individual employee is entitled to receive, and (2) the option or purchase price, if any. This accounting guidance provided that companies would not have to record compensation expense in connection with options granted to employees, officers and directors if the quoted market price of the stock at the measurement date of the stock option award was equal to the amount the employee was required to pay. In contrast, companies would have to record compensation expense to the extent that the quoted market price of the stock at the measurement date exceeded the amount the employee is required to pay.

We determined revised measurement dates for those option grants with incorrect measurement dates and recorded stock-based compensation expense to the extent that the fair market value of our stock on the revised measurement date exceeded the exercise price of the stock option, in accordance with APB 25 and related FASB interpretations. As such, we recorded stock-based compensation expense in our historical financial statements through March 31, 2005 totaling $5.2 million, as well as the tax related impact resulting from the stock-based compensation adjustments of $1.6 million. Additionally, we restated both basic and diluted weighted average shares outstanding for changes in measurement dates resulting from the Investigation. The combination of recording stock-based compensation expense and restating our weighted average shares outstanding has resulted in restated basic and diluted EPS.

Step 1

We reviewed, as available, the documents noted below for sufficient evidence that the approval and terms of the stock options were determined with finality:

Board meeting minutes, resolutions and written consent actions;

Compensation Committee and SIC meeting minutes and resolutions;

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offer letters signed by an authorized approver and the recipient and stating the number of shares and exercise price;

internal communications from an authorized approver stating the recipient, number of shares and exercise price;

executed acquisition agreements stating the number of shares and the option price;

historical stock prices as reflected on Nasdaq to determine when stock price based performance vesting occurred;

public filings as they relate to awards granted in connection with the IPO; and

all stock option plans in place over the Relevant Period.

Step 2

In addition to the documents listed in Step 1, we examined the following documents:

all internal and external communications including emails, offer letters, memos, faxes, letters and handwritten notes;

acquisition agreements that do not contain recipients, exercise price and number of shares;

outside stock option administrator transaction data (e.g. data from First Union, Wachovia, or AST);

management practice regarding the annual non-employee director grants; and

stock option agreements hand dated or not hand dated.

In conjunction with all available documentation, we considered the following facts and circumstances:

our stock option granting practices;

acquisition dates;

new hires start dates;

effective dates of non-employee director appointments to the Board;

our stock performance; and

all other available information.

Step 3

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stock option agreement signed by a member of the SIC and hand dated by the optionee unless other facts and circumstances exist that present ambiguity as to the accuracy of the hand date;

the legible ‘run date’ of the stock option administrator report; and

Measurement dates for approximately 7.6% of the total number of grants made during the Relevant Period were determined based on the documentation listed in Step 3 above.

We also determined that we should have recorded stock-based compensation expense associated with the modification of certain stock option grants which resulted in the application of variable accounting under FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation” (“FIN 44”). The modified grants included certain grants made to newly hired employees, annual director grants, grants made to employees in connection with an acquisition, and discretionary grants made to officers, employee directors, and rank and file employees.

Our Process for Granting Stock Options

Stock Incentive Committee

Beginning in 1996, two employee directors, Bruce Bowen and Phillip G. Norton, began issuing options to employees under the authority of the SIC as prescribed by the provisions of the 1996 Plans.

Under the terms of the LTIP, the Compensation Committee was required to approve any awards. In practice, however, the SIC continued to administer the awards under our current stock compensation plan, the Amended LTIP. The LTIP and Amended LTIP permit a delegation of authority to one or more employee-directors to issue options in certain cases. While we have been unable to locate a document such as Board minutes or a unanimous written consent reflecting a delegation of such authority, our public disclosures provided that the SIC was authorized to award stock, and various stock options and rights and other stock-based compensation grants under the 1998 Plans.

The SIC met on an ad hoc basis to determine to which employees to grant options. In addition to one occasion in which all employees were awarded options, the SIC considered awarding options to (1) employees of companies we acquired in order to enhance employee retention; (2) key ePlus employees in order to provide incentives and enhance retention; and (3) new employees in connection with their hiring.

Administration and Tracking of Stock Options

Historically, our human resources manager prepared the stock option agreements and either administered the stock options internally or communicated with outside stock option administrators, who maintained the detail records of outstanding stock options. Our human resources manager was primarily responsible for retrieving the executed agreements from the employees.

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The stock options were tracked on a spreadsheet administered by the accounting department for the period from our IPO in 1996 through 1997. In late 1997 to early 1998, we licensed SOA Software that was used internally by our human resources manager to enter and track all the stock option information. This software was used from its acquisition through April 2000.

In April of 2000, we solicited the services of First Union to process the stock option administration externally. First Union utilized the same SOA Software to maintain the stock option data. The stock option files from our SOA Software were exported and sent to First Union in May of 2000 to upload into their system. Our human resources manager sent the stock option update information to First Union primarily by email, but sometimes by fax and on occasion by phone. The data sent to First Union usually no less than quarterly consisted of any stock options that were granted, employee terminations and employee address changes. First Union eventually merged with Wachovia. Effective June 30, 2006, the shareholder services business at Wachovia was purchased by AST.

Types of Awards

Annual Non-Employee Director Grants

These are grants relating to the annual awards made to non-employee directors in the Relevant Period. The stock option awards to outside directors were provided for as automatic grants under the terms of the 1996 Plans and the 1998 Plans. The administration of awards to outside directors was not consistently performed in accordance with the provisions of the applicable plans until 2003. The 1996 Plans provided that stock option grants to be awarded on the anniversary date of a director’s admission to the Board. This provision changed in the 1998 Plans to provide for the stock option grants were to be awarded on the date following the annual stockholder meeting. A certain number of the awards issued after the change in the provision in the stock plans were administered after the change in the stock option plan as if the appropriate grant date was the anniversary date of our IPO, November 20. In addition, certain awards were issued on the director’s new appointment anniversary date or the date following the annual stockholders meeting.

Acquisition Grants

These are grants relating to options awarded to new employees who joined us by way of an acquisition. These options were not replacement options for options that existed prior to the acquisition. In our acquisitions prior to 2002, often times the prior owners of the selling company would negotiate employment perks for their key employees to induce them to stay during the acquisition. Many times, stock options were negotiated prior to acquisition and the specific optionees and number of shares awarded to each optionee were documented in a letter of intent or other documentation created during the acquisition process. In some cases, the request was brought before the Compensation Committee to be voted upon in conjunction with the overall presentation of the acquisition opportunity.

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New Hire Grants

Discretionary Grants

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Income and Payroll Tax Related Matters

In certain instances where a revised measurement date was applied to those stock options classified as incentive stock options ("ISOs"), in accordance with United States tax rules, it had the effect of disqualifying the ISO tax treatment of those stock options, causing those stock options to be recharacterized as non-qualified options. For purposes of assessing the tax impact of the accounting change, we concluded that the grant date for tax purposes is the same as the measurement date for financial reporting purposes. The recharacterization of ISOs to non-qualified status resulted in a failure to withhold certain employee payroll taxes and consequently we have recorded an adjustment to salaries and benefits, along with an adjustment to interest and financing costs for penalties and interest, based on the period of exercise. In subsequent periods in which the liabilities were legally extinguished due to statutes of limitations, the payroll taxes, interest and penalties were reversed, and recognized as a reduction in the related functional expense category in our consolidated statements of operations. The fluctuations in the table below for payroll taxes and related penalties are the result of (1) the timing of stock option exercises, and (2) the reversals of expenses previously recorded due to the expiration of these statutes of limitations.

The table below under “—Summary of Impact of Restatement Adjustments for Historical Option Grants” shows income tax benefits recorded in relation to the non-cash stock-based compensation adjustments.

Summary of Impact of Restatement Adjustments for Historical Option Grants

Fiscal Year	Share-Based			Payroll			Payroll			Income Tax			Total
	Compensation			Tax Due			Withholding			Provision			Adjustments,
	Expense			On			Tax			(Benefit)			Net of Tax
				Options			Penalty			Related to
							On			Share-Based
							Exercises			Compensation
										and Payroll
										Taxes
(in thousands)
1997	$	81		$	-		$	-		$	(31	)	$	50
1998		137			-			-			(53	)		84
1999		149			-			-			(57	)		92
2000		962			568			121			(564	)		1,087
2001		990			57			12			(364	)		695
2002		1,602			-			-			(622	)		980
2003		465			34			8			(138	)		369
Cumulative effect on April 1, 2003 opening retained earnings		4,386			659			141			(1,829	)		3,357
2004		810			213			48			(409	)		662
2005		(20	)		(503	)		(104	)		209			(418	)
Total	$	5,176		$	369		$	85		$	(2,029	)	$	3,601

See Note 2, “Restatement of Consolidated Financial Statements,” to our Consolidated Financial Statements for a detailed summary of adjustments.

Summary of the Restatement — Other Items

In addition to the stock option errors described above, we have also restated our Consolidated Balance Sheet as of March 31, 2005 and our Consolidated Statements of Cash Flows for the fiscal years ended March 31, 2005 and 2004 for the following reasons:

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We have now determined that when an unaffiliated finance company remits payments to our suppliers on our behalf, we should show this transaction as a financing cash inflow and an operating cash outflow. In addition, when we repay the financing company, we should present this transaction as a financing cash outflow. As a result, we have restated the accompanying fiscal year 2005 and 2004 Consolidated Financial Statements to correct this error.

Remedial Actions Taken

The Board cancelled $400,000 in cash bonuses that were scheduled to be paid to the four senior officers in 2006. The determination was made that executive bonuses were not appropriate in light of the issues raised in the Audit Committee Investigation and the expense of that Investigation.

Recognizing a need to strengthen our administration, we retained an experienced human resources executive as the new head of our Human Resources Department. In addition, our Board has been expanded to add two additional independent directors.

Moreover, recognizing past weaknesses in the processes relating to stock option awards, the Board adopted new policies and procedures to govern the award of stock options, if any, in the future, as follows:

We now require that all option grants be effective and priced as of the date approved or at a predetermined date certain in the future, in accordance with the applicable plan and the terms of the grant.

The SIC was discontinued and all decisions regarding stock options will be made by the Compensation Committee or the full Board.

Each option grant shall be approved at an in-person or telephonic meeting of the Compensation Committee or full Board. Option grants shall not be approved by unanimous written consent.

We now require systematic authorization for option grants to ensure that all option transactions adhere to our plans and stated policies. All such transactions must be accurately reflected in our books and records and have appropriate supporting documentation. Determinations of the Compensation Committee and/or the Board regarding options must be implemented in an accurate and timely manner.

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We have established a policy to issue options only during a specified window each year, immediately after release of the Form 10-K for the prior year or after quarterly earnings reports, with narrow exceptions for new employees and other special circumstances as determined by the Compensation Committee or the Board.

Each option granted must specify all material terms of any options granted, including date of grant, exercise price, vesting schedule, duration, breakdown of ISOs versus non-qualified stock options, and any other terms the Compensation Committee or the Board deems appropriate.

All Forms 4 must be filed within two business days of any grant.

Option agreements for executive officers must be in the form on file with the SEC.

All option agreements must be signed contemporaneously with each grant.

The Compensation Committee will in its discretion engage independent outside counsel to obtain legal advice on issues that are significant and not ministerial rather than relying on company counsel for advice on such matters.

The Compensation Committee must be advised of the accounting and reporting impact of each grant.

We will strengthen our Internal Audit function by: (i) having the Internal Audit function report directly to the Audit Committee; (ii) implementing appropriate enhancements to our independent monitoring of financial controls, including specifically the monitoring of stock options and compensation issues; and (iii) implementing appropriate additional compliance training for our employees and management.

Our general counsel must review all proposed grants to ensure that all legal requirements have been met.

We shall adopt a new long-term incentive plan to effectuate these recommendations. We will ensure that the new plan is accurately described in public filings.

In connection with the restatement of our Consolidated Statements of Cash Flows, we are working with the Audit Committee to identify and implement corrective actions, where required, to improve the effectiveness of our internal controls, including enhancements of systems, accounting and review procedures and communications among our staff.

DISCUSSION AND ANALYSIS OVERVIEW

The following discussion and analysis of results of operations and financial condition of ePlus gives effect to the restatement discussed in Note 2, “Restatement of Consolidated Financial Statements” to our Consolidated Financial Statements and should be read in conjunction with the Consolidated Financial Statements and the related Notes included elsewhere in this report.

Our results of operations are susceptible to fluctuations for a number of reasons, including, without limitation, customer demand for our products and services, supplier costs, interest rate fluctuations and differences between estimated residual values and actual amounts realized related to the equipment we lease. Operating results could also fluctuate as a result of the sale of equipment in our lease portfolio prior to the expiration of the lease term to the lessee or to a third party. Such sales of leased equipment prior to the expiration of the lease term may have the effect of increasing revenues and net earnings during the period in which the sale occurs, and reducing revenues and net earnings otherwise expected in subsequent periods.

We currently derive the majority of our revenue from sales and financing of information technology and other assets. We have expanded our product and service offerings under our comprehensive set of solutions which represents the continued evolution of our original implementation of our e-commerce products entitled ePlusSuite.

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The expansion to our bundled solution is a framework that combines our IT sales and professional services, leasing and financing services, asset management software and services, procurement software, and electronic catalog content management software and services.

We expect to expand or open new sales locations and hire additional staff for specific targeted market areas in the near future whenever we can find both experienced personnel and qualified geographic areas.

As a result of our acquisitions and expansion of sales locations, our historical results of operations and financial position may not be indicative of our future performance over time.

RECENT ACCOUNTING PRONOUNCEMENTS— In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” or SFAS No. 123R. SFAS No. 123R replaces SFAS No 123, “Accounting for Stock-Based Compensation,” and supersedes APB 25, “Accounting for Stock Issued to Employees,” and subsequently issued stock option related guidance. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based transactions. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. Entities will be required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide services in exchange for the award (usually the vesting period). The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models. If an equity award is modified after the grant date, incremental compensation expense will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. We are required to apply SFAS No. 123R to all awards granted, modified, or settled as of the beginning of the annual fiscal reporting period that begins after June 15, 2005. We are also required to use either the modification-prospective method or modified-retrospective method. Under the modification-prospective method we must recognize compensation expense for all awards subsequent to adopting the standard and for the unvested portion of previously granted awards outstanding upon adoption. Under the modified-retrospective method, we must restate our previously issued financial statements to recognize the amounts we previously calculated and reported on a pro forma basis, as if the prior standard had been adopted. Under both methods, we are permitted to use either the straight-line or an accelerated method to amortize the cost as an expense for awards with graded vesting. The standard permits and encourages early adoption. We have commenced our analysis of the impact of SFAS No. 123R, but have decided not to early adopt. We will use the modified-prospective and the straight-line method. We are currently evaluating the impact that SFAS No. 123R will have on our results of operations and our financial position.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requires retrospective application, or the latest practical date, as the preferred method to report a change in accounting principle or correction of an error. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. While the adoption of SFAS No. 154 did not have a material impact on our Consolidated Financial Statements, the restatement disclosures included herein comply with the provisions of the standard.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”). The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. The interpretation is effective for us on April 1, 2007. We are assessing FIN 48 and have not determined the impact that the adoption of FIN 48 will have on our Consolidated Financial Statements. We do, however, expect to record a cumulative effect adjustment to our fiscal year 2008 balance of beginning earnings retained for use in business, and that adjustment may be material.

During September 2006, the SEC released SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB No. 108 requires a registrant to quantify all misstatements that could be material to financial statement users under both the “rollover” and “iron curtain” approaches. If either approach results in quantifying a misstatement that is material, the registrant must adjust its financial statements. SAB No. 108 is applicable for our fiscal year 2007. The adoption of SAB No. 108 is not expected to have a material impact on our Consolidated Financial Statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for our fiscal year 2009. At this time, we do not believe the adoption of SFAS No. 157 will have a material impact on our results of operations or financial position.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115.” SFAS No. 159 gives companies an opportunity to use fair value measurements in financial reporting and permits entities to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact that SFAS No. 159 will have on our financial condition and results of operations.

CRITICAL ACCOUNTING POLICIES

SALES OF PRODUCT AND SERVICES. We adhere to guidelines and principles of sales recognition described in Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” issued by the staff of the SEC. Under SAB No. 104, sales are recognized when the title and risk of loss are passed to the customer, there is persuasive evidence of an arrangement for sale, delivery has occurred and/or services have been rendered, the sales price is fixed and determinable and collectibility is reasonably assured. Using these tests, the vast majority of our sales represent product sales recognized upon delivery; however, we make an adjustment for our sales that have FOB Shipping Point terms.

From time to time, in the sales of product and services, we may enter into contracts that contain multiple elements. Sales of services currently represent a small percentage of our sales. For services that are performed in conjunction with product sales and are completed in our facilities prior to shipment of the product, sales for both the product and services are recognized upon shipment. Sales of services that are performed at customer locations are recorded as sales of product or services when the services are performed. If the service is performed at a customer location in conjunction with a product sale or other service sale, we recognize the sale in accordance with SAB No. 104 and Emerging Issues Task Force (“EITF”) 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables.” Accordingly, in an arrangement with multiple deliverables, we recognize sales for delivered items only when all of the following criteria are satisfied:

the delivered item(s) has value to the client on a stand-alone basis;

there is objective and reliable evidence of the fair value of the undelivered item(s); and

if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in our control.

We sell certain third-party service contracts and software assurance or subscription products for which we evaluate whether the subsequent sales of such services should be recorded as gross sales or net sales in accordance with the sales recognition criteria outlined in SAB No. 104, EITF 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” and FASB Technical Bulletin 90.1, “Accounting for Separately Priced Extended Warranty and Product Contracts.” We must determine whether we act as a principal in the transaction and assume the risks and rewards of ownership or if we are simply acting as an agent or broker. Under gross sales recognition, the entire selling price is recorded in sales of product and services and our costs to the third-party service provider or vendor is recorded in cost of sales, product and services. Under net sales recognition, the cost to the third-party service provider or vendor is recorded as a reduction to sales resulting in net sales equal to the gross profit on the transaction and there are no cost of sales.

In accordance with EITF 00-10, “Accounting for Shipping and Handling Fees and Costs,” we record freight billed to our customers as sales of product and services and the related freight costs as a cost of sales, product and services.

VENDOR CONSIDERATION. We receive payments and credits from vendors, including consideration pursuant to volume sales incentive programs, volume purchase incentive programs and shared marketing expense programs. Vendor consideration received pursuant to volume sales incentive programs is recognized as a reduction to costs of sales, product and services in accordance with EITF Issue No. 02-16, “Accounting for Consideration Received from a Vendor by a Customer (Including a Reseller of the Vendor’s Products).” Vendor consideration received pursuant to volume purchase incentive programs is allocated to inventories based on the applicable incentives from each vendor and is recorded in cost of sales, product and services, as the inventory is sold. Vendor consideration received pursuant to shared marketing expense programs is recorded as a reduction of the related selling and administrative expenses in the period the program takes place only if the consideration represents a reimbursement of specific, incremental, identifiable costs. Consideration that exceeds the specific, incremental, identifiable costs is classified as a reduction of cost of sales, product and services.

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SOFTWARE SALES AND RELATED COSTS. Revenue from hosting arrangements is recognized in accordance with EITF 00-3, “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware.” Hosting arrangements that are not in the scope of Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” require that allocation of the portion of the fee allocated to the hosting elements be recognized as the service is provided. Currently, the majority of our software revenue is generated through hosting agreements and is included in fee and other income on our Consolidated Statements of Operations.

Revenue from sales of our software is recognized in accordance with SOP 97-2, as amended by SOP 98-4, “Deferral of the Effective Date of a Provision of SOP 97-2,” and SOP 98-9, “Modification of SOP 97-2 With Respect to Certain Transactions.” We recognize revenue when all the following criteria exist: there is persuasive evidence that an arrangement exists, delivery has occurred, no significant obligations by us related to services essential to the functionality of the software remain with regard to implementation, the sales price is determinable, and it is probable that collection will occur. Revenues from sales of our software are included in fee and other income on our Consolidated Statements of Operations.

At the time of each sale transaction, we make an assessment of the collectibility of the amount due from the customer. Revenue is only recognized at that time if management deems that collection is probable. In making this assessment, we consider customer creditworthiness and assess whether fees are fixed or determinable and free of contingencies or significant uncertainties. If the fee is not fixed or determinable, revenue is recognized only as payments become due from the customer, provided that all other revenue recognition criteria are met. In assessing whether the fee is fixed or determinable, we consider the payment terms of the transaction and our collection experience in similar transactions without making concessions, among other factors. Our software license agreements generally do not include customer acceptance provisions. However, if an arrangement includes an acceptance provision, we record revenue only upon the earlier of (1) receipt of written acceptance from the customer or (2) expiration of the acceptance period.

Our software agreements often include implementation and consulting services that are sold separately under consulting engagement contracts or as part of the software license arrangement. When we determine that such services are not essential to the functionality of the licensed software and qualify as “service transactions” under SOP 97-2, we record revenue separately for the license and service elements of these agreements. Generally, we consider that a service is not essential to the functionality of the software based on various factors, including if the services may be provided by independent third parties experienced in providing such consulting and implementation in coordination with dedicated customer personnel. If an arrangement does not qualify for separate accounting of the license and service elements, then license revenue is recognized together with the consulting services using either the percentage-of-completion or completed-contract method of contract accounting. Contract accounting is also applied to any software agreements that include customer-specific acceptance criteria or where the license payment is tied to the performance of consulting services. Under the percentage-of-completion method, we may estimate the stage of completion of contracts with fixed or “not to exceed” fees based on hours or costs incurred to date as compared with estimated total project hours or costs at completion. If we do not have a sufficient basis to measure progress towards completion, revenue is recognized upon completion of the contract. When total cost estimates exceed revenues, we accrue for the estimated losses immediately. The use of the percentage-of-completion method of accounting requires significant judgment relative to estimating total contract costs, including assumptions relative to the length of time to complete the project, the nature and complexity of the work to be performed, and anticipated changes in salaries and other costs. When adjustments in estimated contract costs are determined, such revisions may have the effect of adjusting, in the current period, the earnings applicable to performance in prior periods.

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We generally use the residual method to recognize revenues from agreements that include one or more elements to be delivered at a future date when evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements (e.g., maintenance, consulting and training services) based on vendor-specific objective evidence (“VSOE”) is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements (i.e., software license). If evidence of the fair value of one or more of the undelivered services does not exist, all revenues are deferred and recognized when delivery of all of those services has occurred or when fair values can be established. We determine VSOE of the fair value of services revenue based upon our recent pricing for those services when sold separately. VSOE of the fair value of maintenance services may also be determined based on a substantive maintenance renewal clause, if any, within a customer contract. Our current pricing practices are influenced primarily by product type, purchase volume, maintenance term and customer location. We review services revenue sold separately and maintenance renewal rates on a periodic basis and update our VSOE of fair value for such services to ensure that it reflects our recent pricing experience, when appropriate.

Maintenance services generally include rights to unspecified upgrades (when and if available), telephone and Internet-based support, updates and bug fixes. Maintenance revenue is recognized ratably over the term of the maintenance contract (usually one year) on a straight-line basis and is included in fee and other income on our Consolidated Statements of Operations.

When consulting qualifies for separate accounting, consulting revenues under time and materials billing arrangements are recognized as the services are performed. Consulting revenues under fixed-price contracts are generally recognized using the percentage-of-completion method. If there is a significant uncertainty about the project completion or receipt of payment for the consulting services, revenue is deferred until the uncertainty is sufficiently resolved. Consulting revenues are classified as fee and other income on our Consolidated Statements of Operations.

Training services include on-site training, classroom training, and computer-based training and assessment. Training revenue is recognized as the related training services are provided and is included in fee and other income on our Consolidated Statements of Operations.

SALES OF LEASED EQUIPMENT. Sales of leased equipment consist of sales of equipment subject to an existing lease, under which we are a lessor, including any underlying financing related to the lease. Sales of equipment subject to an existing lease are recognized when constructive title passes to the purchaser. For the year ended March 31, 2006, we sold the equipment on an existing lease to a third party, relieving us of all rights and obligations on this lease. This sale resulted in an extinguishment of non-recourse debt of $1.4 million.

LEASE CLASSIFICATION. The manner in which lease finance transactions are characterized and reported for accounting purposes has a major impact upon reported revenue and net earnings. Lease accounting methods critical to our business are discussed below.

We classify our lease transactions in accordance with SFAS No. 13, “Accounting for Leases,” as: (1) direct financing; (2) sales-type; or (3) operating leases. Revenues and expenses between accounting periods for each lease term will vary depending upon the lease classification.

As a result of these three classifications of leases for accounting purposes, the revenues resulting from the “mix” of lease classifications during an accounting period will affect the profit margin percentage for such period and such profit margin percentage generally increases as revenues from direct financing and sales-type leases increase. Should a lease be financed, the interest expense declines over the term of the financing as the principal is reduced.

For financial statement purposes, we present revenue from all three classifications in lease revenues, and costs related to these leases in direct lease costs.

DIRECT FINANCING AND SALES-TYPE LEASES. Direct financing and sales-type leases transfer substantially all benefits and risks of equipment ownership to the customer. A lease is a direct financing or sales-type lease if the creditworthiness of the customer and the collectibility of lease payments are reasonably certain, no important uncertainties surround the amount of unreimbursable costs yet to be incurred, and it meets one of the following criteria: (1) the lease transfers ownership of the equipment to the customer by the end of the lease term; (2) the lease contains a bargain purchase option; (3) the lease term at inception is at least 75% of the estimated economic life of the leased equipment; or (4) the present value of the minimum lease payments is at least 90% of the fair market value of the leased equipment at the inception of the lease.

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Direct financing leases are recorded as investment in leases and leased equipment—net upon acceptance of the equipment by the customer. At the commencement of the lease, unearned lease income is recorded that represents the amount by which the gross lease payments receivable plus the estimated unguaranteed residual value of the equipment exceeds the equipment cost. Unearned lease income is recognized, using the interest method, as lease revenue over the lease term.

Sales-type leases include a dealer profit or loss that is recorded by the lessor upon acceptance of the equipment by the lessee. The dealer’s profit or loss represents the difference, at the inception of the lease, between the present value of minimum lease payments computed at the interest rate implicit in the lease and the cost or carrying amount of the equipment (less the present value of the unguaranteed residual value) plus any initial direct costs. Interest earned on the present value of the lease payments and residual value is recognized over the lease term using the interest method.

OPERATING LEASES. All leases that do not meet the criteria to be classified as direct financing or sales-type leases are accounted for as operating leases. Rental amounts are accrued on a straight-line basis over the lease term and are recognized as lease revenue. Our cost of the leased equipment is recorded on the balance sheet as investment in leases and leased equipment—net and is depreciated on a straight-line basis over the lease term to our estimate of residual value. Revenue, depreciation expense, and the resulting profit for operating leases are recorded on a straight-line basis over the life of the lease.

Lease revenues consist of rentals due under operating leases and amortization of unearned income on direct financing and sales-type leases. Equipment under operating leases is recorded at cost on the balance sheet as investment in leases and leased equipment—net and depreciated on a straight-line basis over the lease term to our estimate of residual value. For the periods subsequent to the lease term, where collectibility is certain, revenue is recognized on an accrual basis. Where collectibility is not reasonably assured, revenue is recognized upon receipt of payment from the lessee.

RESIDUAL VALUES. Residual values represent our estimated value of the equipment at the end of the initial lease term. The residual values for direct financing and sales-type leases are included as part of the investment in direct financing and sales-type leases. The residual values for operating leases are included in the leased equipment’s net book value and are reported in the investment in leases and leased equipment—net. The estimated residual values will vary, both in amount and as a percentage of the original equipment cost, and depend upon several factors, including the equipment type, manufacturer’s discount, market conditions and the term of the lease.

We evaluate residual values on a quarterly basis and record any required changes in accordance with SFAS No. 13, paragraph 17.d., in which impairments of residual value, other than temporary, are recorded in the period in which the impairment is determined. Residual values are affected by equipment supply and demand and by new product announcements by manufacturers.

We seek to realize the estimated residual value at lease termination mainly through (1) renewal or extension of the original lease, (2) the sale of the equipment either to the lessee or on the secondary market, or (3) lease of the equipment to a new customer. The difference between the proceeds of a sale and the remaining estimated residual value is recorded as a gain or loss in lease revenues when title is transferred to the lessee, or, if the equipment is sold on the secondary market, in sales of product and services and cost of sales, product and services when title is transferred to the buyer.

INITIAL DIRECT COSTS. Initial direct costs related to the origination of direct financing or operating leases are capitalized and recorded as part of the net investment in direct financing leases, or net operating lease equipment, and are amortized over the lease term.

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OTHER SOURCES OF REVENUE. Amounts charged for hosting arrangements in which the customer accesses the programs from an ePlus-hosted site and does not have possession of the software, and for Procure+, our procurement software package, are recognized as services are rendered. Amounts charged for Manage+, our asset management software service, are recognized on a straight-line basis over the period the services are provided. In addition, other sources of revenue are derived from: (1) income from events that occur after the initial sale of a financial asset; (2) re-marketing fees; (3) brokerage fees earned for the placement of financing transactions; (4) agent fees received from various manufacturers in the IT reseller business unit; (5) settlement fees related to disputes or litigation; and (6) interest and other miscellaneous income. These revenues are included in fee and other income on our Consolidated Statements of Operations.

RESERVES FOR CREDIT LOSSES. The reserves for credit losses is maintained at a level believed by management to be adequate to absorb potential losses inherent in our lease and accounts receivable portfolio. Management’s determination of the adequacy of the reserve is based on an evaluation of historical credit loss experience, current economic conditions, volume, growth, the composition of the lease portfolio, and other relevant factors. The reserve is increased by provisions for potential credit losses charged against income. Accounts are either written off or written down when the loss is both probable and determinable, after giving consideration to the customer’s financial condition, the value of the underlying collateral and funding status (i.e., discounted on a non-recourse or recourse basis). Our allowance also includes consideration of uncollectible vendor receivables which arise from vendor rebate programs and other promotions.

CAPITALIZATION OF COSTS OF SOFTWARE FOR INTERNAL USE. We have capitalized certain costs for the development of internal-use software under the guidelines of SOP 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” These capitalized costs are included in the accompanying Consolidated Balance Sheets as a component of property and equipment—net. Capitalized costs, net of amortization, totaled $0.6 million as of March 31, 2005 and March 31, 2006.

CAPITALIZATION OF COSTS OF SOFTWARE TO BE MADE AVAILABLE TO CUSTOMERS. In accordance with SFAS No. 86, “Accounting for Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” software development costs are expensed as incurred until technological feasibility has been established, at such time such costs are capitalized until the product is made available for release to customers. These capitalized costs are included in the accompanying Consolidated Balance Sheets as a component of other assets. We had $1.2 million and $1.0 million of capitalized costs, net of amortization, as of March 31, 2005 and March 31, 2006, respectively.

SHARE-BASED PAYMENT. In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” or SFAS No. 123R. SFAS No. 123R replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB 25 and subsequently issued stock option related guidance. This statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. We are required to apply SFAS No. 123R to all awards granted, modified or settled as of the beginning of the annual fiscal reporting period that begins after June 15, 2005. We have analyzed the impact of SFAS No. 123R, but have decided not to early adopt. Upon adoption, we will use the modified-prospective and the straight-line method.

SENSITIVITY ANALYSIS — STOCK OPTION RESTATEMENT. In connection with the restatement of our Consolidated Financial Statements, we determined that, during the Relevant Period, we applied incorrect measurement dates in our accounting for certain stock options.

Based on the available facts and circumstances surrounding our stock option granting practices, we adopted a methodology for determining the most likely or no later than revised measurement dates. We believe the application of this methodology indicated the most likely or no later than date when the number of options granted to each recipient was approved and the exercise price and number of shares were known with finality. When there was not conclusive documentation or evidence of an earlier date, we relied upon the filing date of the Form 10-Q or 10-K, whichever is applicable, as the date in which an authorized approver would have reviewed the diluted EPS calculation which included the awards. During our review, we also identified errors in accounting for stock option awards where we did not appropriately account for modifications and circumstances in which we did not appropriately account for awards as variable. The correction of all of these errors resulted in additional cumulative stock-based compensation charges on a pre-tax basis of approximately $5.2 million for the nine year period ended March 31, 2005 and an additional $0.6 million for the fiscal year ended March 31, 2006.