Edgar Filing: SURGE COMPONENTS INC

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-KSB

(Mark One)

[X] ANNUAL REPORT UNDER TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended: November 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _________ to __________

Commission file number: 0-14188

Surge Components, Inc.
(Name of small business issuer in its charter)

New York 11-2602030
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

95 East Jefryn Boulevard
Deer Park, New York 11729
(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (631) 595-1818

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:
Common stock, par value $.001 per share Redeemable Class A common stock
purchase warrants

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]

State issuer's net revenues for its most recent fiscal year: $15,722,613.

The aggregate market value of the 8,478,826 shares of voting and non-voting
common equity stock held by non- affiliates (all shareholders other than
officers, directors and 5% or greater shareholders) of the registrant was
$466,335.43, as of March 5, 2002, based on the last sale price of the
registrant's common stock on such date of $0.055 per share, quoted on the
over-the-counter "pink sheets" maintained by Pink Sheets LLC.

There were a total of 9,185,235 shares of the registrant's common stock
outstanding as of March 5, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

NONE

Transitional Small Business Disclosure Format: Yes No X
--- ---

PART I

Throughout this Annual Report on Form 10-KSB, the terms "we," "us,"
"our" and "our company" refers to Surge Components, Inc. ("Surge") and, unless
the context indicates otherwise, includes Surge's wholly-owned subsidiary,
Challenge/Surge, Inc. ("Challenge").

Introductory Comment - Forward-Looking Statements.

Statements contained in this report include "forward-looking
statements" within the meaning of such term in Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements involve known and unknown risks, uncertainties and other factors
which could cause actual financial or operating results, performances or
achievements expressed or implied by such forward-looking statements not to
occur or be realized. Such forward-looking statements generally are based on our
best estimates of future results, performances or achievements, based upon
current conditions and the most recent results of the companies involved and
their respective industries. Forward-looking statements may be identified by the
use of forward-looking terminology such as "may," "will," "project," "expect,"
"believe," "estimate," "anticipate," "intends," "continue," "potential,"
"opportunity" or similar terms, variations of those terms or the negative of
those terms or other variations of those terms or comparable words or
expressions. Potential risks and uncertainties include, among other things, such
factors as:

o our business strategies and future plans of operations,

o general economic conditions in the United States and
elsewhere, as well as the economic conditions affecting the
industries in which we operate,

o political and regulatory matters affecting the foreign
countries in which we operate or purchase goods and materials,

o the market acceptance and amount of sales of our products and
services,

o the extent that our distribution network and marketing
programs achieve satisfactory response rates,

o the effect of the current surplus of electronic component
parts in the broker distributor market on sales by our
Challenge subsidiary,

o our historical losses,

o the competitive environment within the electronic components
industry,

o our ability to raise additional capital, if and as needed,

o the cost-effectiveness of our product development activities,

o the effect of the delisting of our common stock from The
Nasdaq Stock Market,

o the extent of any further investigations or proceedings with
respect to the questionable payments, and

o the other factors and information discussed in other sections
of this report.

Shareholders and others reading this report should carefully consider
such risks, uncertainties and other information, disclosures and discussions
which contain cautionary statements identifying important factors that could
cause actual results to differ materially from those provided in the
forward-looking statements. We undertake no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise.

Item 1. Description of Business.

Business Development

Surge was incorporated under the laws of the State of New York on
November 24, 1981. Surge, a supplier of electronic products and components,
completed an initial public offering of its securities in 1984 and a second
offering of its securities in August 1996. Challenge, a broker and distributor
of electronic components, is a New York corporation formed in 1988. Superus, a
Delaware corporation, was formed in March 2000 to ultimately become our Delaware
parent holding company through the proposed merger of Surge with and into
Superus, which we determined not to proceed with. Superus is currently inactive
and has filed for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code.

In January 2000, Surge formed Mail Acquisition Corp., a Delaware
corporation. On November 16, 2000, MailEncrypt.com, Inc., a California-based
infrastructure application service provider offering Web-based encrypted e-mail
solutions, was merged with and into Mail Acquisition, which changed its name to
MailEncrypt, Inc. upon completion of the merger. On October 23, 2001, Surge
completed a stock exchange transaction with David Bird, Adam J. Epstein, Chris
Harano, Michael Patchen and Thomas Taulli, such individuals being the former
shareholders (the "Shareholders") of MailEncrypt, Inc., the company with whom
Surge had entered into an acquisition agreement, subject to rescission, on
November 16, 2000. Such acquisition agreement provided, among other things, that
if the shareholders of Surge did not approve the conversion into common stock of
Surge's Series B Preferred Stock issued in the MailEncrypt acquisition on or
before July 1, 2001, then the Shareholders had the option, exercisable through
August 15, 2001, to rescind the transaction and reacquire MailEncrypt from
Surge. The Shareholders did not exercise such option. However, Surge and the
Shareholders continued to negotiate the terms of such rescission subsequent to
August 15, culminating in a stock exchange transaction based substantially on
the rescission provisions set forth in the original acquisition agreement. The
rescission was completed pursuant to a Stock Exchange Agreement, dated as of
October 23, 2001, among Surge and the Shareholders. Pursuant to the Stock
Exchange Agreement, Surge exchanged 100 shares of common stock of MailEncrypt,
which represented all of the issued and outstanding capital stock of
MailEncrypt, for 182,139.797 shares of Series B Preferred Stock of Surge which
had been issued to the Shareholders in the MailEncrypt acquisition transaction.
Also, approximately $1.1 million of debt of MailEncrypt was exchanged for
7.31979 shares of MailEncrypt common stock, representing approximately 6.8% of
MailEncrypt, which was issued to Surge based substantially on the rescission
provisions set forth in the original acquisition agreement. Surge also made
payments of $30,000 to each of David Bird and Michael Patchen. In addition, for
a two year period commencing on the closing date, Surge has agreed not to
directly or indirectly engage in the electronic mail encryption business, except
that Surge may sell or provide electronic components to one or more companies
that are engaged in such business.

In January 2000, Surge formed GDIS Acquisition Corp., a Delaware
corporation, to acquire the assets of Global DataTel, Inc. Our transaction with
Global was never consummated. On November 20, 2000, Surge changed the name of
GDIS to SolaWorks, Inc. SolaWorks is a development stage infrastructure
application service provider of integrated Internet business solutions.
SolaWorks is currently inactive and will remain so until adequate funds are
available for its operations, if ever.

Surge's and Challenge's principal executive offices are currently
located at 95 East Jefryn Boulevard, Deer Park, New York 11729; and its
telephone number is (631) 595-1818.

Business of Our Company

Surge is a supplier of electronic products and components. These
products include capacitors, which are electrical energy storage devices, and
discrete components, such as semiconductor rectifiers, transistors and diodes,
which are single function low power semiconductor products that are packaged
alone as compared to integrated circuits such as microprocessors. Surge's
products are typically utilized in the electronic circuitry of diverse products,
including, but not limited to, automobiles, cellular telephones, computers,
consumer electronics, garage door openers, household appliances, power supplies
and smoke detectors. Surge's products are sold to both original equipment
manufacturers, commonly referred to as OEMs, who incorporate them into their
products, and to distributors of Surge's product lines, who resell these
products within their customer base.

Surge's products are manufactured predominantly in Asia by
approximately thirteen independent manufacturers. Surge does not have any
binding long-term supply, distribution or franchise agreements with its
manufacturers. Surge acts as the exclusive sales agent utilizing independent
sales representative organizations in North America to sell and market the
products for many of its manufacturers pursuant to oral agreements. In addition,
in December 2000, Surge launched a joint-venture limited liability company with
Lelon Electronics Corporation, a Taiwan corporation, whereby the joint venture
will act as sales and marketing agent in North America for all Lelon products
utilizing Surge's existing organization and resources. The joint venture is
currently inactive.

Challenge engages in the electronic components and products broker
distribution business. Challenge purchases name brand electronic components and
products, typically from domestic manufacturers and authorized distributors, to
fill specific customer orders. Challenge purchases these components and products
in the open market on the best available terms and generally keeps inventories
of these products. Challenge's revenues are principally derived from the mark-up
on the sale of these products. During the latter part of 1999, Challenge began
selling new product lines which required maintaining higher inventory levels for
these speaker, fan and buzzer products. Challenge expects increased sales of
these new product lines in the current year. Challenge has added sales
representative organizations throughout the United States, as well as some
distributors, to help develop the market for this line of products. Challenge
has its own sales representatives, but generally shares management and
facilities with Surge.

We have achieved consolidated net sales during the last three years of
approximately $12,147,000 in Fiscal 1999, $36,555,000 in Fiscal 2000 and
$15,723,000 in Fiscal 2001. The net sales for Challenge decreased by $20,084,000
in Fiscal 2001 to $7,239,000 when compared to Fiscal 2000. This decrease was
primarily attributable to the economic effect of the overage of certain
electronic components during Fiscal 2001 in the market in which Challenge
primarily operates. Challenge expects to see a significant decline in sales for
at least the first half of Fiscal 2002, which ends on November 30, 2002, due to
the continued slowdown in manufacturing among certain of Challenge's customers.
This is expected to adversely affect sales and profits until demand for these
particular products exceeds supply which may or may not occur in Fiscal 2002 or
thereafter.

The electronic components industry have been characterized by intense
price cutting which could materially adversely affect our future operating
results. Due to our limited financial resources, anticipated expenses and the
highly competitive environment in which we operate, there can be no assurance
that our current rate of revenue growth will continue in the future or that our
future operations will remain profitable. We expect to incur operating losses at
least for the first half of Fiscal 2002.

In the past few years, we expanded our operations through the opening
of additional sales/stocking offices, the expansion of our headquarters office
and warehouse facility and the increase of our inventories. In April 2001, we
relocated Surge's and Challenge's office and warehouse facilities to a new
location in the same local area as our facility and increase the total square
footage for their facility from approximately 7,500 square feet to approximately
23,000 square feet. In order for us to continue to grow, we will depend on,
among other things, the continued growth of the electronics and semiconductor
industries, our ability to withstand intense price competition, our ability to
obtain new clients, our ability to retain sales and other personnel in order to
expand our marketing capabilities, our ability to secure adequate sources of
products which are in demand on commercially reasonable terms, our success in
managing growth, including monitoring an expanded level of operations and
controlling costs, and the availability of adequate financing.

Industry Background

The United States electronics distribution industry is composed of
manufacturers, national and international distributors, as well as regional and
local distributors. Electronics distributors market numerous products, including
active components (such as transistors, microprocessors, integrated circuits and
semiconductors), passive components (such as capacitors and resistors), and
electro mechanical, interconnect (such as connectors and wire) and computer
products. Surge focuses its efforts on the distribution of capacitors and
discrete components, a small subset of the electronic components market.

The electronics industry has been characterized by intense price
cutting and rapid technological changes and development which could materially
adversely affect our future operating results. In addition, the industry has
been affected historically by general economic downturns, which have had an
adverse economic effect upon manufacturers and end-users of our products, as
well as distributors. Furthermore, the life-cycle of existing electronic
products and the timing of new product development and introduction can affect
the demand for electronic components including our products. Accordingly, any
downturn in the electronics industry in general, could adversely affect our
business and results of operations.

There are forces of change affecting the wholesale distribution
industry, including the electronics industry. Those forces of change, as
described in the 1998 Arthur Andersen report entitled "Facing the Forces of
Change" (published by Distribution Research and Education Foundation,
Washington, D.C.), include electronic commerce, supply chain integration,
strategic alliances and globalization. We are addressing these dynamics as part
of our strategy for the next several years.

The industry is also experiencing a strong move by U.S. manufacturers
to design products in the United States, but then shift manufacturing and
purchasing to Asia using their own factory or a subcontractor. The company is
planning to register in Hong Kong and hire sales staff for this Hong
Kong/Greater China market.

Products

Surge supplies a wide variety of electronic components bearing our
private "Surge" label which can be broadly divided into two categories
--capacitors and discrete components. For Fiscal 2001, capacitors accounted for
approximately 90% of Surge's sales. For Fiscal 2000, capacitors accounted for
85% in Surge's sales. Discrete components accounted for Surge's remaining sales
in Fiscal 2001 and Fiscal 2000. Capacitors and discrete components can be
categorized based on various factors, including function, construction,
fabrication and capacity. The principal products sold by Surge under the Surge
name or by Challenge are set forth below.

Capacitors

A capacitor is an electrical energy storage device used in the
electronics industry for varied applications, principally as elements of
resonant circuits, in coupling and bypass applications, blockage of DC current,
as frequency determining and timing elements, as filters and delay-line
components, and in voltage transient suppression (circuit protection devices).
All products are available in traditional leaded as well as surface mount (chip)
packages.

Our product line of capacitors includes:

o Aluminum Electrolytic Capacitors. These capacitors, which are
Surge's principal product, are storage devices used in power
applications to store and release energy as the electronic
circuitry demands. They are commonly used in power supplies
and can be found in a wide range of consumer electronics
products. Our supplier has one of the largest facilities for
these products in Taiwan. This facility is fully certified for
the International Quality Standard ISO 9001 and 9000, which
means that it meets the strictest requirements established by
the automotive industry and adopted throughout the world to
ensure that the facility's manufacturing processes, equipment
and associated quality control systems will satisfy specific
customer requirements. This system is also intended and
designed to facilitate clear and thorough record keeping of
all quality control and testing information and to ensure
clear communication from one department to another about the
information (i.e., quality control, production or
engineering). This certification permits us to monitor quality
control/manufacturing process information and to respond to
any customer questions.

o Ceramic Capacitors. These capacitors are the least expensive,
and are widely used in the electronics industry. They are
commonly used to bypass or filter semiconductors in resonant
circuits and are found predominantly in a wide range of low
cost products including computer, telecom, appliances, games
and toys.

o Mylar Film Capacitors. These capacitors are frequently used
for noise suppression and filtering. They are commonly used in
telecommunication and computer products. Surge's supplier in
Korea has a facility fully certified for the International
Quality Standard ISO 9002.

Discrete Components. Discrete components, such as semiconductor
rectifiers, transistors and diodes, are packaged individually to perform a
single or limited function, in contrast to integrated circuits, such as
microprocessors and other "chips," which contain from a few diodes to as many as
several million diodes and other elements in a single package, and are usually
designed to perform complex tasks. Surge almost exclusively distributes
discrete, low power semiconductor components rather than integrated circuits.
Our product line of discrete components includes:

Rectifiers. Low power semiconductor rectifiers are devices that convert
alternating current, or AC power, into one directional current, or DC power, by
permitting current to flow in one direction only. They tend to be found in most
electrical apparatuses, especially those drawing power from an AC wall outlet.
Surge offers a wide variety of rectifiers, including:

o Schottky barrier rectifiers;

o super-fast rectifiers;

o ultra-fast/high efficiency rectifiers;

o fast recovery rectifiers, the time within which the current
recovers from spikes of voltage or current;

o fast recovery glass passivated rectifiers, a chip coated with
a glass material to protect the component from thermal stress
in a circuit;

o silicon rectifiers, which utilize silicon rectifying cells
designed to withstand large currents and high voltages;

o soft recovery/fast switching rectifiers;

o high voltage rectifiers;

o bridge rectifiers, which connect multiple circuits in
parallel;

o self packaged surface mount rectifiers, chip style without
leads and used in miniaturization; and

o auto rectifiers.

All products are available in traditional leaded as well as surface
mount (chip) packages. Surge's main rectifier supplier has QS 9000 automotive
certification, giving us an opportunity to market our products to the automotive
industry.

Transistors. Transistors send a signal to the circuit for transmission
of waves. They are commonly used in applications involving the processing or
amplification of electric current and electric signals, including data,
television, sound and power. All products are available in traditional leaded as
well as surface mount (chip) packages. Surge sells many types of ISO 9002
transistors, including:

o small signal transistors, designed for lower levels of
current; and

o power transistors, designed for large currents to safely
dissipate large amounts of power.

Diodes. Diodes are two-lead or surface mount components that allow
electric current to flow in only one direction. They are used in a variety of
electronic applications, including signal processing and direction of current.
All products are available in traditional leaded as well as surface mount (chip)
packages. Diodes sold include:

o zener diodes;

o high speed switching diodes;

o and rectifiers, the most popular type of diode.

Circuit Protection Devices. Our circuit protection devices include
transient voltage suppressors and metal oxide varistors, which protect circuits
against switching, lightning surges and other uncontrolled power surges and/or
interruptions in circuits. Transient voltage suppressors, which offer a higher
level of protection for the circuit, are required in telecommunication products
and are typically higher priced products than the metal oxide varistors which
are more economically priced and are used in consumer products. All products are
available in traditional leaded as well as surface mount (chip) packages.

Audible Components. These include audible transducers and Piezo buzzers
and speakers which produce an audible sound for, and are used in back-up power
supplies for, computers, alarms, appliances, smoke detectors, automobiles,
telephones and other products which produce sounds. Challenge has initiated
marketing relationships with certain Asian manufacturers of audible components
to sell these products worldwide. All products are available in traditional
leaded as well as surface mount (chip) packages.

New Products. We periodically introduce new products which are intended
to complement our existing product lines. These products are ones that are
commonly used in the same circuit designs as other of our products and will
further provide a one-stop-shop for the customer. Some of these products are
common items used in all applications and others are niche items with a focus
towards a particular application. We are currently marketing surface mount
rectifiers which are used in miniature or compact products such as cellular
telephones and pagers. These new products include fuses, printed circuit boards
and switches. All products are available in traditional leaded as well as
surface mount (chip) packages.

Inventory

In order to obtain the best available price from our suppliers, we will
typically waive the right to obtain refunds if prices are subsequently lowered
prior to our sale of the products, as well as the right to return inventory to
manufacturers. We generally try to pass these savings on to our customers. We
plan to eventually implement a bar code system to improve the efficiency of its
inventory control. A bar code system would enable us to automatically record all
inventory received, reduce the open order status with the supplier by such
amounts of inventory received, control levels of inventory on hand and create
customer invoices based on shipments made to them.

In order to adequately service our customers' needs, we believe that it
is necessary to maintain large inventories which makes us more susceptible to
price and technology changes. At any given time, we attempt to maintain a three
to four month inventory on certain products in high demand for distributors and
at least one month for other products. Our inventory currently contains more
than 100 million component units consisting of more than 3,000 different part
numbers. Although the number of components and products will continue to
increase as we continue to increase our inventories, we plan to generally
maintain a two to four month inventory. Our products range in sales price from
less than one cent for a commercial diode to more than $2.00 for high power
capacitors and semiconductors. As of November 30, 2001, Surge and Challenge
maintained an inventory valued at $2,311,000. Our inventories at November 30,
2000 were valued at $3,017,000.

As a result of our strategic inventory purchasing policies, under which
we obtain preferential pricing, we waive rights to manufacturers' inventory
protection agreements (including price protection and inventory return rights),
and thereby bear the risk of increases in the prices charged by our
manufacturers and decreases in the prices of products held in our inventory or
covered by purchase commitments. If prices of components which we hold in
inventory decline or if new technology is developed that displaces products
which we sell, our business could be materially adversely affected.

Challenge is in the broker distribution business and fills orders from
customers which need electronic components and products that are not readily
available from their suppliers. Throughout Fiscal 2001, there was an excess of
electronics products in the United States markets. The excess of electronics
products resulted in decreased business among broker distributors. A decrease in
Challenge's broker distribution business is reflected in the decrease in net
sales from approximately $27,323,000 in Fiscal 2000 to $7,239,000 in Fiscal
2001. Challenge has obtained and is seeking to obtain additional product rights
to certain brand name product lines and establish direct relationships with
those manufacturers for the audible products and fans.

Although Challenge cannot be certain, it believes that the broker
distribution business will continue to change and that many of such businesses
will have difficulties surviving if they have insufficient resources to compete
with the factory direct distributors. In furtherance of this belief, Challenge
began to develop in late 1999, a new product division of speakers, fans and
buzzers manufactured in Asia sold under the Challenge name.

Product Availability

Surge obtains substantially all of its products from manufacturers in
Asia, while Challenge historically purchases its products both domestically and
from Asia. However, in Fiscal 2001, Challenge purchased approximately 51% of its
products overseas as a result of the shortages domestically and Challenge's
introduction of new product lines. Of the total goods purchased by Surge and
Challenge in Fiscal 2001, those foreign manufactured products were supplied from
manufacturers in Taiwan (41%), Hong Kong (20%), elsewhere in Asia (14%) and
overseas outside of Asia (1%). Surge purchases its products from approximately
thirteen different manufacturers, for many of which we act as exclusive sales
agent in North America. While these manufacturers are often the leading
suppliers for OEMs, especially in the consumer market which is extremely price
sensitive, they are typically not the largest manufacturers for these products.
Management believes, however, that these manufacturers usually offer lower
prices and quicker response times than some of the largest manufacturers.

In December 2000, Surge launched a joint-venture limited liability
company with Lelon Electronics Corporation, a Taiwan corporation, whereby the
joint venture acts as sales and marketing agent in North America for all Lelon
products. Lelon, in business since 1976 and publicly-traded in Taiwan, is a
world-class manufacturer of aluminum electrolytic capacitors and has been
supplying products to Surge for over ten years on a master distributor basis.
The newly formed company is operating under the name of Surge/Lelon, LLP and
markets and sells the full range of product offerings in North America that are
currently manufactured under the Lelon name. As a result of the synergies
created by Surge/Lelon, we have increased the addressable market and breadth of
our product offerings, and also share in revenue from all North American sales
with Lelon and also from all North American joint-venture sales. Surge/Lelon LLP
is operating from our existing location in Deer Park, NY, and is headed by Ira
Levy, Surge's President. To date, we have not derived any revenues from the
joint venture.

Most of the facilities which manufacture products for Surge have
obtained or have applied for the International Quality Standard ISO 9002
certification. We predominantly purchase our products in United States currency
in order to minimize the risk of currency fluctuations. In most cases, Surge
utilizes two or more alternative sources of supply for each of its products with
one primary and one complementary supplier for each product. The products are
manufactured to our order with the "Surge" logo and label. Surge is continually
building relationships with suppliers and from time to time adds new suppliers
when needed. Surge's relationships with many of its suppliers date back to the
commencement of our import operations in 1983.

We have established payment terms with our manufacturers of between 30
and 60 day open account terms.

We do not have any written long-term supply, distribution or franchise
agreements with any of our manufacturers, other than Surge/Lelon LLP. We act as
the exclusive sales agent in North America for many of our manufacturers,
pursuant to oral agreements. While we believe that we have established close
working relationships with our principal manufacturers, our success depends, in
large part, on maintaining these relationships and developing new supplier
relationships for our existing and future product lines. Because of the lack of
long- term contracts, we may not be able to maintain these relationships.

For Fiscal 2001, DB Products and Lelon accounted for 10% or more of
Surge's consolidated purchases. DB Products accounted for 11% and Lelon 29% of
Surge's consolidated purchases. In Fiscal 2000, no supplier accounted for 10% or
more of Surge's consolidated purchases.

We do not regard any one supplier as essential to our operations, since
equivalent replacements for most of the products are either readily available
from one or more of our other suppliers or are available from various other
sources at competitive prices. Nevertheless, the loss of, or a significant
disruption in, the relationship with any of our major suppliers could have a
material adverse effect on our business and results of operations until a
suitable replacement could be obtained.

The components business has, from time to time, experienced periods of
extreme shortages in product supply, generally as the result of demand exceeding
available supply. When these shortages occur, suppliers tend to either increase
prices or reduce the number of units sold to customers. While we believe that
because of our inventory and our relationships with our manufacturers, we have
not been adversely affected by shortages in components. However, should there be
shortages in the future, such shortages could have both a beneficial or an
adverse effect upon our business. Conversely, due to poor market demand, there
could be an excess of components in the market, causing a stronger competition,
and an erosion of prices.

Marketing and Sales

Surge's sales efforts are directed towards OEM customers in numerous
industries where our products have wide application. Surge currently employs
eleven sales and marketing personnel, including two of its executive officers,
who are responsible for certain key customer relationships. Our executive
officers also devote a significant amount of time to developing and maintaining
continuing relations with our key customers.

We use independent sales representatives or organizations, which often
specialize in specific products and areas and have specific knowledge of and
contacts in particular markets. As of November 30, 2001, we had representation
agreements with approximately 20 sales representative organizations. Sales
representative organizations, which are generally paid a 5% commission on net
sales, are generally responsible in their respective geographic markets for
identifying customers and soliciting customer orders. Pursuant to arrangements
with our independent sales representatives, they are permitted to represent
other electronics manufacturers, but are generally prohibited from carrying a
line of products competitive with our products. These arrangements can be
terminated on written notice by either party or if breached by either party.
These organizations normally employ between one and twelve sales
representatives. The individual sales representatives employed by the sales
organizations generally possess an expertise which enhances the scope of our
marketing and sales efforts. This permits us to avoid the significant costs
associated with creating a direct marketing network. We have had relationships
with certain sales organizations since 1988 and continue to engage new sales
organizations as needed. We believe that additional sales organizations and
representatives are available to us, if required.

We engage independent sales representative organizations in various
regions throughout the world for marketing to OEM customers and distributors.
Sales by the independent sales representative organization Win-Cor Electronics
Sales Corp. in the New York metropolitan area represented 18% of Surge's sales
in Fiscal 2001 and 18% in Fiscal 2000.

We have initiated a formal national distribution program to attract
more distributors to promote our products. We have a National Distribution
Manager to develop and manage this program. We expect this market segment to
contribute significantly to our sales growth over time.

Many OEMs require their suppliers to have a local presence and Surge's
network of independent sales representatives are responsive to these needs. In
this regard, in order to service the growing importance of the electronics
community, Surge has a quality support/engineering location and a sales location
in California. Surge also opened a contracted warehouse space in Phoenix,
Arizona to stock products for customers in the western region. Surge pays for
this space on a monthly basis. Surge also has a marketing office in Taiwan that
provides marketing and customer service for the Asian market. The cost and
related expenses of this office have been minimal since Surge is utilizing the
same office space used by one of its supplier management groups. Currently,
Surge is planning to register the company in Hong Kong and hire a regional sales
manager to service the Hong Kong/Greater China region customers.

We utilize the services of the Progressive Marketing Corp., of
Melville, New York, an unaffiliated marketing/public relations organization,
which publicizes our achievements and helps us develop greater name recognition
and positioning within the electronics industry. Progressive places
announcements in trade journals concerning our new product introductions, hiring
of key personnel, new sales organizations and representatives. Other marketing
efforts include generation and distribution of our product catalogs and
brochures and attendance at trade shows. We have produced an exhibit for display
at electronics trade shows throughout the year. Our products have been exhibited
at the electronic distribution show in Las Vegas, Nevada and we will continue
our commitment and focus on the distribution segment of the industry by our
visibility at the Electronic Distributor Trade Show.

Customers

Our products are sold to distributors and OEMs in such diverse
industries as the automotive, computer, communications, cellular telephones,
consumer electronics, garage door openers, smoke detectors, and household
appliances industries. We request our distributors to provide point of sales
reporting which enables us to gain knowledge of the breakdown of industries into
which our products are sold. For Fiscal 2001, one customer, Millennium
Components, a company owned by a non-officer/director employee of Surge,
accounted for 10% of Surge's consolidated net sales. For Fiscal 2000, such
customer accounted for 29% of Surge's consolidated net sales. Our discrete
components are often sold to the same clients as our capacitors. These OEM
customers typically accept samples for evaluation and, if approved, we work
towards procuring the next orders for these items.

Typically, we do not maintain contracts with our customers and
generally sell products pursuant to customer purchase orders. Although our
customer base has increased, the loss of our largest customers as well as, to a
lesser extent, the loss of any other material customer, could have a materially
adverse effect on our operations during the short-term until we are able to
generate replacement business, although we may not be able to obtain such
replacement business. Because of our contracts and good working relationships
with our distributors, we offer the OEMs, when purchasing through distributors,
extended payment terms, just-in-time deliveries and one-stop shopping for many
types of electronic products.

Competition

We conduct business in the highly competitive electronic components
industry. We expect this industry to remain competitive. We face intense
competition, in both our selling efforts and purchasing efforts, from the many
companies that manufacture or distribute electronic components. Our principal
competitors in the sale of capacitors include Nichicon, Panasonic, Illinois
Capacitor, NIC, AVX, Murata and Kemet. Our principal competitors in the sale of
discrete components include General Instrument Corp., Motorola, Inc., Microsemi
Corp., Diodes, Inc. and Samsung. Many of these companies are well established
with substantial expertise, and have much greater assets and greater financial,
marketing, personnel, and other resources than we do. Many larger competing
suppliers also carry product lines which we do not carry. Generally, large
semiconductor manufacturers and distributors do not focus their direct selling
efforts on small to medium sized OEMs and distributors, which constitute most of
our customers. As our customers become larger, however, our competitors may find
it beneficial to focus direct selling efforts on those customers, which could
result in our facing increased competition, the loss of customers or pressure on
our profit margins. There can be no assurance that we will be able to continue
to compete effectively with existing or potential competitors.

Other factors that will affect our success in these markets include our
continued ability to attract additional experienced marketing, sales and
management talent, and our ability to expand our support, training and field
service capabilities. Our motto is "never say no," as we offer same day
fulfillment without minimum purchase order requirements and generally maintain
flexibility to ensure complete customer satisfaction.

Management Information Systems

We have made an investment in computer hardware and software. Our
management information systems consultants are responsible for software and
hardware upgrades, maintenance of current software and related databases, and
designing custom systems. As part of our MIS program, we plan to implement
individual bar coding on most products and intend to implement a bar code system
to improve the efficiency of our inventory control system. All sales personnel
of Surge are equipped with computer terminals to assist in providing up-to-date
reliable information to customers. Surge's purchasing department manages our
inventory on a real time computer system offering the sales and accounting
departments complete knowledge regarding inventory availability, income and
expense levels, sales and product line information. Management also analyzes
various reports, including product, profit, and sales trends using our computer
system. We intend to continually evaluate and upgrade our IBM- compatible
computer system as our requirements evolve.

Customer Service

We have two full-time customer service employees whose time is
dedicated largely to respond to customer inquiries such as price quote requests,
delivery status of new or existing purchase orders, changes of existing order
dates, quantities, dates, etc. We intend to increase our customer service
capabilities, as necessary.

Foreign Trade Regulation

Most products sold by Surge are manufactured in Asia, including such
countries as Taiwan, South Korea, Hong Kong, India, Japan and China. The
purchase of goods manufactured in foreign countries is subject to a number of
risks, including economic disruptions, transportation delays and interruptions,
foreign exchange rate fluctuations, impositions of tariffs and import and export
controls, and changes in governmental policies, any of which could have a
material adverse effect on our business and results of operations. Potential
concerns may include drastic devaluation of currencies, loss of supplies and
increased competition within the region.

From time to time, protectionist pressures have influenced United
States trade policy concerning the imposition of significant duties or other
trade restrictions upon foreign products. We cannot predict whether additional
United States customs quotas, duties, taxes or other charges or restrictions
will be imposed upon the importation of foreign components in the future or what
effect such actions could have on our business, financial condition or results
of operations.

Our ability to remain competitive with respect to the pricing of
imported components could be adversely affected by increases in tariffs or
duties, changes in trade treaties, strikes in air or sea transportation, and
possible future United States legislation with respect to pricing and import
quotas on products from foreign countries. Our ability to remain competitive
could also be affected by other governmental actions related to, among other
things, anti-dumping legislation and international currency fluctuations. While
we do not believe that any of these factors adversely impact our business at the
present time, there can be no assurance that these factors will not materially
adversely affect us in the future. Any significant disruption in the delivery of
merchandise from our suppliers, substantially all of whom are foreign, could
have a material adverse impact on our business and results of operations.

Government Regulation

Various laws and regulations relating to safe working conditions,
including the Occupational Safety and Health Act, are applicable to our company.
We believe we are in substantial compliance with all material federal, state and
local laws and regulations regarding safe working conditions. We believe that
the cost of compliance with such governmental regulations is not material.

Absence of Patents, Trademarks and Proprietary Information

Although we believe that our products do not and will not infringe
patents or trademarks, or violate proprietary rights of others, it is possible
that infringement of existing or future patents, trademarks or proprietary
rights of others may occur. In the event our products infringe proprietary
rights of others, we may be required to modify the design of our products,
change the name of our products and/or obtain a license. There can be no
assurance that we will be able to do any of these things in a timely manner,
upon acceptable terms and conditions or at all. Our failure to do any of the
foregoing could have a material adverse effect upon our operations. In addition,
there can be no assurance that we will have the financial or other resources
necessary to enforce or defend a patent infringement or proprietary rights
violation action. Moreover, if our products infringe patents, trademarks or
proprietary rights of others, we could, under certain circumstances, become
liable for damages, which also could have a material adverse effect on our
business.

Backlog

As of November 30, 2001, our backlog was approximately $5,076,000, as
compared with $3,770,000 at November 30, 2000. Substantially all backlog is
shipped by us within 90 to 180 days. Year to year comparisons of backlog are not
necessarily indicative of future operating results.

Employees

As of November 30, 2001, Surge and Challenge employed 25 persons, two
of whom are employed in executive capacities, eight are engaged in sales, one in
engineering, three in purchasing, three are engaged in administrative
capacities, two are in customer service, two are in accounting and four are in
warehousing. As of November 30, 2001, Superus had no employees. Its Chief
Executive Officer is employed by Surge. None of our employees is covered by a
collective bargaining agreement, and we consider our relationship with our
employees to be good.

RISK FACTORS

All forward-looking statements should be read with caution. The risks and
uncertainties described below are those that we currently believe may materially
affect our company. Additional risks and uncertainties that we are unaware of or
that we currently deem immaterial also may become important factors that affect
our company.

We have limited historical profitability and our future operating results could
be weak.

We had a net loss of $6,111,000 in Fiscal 2001 and $11,370,000 in
Fiscal 2000. Given our historical losses there can be no assurance we will be
able to become profitable in the future. The electronics and semiconductor
industries have been characterized by intense price cutting which could
materially adversely affect our future operating results. Given our limited
financial resources, anticipated expenses and legal fees and the highly
competitive environment in which we operate, there can be no assurance that we
will be able to achieve revenue growth in the future or that our future
operations will become profitable.

We may need additional financing to operate profitably.

We have recently expanded our facilities to achieve growth primarily
through the increased penetration of the OEM and distribution market, the
introduction of new products and the upgrade of existing product lines. We
expect to continue to incur significant operating costs. These costs consist
principally of payroll, marketing and facilities related charges. Our future
profitability depends on increased future sales. In the event that future sales
levels do not increase or in the event that we are unable to obtain such
additional financing as it becomes necessary, we will not be able to achieve all
of our business plans and our business could be materially adversely affected.

We may be adversely affected by a downturn in our industry and the economy in
general.

The electronics components industry is cyclical and as a result we are
subject to downturns in general economic conditions and changes in client
business and marketing budgets. A downturn in general economic conditions in one
or more markets or changes in client business and marketing budgets could have a
material adverse effect on our business, financial condition and results of
operations.

We may have difficulty competing in the electronic components market.

Surge conducts business in the highly competitive electronic components
industry. We expect this industry to remain competitive. Throughout Fiscal 2001
and 2000, there was an excess of electronics products in the U.S. markets.

If we fail to attract and retain employees, our growth could be limited and our
business may be adversely affected.

Our future success will depend in large part upon the abilities and
continued services of Ira Levy, our President and Chief Executive Officer. We
cannot assure you that we will be able to retain the services of Mr. Levy. In
addition, we must be able to attract, train and retain additional highly skilled
executive-level management and creative, technical, consulting and sales
personnel. The competition in our industries for skilled personnel is intense,
and we cannot be sure that we will be successful in attracting, training and
retaining such personnel. An inability to hire and retain employees would
increase our recruiting and training costs and decrease operating efficiencies
and productivity. This could have a material adverse effect on our business.

Regulatory and legal uncertainties could harm our business.

Several industries in which our clients operate are subject to varying
degrees of governmental regulation. Generally, compliance with these regulations
is the responsibility of our clients. However, we could be subject to a variety
of enforcement or private actions for our failure or the failure of our clients
to comply with these regulations. These actions could have a material adverse
effect on our business.

From time to time state and federal legislation is proposed with regard
to the use of proprietary databases of consumer groups. The fact that we
generate and receive data from many sources increases the uncertainty of the
regulatory environment. As a result, there are many ways both domestic and
foreign governments might attempt to regulate our use of our data. Any such
restrictions could have a material adverse effect on our business. The services
we offer outside the United States may be subject to foreign regulations
including:

o advertising content;

o promotions of financial products;

o activities requiring customers to send money with mail orders;
and

o the maintenance and use of customer data held on databases.

We lack written long-term supply contracts with manufacturers and depend on a
limited number of suppliers.

Surge does not have any written long-term supply, distribution or
franchise agreements with any of its manufacturers. We act as the exclusive
sales agent in North America for many of our manufacturers, pursuant to oral
agreements. While we believe that we have established close working
relationships with our principal manufacturers, our success depends, in large
part, on maintaining these relationships and developing new supplier
relationships for our existing and future product lines. Because of the lack of
long- term contracts, we may not be able to maintain these relationships. For
Fiscal 2001, two suppliers accounted for in excess of 10% of our net purchases.
Purchases from these two suppliers in Fiscal 2001 were approximately $4,306,000.
While we believe that there are alternative semiconductor and capacitor
manufacturers whose replacement products may be acceptable to our customers, the
loss of, or a significant disruption in the relationship with, one or more of
our major suppliers would most likely have a material adverse effect on our
business and results of operations.

We need to maintain large inventories in order to succeed; price fluctuations
could harm us.

In order to adequately service our customers, we believe that it is
necessary to maintain a large inventory of our products. Accordingly, we attempt
to maintain a three to four month inventory of those products we offer which are
in high demand. As a result of our strategic inventory purchasing policies,
under which we order in to obtain preferential pricing, waive the rights to
manufacturers' inventory protection agreements (including price protection and
inventory return rights), we bear the risk of increases in the prices charged by
our manufacturers and decreases in the prices of products held in our inventory
or covered by purchase commitments. If prices of components which we hold in
inventory decline or if new technology is developed that displaces products
which we sell, our business could be materially adversely affected.

We depend on certain customers.

For Fiscal 2001 approximately 10% of our net sales were derived from
Millennium Components, a related party, which accounted for 10% of our revenues.
During Fiscal 2000, this customer accounted for approximately 29% of our net
sales. Although our customer base has increased, the loss of our largest
customers as well as, to a lesser extent, the loss of any other principal
customer, would be expected to have a materially adverse effect on our
operations during the short-term until we are able to generate replacement
business, although we may not be able to obtain such replacement business.

We may not be able to compete against large competitors who have better
resources.

We face intense competition, in both our selling efforts and purchasing
efforts, from the many companies that manufacture or distribute electronic
components and semiconductors. Our principal competitors in the sale of
capacitors include Nichicon, Panasonic, Illinois Capacitor, NIC, AVX, Murata and
Kemet. Our principal competitors in the sale of discrete components include
General Instrument Corp., Motorola, Inc., Microsemi Corp., Diodes, Inc. and
Samsung. Many of these companies are well established with substantial
expertise, and have much greater assets and greater financial, marketing,
personnel, and other resources than we do. Many larger competing suppliers also
carry product lines which we do not carry. Generally, large semiconductor
manufacturers and distributors do not focus their direct selling efforts on
small to medium sized OEMs and distributors, which constitute most of our
customers. As our customers become larger, however, our competitors may find it
beneficial to focus direct selling efforts on those customers, which could
result in our facing increased competition, the loss of customers or pressure on
our profit margins. There can be no assurance that we will be able to continue
to compete effectively with existing or potential competitors.

Our business will be adversely affected if there is a shortage of components.

The components business has, from time to time, experienced periods of
extreme shortages in product supply, generally as the result of demand exceeding
available supply. When these shortages occur, suppliers tend to either increase
prices or reduce the number of units sold to customers. While we believe that
because of our large inventory and our relationships with our manufacturers, we
have not been adversely affected by shortages in certain discrete semiconductor
components. However, in the future shortages may have an adverse effect upon our
business.

We may be adversely affected by trade regulation and foreign economic
conditions.

Approximately 76% of the total goods which we purchased in Fiscal 2001
were manufactured in foreign countries, with the majority purchased in Taiwan
(41%), China (3%), Hong Kong (20%), Japan (1%), other Asia countries (10%) and
overseas outside of Asia (1%). These purchases subject us to a number of risks,
including economic disruptions, transportation delays and interruptions, foreign
exchange rate fluctuations, imposition of tariffs and import and export controls
and changes in governmental policies, any of which could have a materially
adverse effect on our business and results of operations. In addition, the
current economic conditions in Southeast Asia may severely impact our business.
Potential concerns may include drastic devaluation of currencies, loss of
supplies and increased competition within the region.

The ability to remain competitive with respect to the pricing of
imported components could be adversely affected by increases in tariffs or
duties, changes in trade treaties, strikes in air or sea transportation, and
possible future United States legislation with respect to pricing and import
quotas on products from foreign countries. For example, it is possible that
political or economic developments in China, or with respect to the United
States' relationship with China, could have an adverse effect on our business.
Our ability to remain competitive could also be affected by other governmental
actions related to, among other things, anti-dumping legislation and
international currency fluctuations. While we do not believe that any of these
factors have adversely impacted our business in the past, there can be no
assurance that these factors will not materially adversely affect us in the
future.

The cyclical nature of the electronics industry may adversely affect our
operations.

The electronics industry is currently being affected and has been
affected historically by general economic downturns, which have had an adverse
economic effect upon manufacturers and end-users of capacitors and
semiconductors. In addition, the life-cycle of existing electronic products and
the timing of new product developments and introductions can affect demand for
semiconductor components. Any further downturns in the electronics distribution
industry could adversely affect our business and results of operations.

We do not have any registered patents, trademarks or copyrights.

We do not have any patents, trademarks or copyrights registered in the
United States Patent and Trademark Office or in any state. We rely on the
know-how, experience and capabilities of our management personnel. Therefore,
without trademark and copyright protection, we have no protection from other
parties attempting to offer similar services.

We may be subject to further investigations or proceedings due to the
"questionable payments."

As we have previously disclosed, there have been certain "questionable
payments" which have resulted in the delisting of our common stock from The
Nasdaq Stock Market and which are currently the subject of an inquiry by the
Securities and Exchange Commission. We have taken steps to ensure that no such
payments are made in the future, including requiring that no payments above
$5,000 be made to any party except a party on a list approved by our audit
committee, requiring co-signatures on each check for more than $10,000, adopting
a Code of Conduct, and seeking to add additional Board and audit committee
members, as soon as feasible, a controller and chief financial officer. However,
there can be no assurance that the questionable payments and related
investigations will not lead to any other proceedings and we have received
threats of litigation related to such events. Any such proceeding or litigation
could adversely affect our business and results of operations.

The delisting of our common stock from Nasdaq could adversely affect us.

Our common stock was delisted from The Nasdaq Stock Market effective
November 30, 2001 and currently trades on the over-the-counter Pink Sheets
maintained by Pink Sheets LLC. The effects of delisting include more limited
information as to the market prices of our common stock, less liquidity for the
common stock and limited news coverage of us. Our delisting may restrict
investors' interest in our securities and materially adversely affect the
trading market and prices for such securities and our ability to issue
additional securities or to secure additional financing.

Item 2. Description of Property.

Surge and Challenge each lease their current executive offices and
warehouse facilities, located at 95 Jefryn Boulevard, Deer Park, New York,
11729, at an aggregate annual rental for each of Surge and Challenge of $174,376
during 2001. The Lessor is Great American Realty of 95 Jefryn Blvd., LLC ("Great
American"), an entity owned equally by Ira Levy, Surge's president, Steven
Lubman, Surge's vice president and one of its directors, Mark Siegel. These
leases expire on September 30, 2010. Each lease is subject to a 3% annual
increase. Each tenant occupies approximately 11,625 square feet of office space
and warehouse space.

Item 3. Legal Proceedings.

As disclosed in our public filings and in this Annual Report, there
have been certain questionable payments which have led to the delisting of the
Company's stock from Nasdaq and which are currently the subject of an informal
inquiry by the Securities Exchange Commission which began in October 2001. There
can be no assurance that the questionable payments and related investigations
will not lead to any other proceedings and we have received threats of
litigation related to such events.

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

No matters were submitted during the fourth quarter of the year ended
November 30, 2001.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

(a) Market Information

On November 30, 2001, our common stock was delisted from the Nasdaq
SmallCap Market. Since such date, our common stock has been quoted on the
over-the-counter "pink sheets" maintained by Pink Sheets LLC (formerly the
National Quotation Bureau), under the symbol "SPRS".

Until November 30, 2001, our common stock was traded on the Nasdaq
SmallCap Market under the symbol "SPRS" and on the Boston Stock Exchange under
the symbol "SRD."

The following tables set forth the range of high and low prices for our
common stock for the periods indicated as derived from reports furnished by The
Nasdaq Stock Market and Pink Sheets LLC. The information reflects inter-dealer
prices, without retail mark-ups, mark-downs or commissions.

High Low
Fiscal 2000:

Quarter Ended February 29, 2000 8-3/16 1-3/4
Quarter Ended May 31, 2000 10-3/8 3
Quarter Ended August 31, 2000 6-7/16 3-1/16
Quarter Ended November 30, 2000 4-7/8 4-7/8

Fiscal 2001:

Quarter Ended February 28, 2001 3.125 1.594
Quarter Ended May 31, 2001 2.000 0.750
Quarter Ended August 31, 2001 1.000 0.130
Quarter Ended November 30, 2001 0.229 0.100

Fiscal 2002:

Quarter Ended February 28, 2002 0.160 0.041

On March 5, 2002, the closing price of our common stock as reported by
the Pink Sheets was $0.055. As of March 5, 2002, (i) we had 233 holders of
record of our common stock, (ii) 9,185,235 shares of our common stock were
outstanding, (iii) 62,000 shares of our Series C preferred stock were
outstanding, and (iv) 620,000 shares of our common stock were reserved for
issuance upon conversion of our Series C preferred stock.

Dividends and Dividend Policy

We have not paid any cash dividends on our common stock during the last
two fiscal years and we do not anticipate paying any dividends on our common
stock in the foreseeable future. We currently intend to retain any future
earnings for reinvestment in our business. Any future determination to pay cash
dividends will be at the discretion of our board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements and other relevant factors. In addition, we are required to give
preference in any declaration and payment of dividends to the Series C preferred
stock. Series C preferred stock requires an annual dividend payment of $.50 per
share, or $35,000 in the aggregate. We paid dividends totaling $6,625 to Series
C preferred stock holders during the year ended November 30, 2001.

Recent Sales of Unregistered Securities

The information set forth below is a list of all our sales and
issuances of our equity securities occurring during our fiscal year ended
November 30, 2001 which we have not otherwise disclosed in any of our Quarterly
Reports on Form 10-QSB.

In March 2000, the Company completed a $7,000,000 private placement
offering ("Private Placement") of convertible promissory notes (the "Notes").
All of the proceeds from the Private Placement were loaned to Global DataTel,
Inc. ("Global") and MailEncrypt. The Notes accrued interest at the rate of 12%
per annum and were due on December 31, 2000, or earlier upon shareholder
approval, which was obtained on October 17, 2000. Since the Global acquisition
did not occur, these notes were to automatically convert into shares of the
Company's common stock at a conversion price of $2.50 per share. On February 1,
2001, Nasdaq advised the Company that in order to comply with Nasdaq's rules,
absent specific shareholder approval, the Company must limit the delivery of the
conversion shares to no greater than 19.9% of the Company's outstanding shares
at the time the Private Placement commenced. Accordingly, in February 2001, the
Company converted $2,478,655 principal amount of the Notes into 991,462 shares
of the Company's common stock. On July 10, 2001, the shareholders of the Company
approved a proposal to authorize the issuance and delivery of 1,808,542 shares
of the Company's common stock, pursuant to the automatic conversion of the Notes
issued in the Private Placement plus up to an additional 407,185 shares of the
Company's common stock in payment of accrued interest if the note holder chooses
to receive shares. Following the approval of such proposal, the Company issued
to the holders of the Notes (a) 1,808,542 shares of the Company's common stock
in order to fully satisfy the Company's delivery obligation in connection with
the automatic conversion of the principal amount of the Notes and (b) 60,753
shares to the note holders who agreed to accept the Company's common stock for
the payment of accrued interest due on the Notes through December 31, 2000. The
Company accrued additional interest through the dates the notes were converted
of approximately $282,000. In October and November 2001, 270,954 shares valued
at $740,000 for accrued interest were issued in partial payment of such accrued
interest to certain holders of the notes who agreed to accept stock in payment
of such accrued interest. The issuance of the Notes was exempt from registration
under the Securities Act pursuant to the provisions of Section 4(2) of the
Securities Act. The issuance of such shares upon conversion of the Notes was
exempt from registration under the Securities Act pursuant to the provisions of
Sections 3(a)(9) and 4(2) of the Securities Act.

Between November 2000 and January 2001, Surge sold $513,448 in
principal amount of 12% convertible promissory notes to two accredited
investors. These notes were sold at par. The amount sold includes the exchange
of $238,374 of prior debt, plus accrued interest on such prior debt of $23,043,
received in connection with an over-subscription to our $7 million private
placement of December 1999 through March 2000. Such over-subscription amount was
loaned to Surge outside of such private placement. These two notes were
convertible into Surge common stock at $2.56 per share at the option of the note
holders. The Company issued to the holders of these notes 283,912 shares of the
Company's Common Stock pursuant to the conversion of the notes and a portion of
the interest due. We paid $25,600 in sales commissions to a broker-dealer
involved in the sale of one of such notes. Surge believes that this transaction
was exempt from registration under the exemption provided pursuant to Section
4(2) of the Securities Act, as a transaction not involving any public offering,
based on the knowledge, sophistication and net worth of the note purchasers, as
well as exemption from registration under Regulation D under the Securities Act.

On October 23, 2001, Surge completed a stock exchange transaction with
David Bird, Adam J. Epstein, Chris Harano, Michael Patchen and Thomas Taulli,
such individuals being the former shareholders (the "Shareholders") of
MailEncrypt, the company with whom Surge had entered into an acquisition
agreement, subject to rescission, on November 16, 2000. Such acquisition
agreement provided, among other things, that if the shareholders of Surge did
not approve the conversion into common stock of Surge's Series B Preferred Stock
issued in the MailEncrypt acquisition on or before July 1, 2001, then the
Shareholders had the option, exercisable through August 15, 2001, to rescind the
transaction and reacquire MailEncrypt from Surge. The Shareholders did not
exercise such option. However, Surge and the Shareholders continued to negotiate
the terms of such rescission subsequent to August 15, culminating in a stock
exchange transaction based substantially on the rescission provisions set forth
in the original acquisition agreement. The rescission was completed pursuant to
a Stock Exchange Agreement, dated as of October 23, 2001, among Surge and the
Shareholders. Pursuant to the Stock Exchange Agreement, Surge exchanged 100
shares of common stock of MailEncrypt, which represented all of the issued and
outstanding capital stock of MailEncrypt, for 182,139.797 shares of Series B
Preferred Stock of Surge which had been issued to the Shareholders in the
MailEncrypt acquisition transaction. Also, approximately $1.1 million of debt of
MailEncrypt was exchanged for 7.31979 shares of MailEncrypt common stock,
representing approximately 6.8% of MailEncrypt, which was issued to Surge based
substantially on the rescission provisions set forth in the original acquisition
agreement. Surge also made payments of $30,000 to each of David Bird and Michael
Patchen. In addition, for a two year period commencing on the closing date,
Surge has agreed not to directly or indirectly engage in the electronic mail
encryption business, except that Surge may sell or provide electronic components
to one or more companies that are engaged in such business. We believe that the
share exchange transaction was exempt from registration under the exemption
provided pursuant to Section 4(2) of the Securities Act as a transaction not
involving any public offering.

Item 6. Management's Discussion and Analysis or Plan of Operation.

Results of Operations

Fiscal Year Ended November 30, 2001 as Compared to Fiscal Year Ended
November 30, 2000

Consolidated net sales for the year ended November 30, 2001 decreased
by approximately $20,832,000, or 57%, to $15,723,000 as compared to net sales of
$36,555,000 for the year ended November 30, 2000. The net sales for the year
ended November 30, 2001 for Surge without Challenge/Surge, Inc. ("Challenge"),
one of the Company's subsidiaries, decreased by approximately $748,000, or 8%
when compared to the year ended November 30, 2000. The Company had lower sales
during the current year as a result of a slowdown in the electronics industry.

The net sales for the year ended November 30, 2001 for Challenge
decreased by approximately $20,085,000, or 74% when compared to the year ended
November 30, 2000. This decrease was primarily attributable to the economic
effect of the surplus of certain electronic components available in the broker
distributor market in which Challenge primarily operates during the year ended
November 30, 2001. Currently, Challenge is experiencing a decline in sales due
to a slowdown in manufacturing among computer, telecommunications and phone
manufacturers. This slowdown is expected to exist through the first half of
2002. Any future improvements in sales and possible profitability is expected to
be based on future demand and supply for Challenge's product mix.

There can be no assurance that once demand for these products catches
up with the supply, Challenge will be able to attain the sales levels
experienced during fiscal 2000. However, Challenge started an audible products
division in 1999 and sales of speakers, fans and buzzers by this division has
increased steadily since their introduction.

Our gross profit for the year ended November 30, 2001 decreased by
approximately $5,962,000, or 62%, as compared to the year ended November 30,
2000. Gross margin as a percentage of net sales relatively decreased to 24% in
the year ended November 30, 2001 as compared to 26% for the year ended November
30, 2000. The decrease in our gross profit was a result of Challenge's decreased
sales as described above.

General and administrative expenses for the year ended November 30,
2001 increased by approximately $438,000, or 12%, as compared to the year ended
November 30, 2000. The increase during the year ended November 30, 2001 is due
to our continued funding of MailEncrypt's operations and the subsequent
unwinding of the MailEncrypt acquisition transaction, the costs of which were
expensed as incurred, and overhead attributable to Superus. We acquired
MailEncrypt in November 2000 and unwound such acquisition on October 23, 2001
and commenced operating Superus in March 2000. Superus incurred approximately
$2,185,000 of expenses relating to salaries, rent, professional fees, public
relations and consulting fees for the year ended November 30, 2001. Superus had
no revenues for the year ended November 30, 2001. In March 2001, our board of
directors decided to not proceed with the proposed recapitalization and merger
of Surge into Superus. Superus is attempting to settle and terminate its
obligations and lease commitments, and to wind down its operations, which should
reduce general and administrative costs in future periods. We estimated the cost
to terminate the Superus' San Francisco lease to be a minimum of $402,000, which
was expensed during the quarter ended May 30, 2001. This estimated cost included
$345,000 subject to a letter of credit, which was secured by a certificate of
deposit. In October 2001, the landlord utilized the letter of credit for payment
of Superus' obligations. The bank subsequently used the certificate of deposit
in payment of the guarantee. Throughout 2001, we attempted to negotiate a
settlement with the landlord to terminate the lease. To date, we have been
unable to enter into a settlement agreement with the landlord. On March 8, 2002,
Superus filed a petition for bankruptcy under Chapter 7 of the Bankruptcy Code.

Selling and shipping expenses for the year ended November 30, 2001,
decreased by approximately $645,000, or 33%, as compared to the year ended
November 30, 2000. This decrease is primarily due to the decreased sales
commissions resulting from lower sales in the current year. We are committed to
increasing sales through authorized distributors, global and domestic sales
representatives, an Internet web site, literature, and participation in trade
shows.

Financial consulting fees and expenses for the year ended November 30,
2001 were approximately $2,334,000, principally representing the amortization of
the value of the securities issued in payment of such fees. These fees and
expenses were incurred in connection with an agreement with an investment banker
regarding services through May 2001 and reimbursement of expenses. Financial
consulting fees and expenses in Fiscal 2000 pursuant to the agreement were
approximately $5,916,000.

Interest expense, including the amortization of debt costs, for the
year ended November 30, 2001 decreased by approximately $1,234,000, as compared
to the year ended November 30, 2000. This decrease primarily is related to our
conversion of our private placement notes as of December 30, 2000. In July 2001,
in order to avoid disputes, the Company decided to accrue additional interest on
the convertible notes through the dates the notes were converted. Previously
interest was accrued only to December 30, 2000.

Investment income decreased by approximately $284,000 for the year
ended November 30, 2001, as compared to the year ended November 30, 2000. This
decrease is primarily related to interest due on monies loaned to Global
DataTel, Inc. and MailEncrypt in the year ended November 30, 2000. These loans
were fully reserved at November 30, 2000. Accordingly, no additional interest
has been accrued in the current year.

In connection with its acquisition of MailEncrypt in November 2000, we
incurred acquisition costs, consisting of finders' fees and financial consulting
fees, totaling an aggregate of $607,188. We did not meet certain provisions of
the merger agreement with MailEncrypt, and, accordingly, the former shareholders
had the option to repurchase MailEncrypt from us. We ceased funding the
operations of MailEncrypt as of May 30, 2001. As discussed further in liquidity
and capital resources, in October 2001, we entered into a Stock Exchange
Agreement with the former shareholders of MailEncrypt, effectively unwinding the
acquisition.

We have included in other income $1 million in respect of a return of a
portion of the questionable payments reported in our Form 10-Q for the quarter
ended February 28, 2001. Such payments were made to the wife of an employee of
one of our suppliers in return for help obtaining components from that supplier
and another distributor. According to management personnel responsible for
making the payments, prior to making any payment, they disclosed the transaction
to our legal counsel to determine whether payments to an employee of a supplier
would be legal. Management personnel believed they had received reasonable
assurances at the time, and thereafter, that such payments are not illegal, so
long as the recipient of the payments received an IRS Form 1099, and all
payments were made by check.

The costs of such payments were recorded in our books and records and
financial statements.

According to Steven Lubman, our vice president, in mid-March 2001, he
became aware of a document in a criminal proceeding unrelated to us in which the
payments were described as kickbacks. This caused management to seek
reconfirmation of the legal advice previously given. Legal counsel advised us by
letter on or about March 22, 2001, that, since the payments had been described
in a document in the unrelated criminal action as kickbacks, disclosure of the
document should be made to our auditors, which was done. Such counsel stated in
the letter that no conclusion had been reached that such payments were
kickbacks. On April 17, 2001, we disclosed in a 10-QSB that the questionable
payments had been made.

In addition, after receipt of the March 22 letter, the Board determined
to investigate the payments and ask for the return of the payments. The Company
requested that the $3 million be repaid, and we received $1 million.

In May 2001, the law firm Mintz Levin Cohn Ferris Glovsky and Popeo,
P.C., was formally engaged to assist in an investigation concerning the payments
and to recommend policies to prevent any similar future payments. Due, in part
to the previously disclosed resignation of our outside counsel and such
counsel's refusal to be interviewed as part of the investigation, we were unable
to confirm what legal advice was rendered as to the making of such payments. The
investigation did not uncover any additional payments similar to the previously
disclosed "questionable payments". We have taken steps to ensure that such
payments are not made in the future, including requiring that payments above
$5,000 be made to any party except a party on a list approved by our audit
committee, requiring co-signatures on each check for more than $10,000, adopting
a Code of Conduct, and seeking to add additional Board and audit committee
members, as well as, as soon as feasible, a controller and chief financial
officer. Except for proceedings relating to the delisting of our stock by Nasdaq
and the Boston Stock Exchange and an SEC inquiry commenced in October, we are
not aware of any pending proceedings relating to the questionable payments.

Our previously announced restructuring initiative, including the
resignation of Adam J. Epstein as Surge's Chairman of the Board and Acting Chief
Executive Officer, are completely unrelated to the questionable payments being
investigated and/or any similar payments.

As result of the foregoing, we had a consolidated net loss of
$6,117,000 for the year ended November 30, 2001, as compared to $11,370,000 for
the year ended November 30, 2000.

Fiscal Year Ended November 30, 2000 as Compared to Fiscal Year Ended
November 30, 1999

Consolidated net sales for Fiscal 2000 increased by $24,408,000, or
201%, to $36,555,000, as compared to consolidated net sales of $12,147,000 for
Fiscal 1999. Net sales for Surge without Challenge increased by $1,756,000, or
23%, when compared to Fiscal 1999 results. Surge's growth was attributable
primarily to increased sales volumes with new customers, as a result of our
investment in an increased sales force. In addition, our existing customers are
buying additional product lines. The net sales for Challenge increased by
$22,652,000, or 485%, when compared to Fiscal 1999.

The sales growth for Challenge was primarily attributable to the
economic effect of the shortage of certain electronic components during Fiscal
2000 in the broker distributor market in which Challenge primarily operates.
This shortage resulted in a higher demand for electronic products in the broker
market. The Challenge broker division expects to see a decline in sales for at
least the first half of Fiscal 2001 due to a slowdown in manufacturing among
computer, telecommunications and phone manufacturers. Any future improvements in
profitability will be based on future demand and supply of Challenge's product
mix. There can be no assurance that once demand for these products catches up
with the supply, Challenge will be able to attain the sales levels experienced
during Fiscal 2000. However, Challenge started an audible division in Fiscal
1999, which resulted in approximately $2 million of sales in Fiscal 2000.
Challenge expects this division's sales of speakers, fans and buzzers to
increase substantially in Fiscal 2001 from Fiscal 2000. Our substantial
increases in revenues, and gross profits as described below, from our electronic
components business were offset by the costs associated with the termination of
our proposed acquisition of Global, financial consulting fees, interest on
convertible debt and the costs of acquiring MailEncrypt.

Our gross profit for Fiscal 2000 increased by approximately $6,605,000,
or 215%, to $9,684,000, as compared to $3,079,000 for Fiscal 1999. Gross margin
as a percentage of net sales increased from 25.3% in Fiscal 1999 to 26.5% in
Fiscal 2000. The gross profit for Fiscal 2000 and Fiscal 1999 were $2,245,000
and $1,904,000 for Surge and $7,439,000 and $1,174,000 for Challenge. The
increase in our gross profit was a result of increased sales and higher profit
margins. The higher margins were primarily a result of the economic effect of
the shortage of electronic components in Challenge's broker distributor market.
Also, Surge is making its operations more efficient by reducing inventory
acquisition costs and has instituted a policy of increasing direct shipments to
its customers' factories overseas. This has resulted in a substantial reduction
of import related fees. The increase in gross profit was partially offset by our
writing down a portion of our inventories to its realizable value.

General and administrative expenses for Fiscal 2000 increased by
approximately $3,414,000, or 161%, to $5,535,000, as compared to $2,121,000 for
Fiscal 1999. The increase is primarily due to performance and annual bonuses to
employees which increased by approximately $1,070,000 and the expense related to
options issued to our consultants which increased by approximately $186,000. We
also hired additional personnel in the latter part of 1999. Superus incurred
approximately $1,085,000 of expenses relating to salaries, rent, professional
fees, public relations and consulting fees. Superus had no revenues in Fiscal
2000.

Selling and shipping expenses for Fiscal 2000 increased by
approximately $922,000, or 89%, to $1,953,000, as compared to $1,031,000 for
Fiscal 1999. This increase is primarily due to the increased sales commissions
resulting from the increase in sales for the year, as well as an increase in
selling related travel and entertainment incurred primarily by Challenge. We are
committed to increasing sales through authorized distributors, global and
domestic sales representatives, an Internet Web site, literature, and
participation in trade shows. Superus incurred approximately $114,000 in selling
related expenses.

Financial consulting fees and expenses in Fiscal 2000 were
approximately $5,351,000, based on the fair market value of the securities
received by the investment banker. As further discussed in "Liquidity and
Capital Resources" below, these fees were incurred based on an agreement with
our investment banker for past and future services and expenses.

Our loss on the termination of the Global acquisition in Fiscal 2000
totaled approximately $6,028,000. In November 2000, we terminated the Global
acquisition transaction. As a result, $3,250,000 of the indebtedness and accrued
interest was discharged. We have provided a reserve for the full amount of the
remaining indebtedness to us from Global of $1,250,000 and accrued a loss
contingency for the full $500,000 of the Global loans guaranteed by us, in both
cases due to the uncertainty of repayment. Other professional fees and
acquisition related costs have also been included.

Provisions for bad debts increased by approximately $939,000. This
increase relates primarily to our providing for a 100% reserve relating to our
$933,000 of loans including accrued interest to MailEncrypt.

The Company incurred a loss from operations of approximately
$10,122,000 for Fiscal 2000, as compared to a loss of $73,000 in Fiscal 1999.
However, exclusive of the above-described financial consulting fees, loss
incurred on the termination of the Global acquisition and loan write-offs
relating to MailEncrypt we would have had adjusted income from operations of
approximately $2,189,000 in Fiscal 2000.

Interest expense (including amortization of debt costs) for Fiscal 2000
increased by approximately $1,684,000, as compared to Fiscal 1999. This increase
is primarily due to our incurring debt in the principal amount of $7 million as
a result of our sale of 12% convertible promissory notes between December 1999
and March 2000.

Investment income increased by approximately $300,000 for Fiscal 2000
as compared to Fiscal 1999. This increase is primarily related to the interest
on the notes receivable from Global DataTel, Inc and MailEncrypt.com, Inc. The
interest on these notes were fully reserved for and written off in Fiscal 2000.

As a result of the above, the Company on a consolidated basis had a net
loss of approximately $11,370,000 for Fiscal 2000, as compared to a net income
of $85,000 for Fiscal 1999.

Liquidity and Capital Resources

Working capital increased by $572,000 during Fiscal 2001 to $3,896,000
at November 30, 2001, from $3,324,000, at November 30, 2000. This increase
resulted primarily from the conversion of the private placement of $7 million of
12% convertible promissory notes and related accrued interest into our common
stock. Our current ratio increased to 2.1:1 at November 30, 2001, as compared to
1.4:1 at November 30, 2000. This current ratio increase also was the result of
the conversion of the $7 million of notes. Inventory turned about one-third as
much in Fiscal 2001 as compared to Fiscal 2000. The average number of days to
collect receivables increased from 26 days to 54 days. This increase to 54 days
to collect receivables represents a return to our historical levels and also
reflects the impact of the slowdown in the electronic components market. We
believe that our working capital levels are adequate to meet our current
operating requirements.

We have no existing lines of credit. The Company is currently
negotiating a credit line between $1,000,000 and $1,500,000 from an asset based
lender.

We continue to incur increasing operating costs. These costs
principally consist of rent, payroll, professional fees and marketing related
charges. Our ability to operate profitably in the future depends on increasing
sales levels and decreasing our expenses. To accomplish this goal, we continue
to streamline our operations by reducing payroll and are reviewing other
possible reductions.

Surge and Challenge moved their operations to larger quarters at the
end of April 2001. The lease for the new premises is with a company owned by
certain of our officers, directors and shareholders. Rental costs for the new
premises are approximately $95,000 per year higher than rental costs incurred at
the prior premises. Amortization of the leasehold improvements are made ratably
over the shorter of the ten year term of the new lease or the life of the
improvements.

From December 1, 1999 through November 30, 2000, stock options for an
aggregate of 103,950 shares at an aggregate exercise price of $176,449 were
exercised. In addition, in March 2000, 1,031 warrants were exercised for at an
aggregate exercise price of $5,155. From December 1, 2000 through May 31, 2001,
stock options totaling 27,550 shares at an aggregate exercise price of $36,238
were exercised.

During Fiscal 2001, we had net cash provided by operating activities of
approximately $234,000 as compared to $959,000 in Fiscal 2000. The decrease in
cash provided by operating activities resulted from our net loss, offset in part
by increases in accounts receivable and prepaid expenses.

We had net cash used in investing activities of approximately
$1,481,000 for Fiscal 2001, as compared to $5,301,000 for Fiscal 2000.
Approximately $961,000 was expended for improvements at our new premises during
Fiscal 2001. Additionally, we expended approximately $1,055,000 as the result of
repurchase agreement entered into with Invensys, as more fully discussed below.
We partially funded these expenditures through the sale of marketable
securities. As discussed more fully below, we loaned an aggregate of $4,016,000
to Global and $875,000 to MailEncrypt, during Fiscal 2000. We expect that our
cash flow from operations will be sufficient to meet our current financial
requirements over at least the next twelve months.

We had net cash provided by financing activities of approximately
$7,088,000 for Fiscal 2000, as compared to $630,000 used in financing activities
for Fiscal 2001. We expended $650,000 in April 2001 to repurchase a portion of
the shares issued to our investment banker in November 2000. The increase in
Fiscal 2000 was a result of $7 million of gross proceeds from our 12% note
private placement, the proceeds from notes payable and the exercise of stock
options and offset, in part, by loan costs. The net proceeds of the $7 million
note offering of approximately $6,295,000 and the loan payable of approximately
$494,000 were used primarily to lend money to fund the operations of Global in
the amount of approximately $4,016,000 and to lend money to fund the operations
of MailEncrypt in the amount of $875,000. This private placement was
over-subscribed by approximately $238,000. An investor in the private placement
agreed to loan us this over-subscribed amount with interest at 12% per annum,
rather than accept a partial return of its subscription. The investor converted
this loan into a convertible promissory note issued in our November 2000 private
placement discussed below. As a result of the foregoing, we had a net decrease
in cash of $1,876,000 during Fiscal 2001, as compared to a net increase of
$2,747,000 for Fiscal 2000.

Between November 2000 and January 2001, we sold approximately $513,000
of new convertible promissory notes, due December 31, 2001, to two investors in
a private placement. This amount included the conversion of $238,000 of prior
debt plus accrued interest of $24,000 from an investor in our $7 million private
placement whose over-subscription was loaned to us outside of such $7 million
private placement. The notes paid interest at the rate of 6% per annum through
December 31, 2000 and thereafter at 12% until converted into equity or paid at
maturity. In November 2001, the Company converted these notes and a portion of
the interest into 283,912 shares of our common stock.

As of November 30, 2000, we had convertible debt in the amount of $7
million as a result of our private placement completed in March 2000. These
notes accrued interest at the rate of 12% per annum, or approximately $840,000
per year. These notes were payable on or before December 31, 2000, unless
converted earlier upon shareholder approval. Since shareholder approval was
obtained at a Surge shareholder meeting held on September 26, 2000, as adjourned
to and concluded on October 17, 2000, and the Global acquisition was
subsequently terminated, the stated terms of these notes provided for automatic
conversion into Surge common stock at $2.50 per conversion share.

On February 1, 2001, Nasdaq advised us that, in order to comply with
Nasdaq's strict interpretation of its Marketplace Rules, we must limit the
delivery of the conversion shares to no greater than 19.9% of the total number
of shares of Surge common stock issued and outstanding at the time of the
commencement of the $7 million note offering and seek additional shareholder
approval prior to the delivery of the remaining conversion shares and any shares
representing the payment of accrued interest. The 19.9% maximum delivery
threshold equals approximately 991,000 shares of Surge common stock.

On July 10, 2001, our shareholders authorized an issuance and delivery
of the remaining 1,808,542 shares of our common stock, plus up to an additional
407,185 shares of our common stock in payment of accrued interest. We issued
60,753 shares of our common stock in connection with the partial conversion of
the accrued interest due on these notes. The remaining shares for accrued
interest were issued when the holders of the notes agreed to accept these shares
in payment. The liability in the amount of $4,635,257 was reclassified to equity
as of July 10, 2001.

On November 3, 2000, we terminated the Asset Purchase Agreement with
Global due to the failure of Global to obtain regulatory and other required
approvals and Global's failure to fulfill various conditions precedent to
closing the transaction. The Securities and Exchange Commission, The Nasdaq
Stock Market and the U.S. Attorney's Office all had substantial concerns about
Global and certain principal shareholders of Global. Following the termination
of the Global acquisition transaction, we entered into a Termination, Release,
and Debt Discharge Agreement with Global (the "Termination Agreement") pursuant
to which we released Global from payment of approximately $3.25 million of debt
in exchange for mutual releases and approximately 239,000 shares of Surge's
Series A Preferred Stock held in escrow for all of the Global Shareholders and
agreed to release an additional $1.25 million in principal amount of
indebtedness owed to us by Global, if no legal actions were commenced against us
relating to Global and/or the termination of the Global agreement. Thereafter,
an arbitration in Mexico was commenced against Superus relating to a Global
transaction. We have notified Global that it was in default of the
termination agreement and that the $1.25 million remaining indebtedness was due
and owing and would not be canceled. We have provided a 100% reserve for this
remaining indebtedness due to the uncertainty of collection. In addition, we
have guaranteed and co-signed Global loans totaling $500,000. We placed a
$500,000 certificate of deposit with the bank to secure our guarantee. We had
provided a 100% reserve for this guarantee due to the uncertainty related to
Global's ability to repay the loan during Fiscal 2000. In May 2001, the bank
demanded payment per the terms of the guarantee and claimed $454,000 of the
certificate of deposit. The remaining $46,000 plus interest totaling
approximately $25,000 were returned to the Company.

Between February and September 2000, we loaned to MailEncrypt an
aggregate of $875,000. These loans, which are evidenced by notes in the
principal amounts of $750,000 and $125,000, bear interest at the rate of 10% per
annum and are due April 16, 2001. In the event the acquisition of MailEncrypt
were to be unwound, these notes would be convertible into common stock of
MailEncrypt at the rate of one share of MailEncrypt common stock for every $5.58
of principal so converted. Subsequent to November 30, 2000, we continued to
advance additional funds to MailEncrypt to be secured by the assets of
MailEncrypt if the acquisition was unwound. Subsequent to November 30, 2000, we
continued to advance additional funds to MailEncrypt, secured by the assets of
MailEncrypt. Additional advances totaled approximately $222,970 through May 31,
2001. No additional advances have been made since May 31, 2001. The MailEncrypt
acquisition was unwound on October 23, 2001 as described below.

On November 24, 2000, we entered into an agreement with our financial
consultant, Equilink Capital Partners LLC, which provided for the issuance of
900,000 shares of our common stock, 70,000 shares of our Series C preferred
stock and warrants to purchase 2,000,000 shares of our common stock at $3.00 per
share in consideration for past and future services (over a six month period)
and accrued reimbursable expenses. Included in the past services were fees
totaling approximately $338,000 relating to services performed and expenses
incurred in connection with the MailEncrypt merger. The securities issued under
the agreement were the sole consideration paid by us to Equilink during a
two-year period. Should the Equilink warrants be exercised, the $6 million of
gross proceeds from such exercise will be used for general working capital.

The 70,000 shares of Series C preferred stock issued to Equilink will
automatically convert into 700,000 shares of Surge common stock upon shareholder
approval of the issuance of such 700,000 shares. The Series C preferred stock
has limited voting rights and ranks senior to Surge common stock and on parity
to the Surge Series B preferred stock. The Series C preferred stock has a
liquidation preference of $5.00 per share. The Series C preferred stock also has
cumulative dividends of $.50 per share per year, payable semi-annually. We paid
$6,625 in dividends during Fiscal 2001. The Series C preferred stock has a
liquidation preference of $5.00 per share.

On April 3, 2001, we entered into a Redemption Agreement with Equilink
and Robert DePalo, president and sole equity owner of Equilink, pursuant to
which we purchased from Equilink 423,000 shares of our common stock and 8,000
shares of our series C preferred stock for $650,000 in cash. The purchase price
for these securities was based upon approximately 95% of the average closing
price of our common stock for the five trading days ended on April 2, 2001.

In July 2001, we entered into a Termination and Separation Agreement
with Craig Carlson. Mr. Carlson had served as our Vice President, Corporate
Development since March 2000, a position he resigned from effective July 9,
2001. Under the terms of this agreement, we made severance payments to Mr.
Carlson totaling approximately $47,000 over a three month period. These
severance payments have been completed and we have no further obligations in
connection with this agreement.

In September 2001, we entered into an agreement with Invensys Co.
pursuant to which we agreed to supply Invensys and its affiliates ("Invensys")
electrical components on the terms set forth in the agreement, including
providing Invensys with a minimum price reduction of 5% per year after the first
year of the agreement. We believe that Invensys could provide substantial
business. In connection with such agreement, we purchased certain inventory from
Invensys for approximately $1,250,000 and Invensys agreed to repurchase the
inventory at our cost in installments over 12 months. In effect, we have
provided one-year 0% financing of approximately $1,250,000 and provided certain
other favorable terms to Invensys in order to potentially expand our business
with them. In addition Invensys agreed, subject to certain conditions, to
purchase at least $3 million of our products over 12 months. In December 2001,
the Company received the second scheduled payment of approximately $260,459. As
of November 30, 2001, the Company had received $200,549, the first scheduled
payment from Maple Chase, one-year non-interest bearing financing. We have
received an approximately $3,000,000 purchase order from Maple Chase, an
Invensys division.

In October 2001, we entered into a Stock Exchange Agreement with the
former shareholders of MailEncrypt which recinded our acquisition of
MailEncrypt. Pursuant to the Stock Exchange Agreement, Surge exchanged 100
shares of common stock of MailEncrypt, which represented all of the issued and
outstanding capital stock of MailEncrypt, for 182,139.797 shares of Series B
Preferred Stock of Surge which had been issued to the Shareholders in the
MailEncrypt acquisition transaction. Also, approximately $1.1 million of debt of
MailEncrypt was exchanged for 7.31979 shares of MailEncrypt common stock,
representing approximately 6.8% of MailEncrypt, which was issued to Surge based
substantially on the rescission provisions set forth in the original acquisition
agreement. Surge also made payments of $30,000 to each of David Bird and Michael
Patchen. In addition, for a two year period commencing on the closing date,
Surge has agreed not to directly or indirectly engage in the electronic mail
encryption business, except that Surge may sell or provide electronic components
to one or more companies that are engaged in such business.

On November 30, 2001, our common stock was delisted from the Nasdaq
SmallCap Market. The effects of delisting include more limited information as to
the market prices of our common stock, less liquidity for the common stock and
less news coverage of us. Delisting may adversely affect investors' interest in
our securities and materially adversely affect the trading market and prices for
such securities and our ability to issue additional securities or to secure
additional financing.

Inflation And Increasing Interest Rates

In the past two fiscal years, inflation has not had a significant
impact on our business. We have generally been able to offset the impact of
rising costs through purchase price reductions and increases in selling prices.
However, any significant increase in inflation and interest rates could have a
significant effect on the economy in general and, thereby, could affect our
future operating results.

Item 7. Financial Statements.

Set forth below is a list of our financial statements included in this
Annual Report on Form 10-KSB and their location.

Item Page*
---- -----
Independent auditors' report ........................................ F-2
Consolidated balance sheet at November 30, 2001 ..................... F-3
Consolidated statements of operations and comprehensive loss
for the years ended November 30, 2001 and 2000 ..................... F-4
Consolidated statements of shareholders' equity
for the years ended November 30, 2001 and 2000 ..................... F-5
Consolidated statements of cash flows for the years
ended November 30, 2001 and 2000 ................................... F-6
Notes to consolidated financial statements .......................... F-7-21

* Page F-1 follows Part III to this Annual Report on Form 10-KSB.

Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.

On November 27, 2000, we replaced Seligson & Giannattasio, LLP as the
independent auditors of our financial statements. We appointed Richard A. Eisner
& Company, LLP as our new independent auditors for our fiscal year ended
November 30, 2000.

The reports of Seligson & Giannattasio for the previous two years did
not contain an adverse opinion or a disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
Further, we had no disagreements with Seligson & Giannattasio requiring
disclosure pursuant to Item 304(a)(1)(iv) of Regulation S-B, nor were there any
reportable events requiring disclosure pursuant to Item 304(a)(1)(v) of
Regulation S-B. In addition, during our two most recent fiscal years and through
the date of termination of Seligson & Giannattasio, neither we nor anyone acting
on our behalf consulted with Richard A. Eisner & Company, LLP on matters which
would require disclosure pursuant to Item 304(a)(2) of Regulation S-B.

Seligson & Giannattasio has furnished us with a letter, addressed to
the Commission, stating it agrees with the above statements. A copy of the
Seligson & Giannattasio letter has been made an exhibit to our current Report on
Form 8-K (Date of Report: November 27, 2000).

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.

Our Executive Officers and Directors

Surge's current executive officers and directors, and their ages, positions and
offices with us are as follows:

Name Age Positions and Offices with Surge
---- --- --------------------------------
Ira Levy 45 Chief Executive Officer, President and Director
Steven J. Lubman 46 Vice President, Principal Financial Officer,
Secretary and Director
Alan Plafker 43 Director, Member of the Audit Committee and
Member of the Compensation Committee
David Siegel 75 Director, Member of the Audit Committee and
Chairman of the Compensation Committee
Mark Siegel 47 Director, Member of the Audit and Compensation
Committees
Lawrence Chariton 44 Director, Member of Audit Committee

Set forth below is a brief description of the background of each of the
executive officers and directors of Surge, based on information provided to us
by them.

Ira Levy has served as President of Surge and a director since its inception in
November 1981 and, until February 2000, also served as Surge's Chief Executive
Officer. He was elected a director of Superus upon its formation in March 2000.
From 1976 to 1981, Mr. Levy was employed by Capar Components Corp., an importer
and supplier of capacitor and resistor products.

Steven J. Lubman has served as Surge's Vice President, Principal Financial
Officer, Secretary and a director since its inception in November 1981 and is
the President and Director of Challenge. From 1975 to 1981, Mr. Lubman was
employed by Capar Components, Inc.

David Siegel has served as a director since 1983, as well as Chairman of the
Board from 1983 to February 2000. Mr. Siegel also serves on the boards of
directors of Kent Electronics Corp. and Micronetics Corp., each of which is a
publicly traded company, and Great American of Deer Park, Inc., a privately held
company which leases facilities to Surge. David Siegel is the father-in-law of
Ira Levy and the father of Mark Siegel.

Mark Siegel has served as a director since October 1996. Since 1985, Mr. Siegel
has been the President of Mark Siegel Inc., d/b/a Great American Electronics
Corp., an electronics parts distributor, and Great American of Deer Park, Inc.,
a privately held company which leases facilities to Surge. Mark Siegel is the
son of David Siegel and the brother in-law of Ira Levy.

Alan Plafker has served as a director since June 2001. Mr. Plafker is the
President and Chief Executive Officer of Member Brokerage Service LLC, a credit
union service organization owned by Melrose Credit Union. Mr. Plafker has over
20 years of management experience in the insurance and credit union industries.

Lawrence Chariton has served as a director since August 2001. For the last 25
years, Mr. Chariton has worked as a Sales Manager for Linda Shop, a retail
jewelry business, and is involved in charitable organizations benefiting the
State of Israel. Mr. Chariton graduated from Hofstra University in 1979 with a
Bachelor's Degree in accounting.

Director Compensation

Currently, our directors, other than David Siegel, receive $500
compensation per month for serving on our board of directors and are entitled to
any grant of stock options from time to time at the discretion of our board.
David Siegel receives $750 per month to serve in addition on our board of
directors. See "Item 12. Certain Relationships and Related Transactions."
Directors are reimbursed for their reasonable expenses incurred in attending
meetings.

During Fiscal 1999, 2000, and 2001 David Siegel received $750 per month
for serving as a director and chairman of the audit and compensation committees.
During Fiscal 1999, 2000, and 2001, Mark Siegel received $500 per month for
serving on the audit and compensation committees. During Fiscal 2001, Lawrence
Chariton received $2,000 in total and James Miller received $23,825 in total.

Meetings of the Board of Directors and its Committees

Surge held eight formal meetings of its board of directors and took
action by written consent in lieu of a meeting on eight occasions during Fiscal
2001. The audit and compensation committees of Surge's board held four meetings
during Fiscal 2001. Alan Plafker, Lawrence Chariton, David Siegel and Mark
Siegel currently serve on Surge's audit and compensation committees. The
compensation committee reviews and approves the compensation to be paid to our
executive officers.

Each member of Surge's board of directors attended, in person or
telephonically, all of the meetings of the Surge board and its committees upon
which he served during Fiscal 2000 and Fiscal 2001.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely upon a review of Forms 3, 4 and 5 and amendments to these
forms furnished to us, together with written representations received by us from
applicable parties that no Form 5 was required to be filed by such parties, all
parties subject to the reporting requirements of Section 16(a) of the Exchange
Act filed all such required reports during and with respect to our 2001 Fiscal
year, except that an initial report of ownership has not yet been filed by
Lawrence Chariton.

Item 10. Executive Compensation.

The following table sets forth all compensation awarded to, earned by,
or paid for all services rendered to Surge during the fiscal years ended
November 30, 2001, 2000 and 1999 by those persons who served as chief executive
officer and any executive officer who received compensation in excess of
$100,000 during such years.

Summary Compensation Table

Long-Term
Compensation
Annual Compensation Other Shares
----------------------- Annual Underlying
Name and Principal Positions Year Salary Bonus Compensation(1) Options
---------------------------- ---- ------ ----- --------------- -------

Ira Levy, 2001 $200,000 $48,736(3) 0 0
President and Chief 2000 200,000 528,156(3) 0 250,000
Executive Officer(2) 1999 200,000 51,996 0 50,000

Steven J. Lubman, 2001 $200,000 $161,230(3) 0 0
Vice President and President 2000 200,000 651,028(3) 0 50,000
of Challenge 1999 200,000 56,614 0 50,000

Adam Epstein 2001 $184,615 $-0- 500,000(4)
Former Chairman of the Board and 2000 157,692 -0- 0 1,000,000(4)
Former Chief Executive Officer(2)

(1) The above compensation figures do not include the cost for the use of
automobiles leased by us, the cost of benefits, including premiums for life
insurance, and any other perquisites provided by us to such persons in
connection with our business, all of which does not exceed the lesser of
$50,000 or 10% of such person's annual salary and bonus for the subject
fiscal year.

(2) Adam Epstein became Acting Chief Executive Officer of Surge in 2000
until his separation from Surge in July 2001. Ira Levy served as Chief
Executive Officer during all of Fiscal 1998 and Fiscal 1999 and until
February 2000 and became Chief Executive Officer again in July 2001.

(3) Messrs. Levy and Lubman participated in the Surge bonus pool, which
consisted of 10% of Surge's and Challenge's combined net profits, defined
as income before income taxes, accrued interest charges and annualized
costs, and also excluding interest on Surge's $7 million private placement
of its 12% convertible promissory notes, specifically identifiable costs
relating entirely to Superus and costs associated with the terminated
acquisition of Global, but before the payment of bonuses. For Fiscal 2000,
they each also received $250,000 in additional year end bonuses.

(4) Pursuant to his Termination and Separation Agreement in July 2001, all
of Mr. Epstein's options terminated except for an option to purchase up to
125,000 shares of Surge common stock at an exercise price of $2.90 per
share, which shall remain exercisable until the earlier of a material
breach by Mr. Epstein of his agreement or one year and one day after the
date of such agreement.

Option Grants in Last Fiscal Year

The following table sets forth the (a) number of shares of Surge common
stock underlying Surge options granted to each executive officer named in the
summary compensation table during Fiscal 2001, (b) percentage that the grant
represents of the total number of Surge options granted to all of our employees
during Fiscal 2001, (c) per share exercise price of each Surge option and (d)
expiration date of each Surge option.

Number of Shares Percentage of Total
Underlying Options Options Granted to Exercise Expiration
Name Granted During 2001 Employees in 2001 Price (per share) Date
---- ------------------- ----------------- ----------------- ----

Ira Levy 25,000 3.8% $2.00 3/8/2011
Steven J. Lubman 25,000 3.8% $2.00 3/8/2011
Adam Epstein 500,000(1) 75% $2.90 3/5/2011

(1) Pursuant to his Termination and Separation Agreement in July 2001, all
of Mr. Epstein's options terminated except for an option to purchase up to
125,000 shares of Surge common stock at an exercise price of $2.90 per
share, which shall remain exercisable until the earlier of a material
breach by Mr. Epstein of his agreement or one year and one day after the
date of the agreement.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option
Values

Set forth in the table below is information, with respect to Ira Levy,
Steven J. Lubman and Adam Epstein, our only executive officers listed in the
summary compensation table above, as to:

o the total number of unexercised Surge options held by them on November
30, 2001, separately identified between those exercisable and those not
exercisable as of such date, and

o the aggregate value of in-the-money, unexercised Surge options held by
them on November 30, 2001, separately identified between those
exercisable and those not exercisable.

Number of Value of Unexercised
Unexercised Options In-the-Money Options
at November 30, 2001 at November 30, 2001(1)
-------------------------------- -------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------

Adam Epstein....... 125,000 0 $0 $0
Ira Levy........... 315,555 0 $0 $0
Steven J. Lubman... 200,000 0 $0 $0

(1) Based on a closing price of $0.14 per share on November 30, 2001.

Employment Agreements

Employment Agreements for Ira Levy and Steven J. Lubman

Surge entered into employment agreements, each dated as of February 1,
1996, with Ira Levy, our president, and Steven J. Lubman, our vice president.
These employment agreements provide that Messrs. Levy and Lubman shall devote
all of their business time to Surge, each in consideration of an annual salary
of $200,000 for five-year periods commencing on July 31, 1996. Bonuses to
Messrs. Levy and Lubman are to be based upon the performance of Surge and
Challenge and determined at the discretion of our board of directors. Their
salaries may be increased annually during the term of their employment, at the
discretion of our board or its compensation committee. These employment
agreements provide that, during the term of their employment with Surge and
Challenge and for a period of one year following termination of employment,
Messrs. Levy and Lubman are prohibited from engaging in activities which are
competitive with those of Surge. In March 1998, the employment agreements were
amended to extend their respective terms to July 30, 2003 and to provide that,
unless terminated in writing by either party, on July 30th of each successive
year of the employment agreements, the employment agreements shall automatically
renew for an additional one-year term, so that on each July 30th there will be
five years remaining on the terms of the agreements. The employment agreements
further provide that in the event of a change of control where Messrs. Levy or
Lubman is not elected to the Surge board and/or is not appointed as a Surge
officer and/or there has been a change in ownership of at least 25% of the
issued and outstanding stock and such issuance was not approved by either Ira
Levy or Steven J. Lubman, then the non-approving person(s) may elect to
terminate his employment contract and receive 2.99 times his annual compensation
including benefits, or such other amount then permitted under the Internal
Revenue Code without an excess penalty, in addition to the remainder of his
compensation under his existing employment contract. In such event, however, the
right of first refusal and warrants granted to Messrs. Levy and Lubman discussed
in the following paragraph would not apply.

In July 2001, we entered into a Termination and Separation Agreement
with Adam J. Epstein. Mr. Epstein had served as our Chairman and Acting Chief
Executive Officer since February 2000, positions he resigned from effective July
11, 2001. Under the terms of this agreement, we made severance payments to Mr.
Epstein totaling $100,000 over a six month period. These severance payments have
been completed and we have no further obligations in connection with this
agreement. All of Mr. Epstein's options terminated except for an option to
purchase up to 125,000 shares of Surge common stock at an exercise price of
$2.90 per share, which shall remain exercisable until the earlier of a material
breach by Mr. Epstein of his agreement or one year and one day after the date of
the agreement.

Our Stock Plans

In 1996, we adopted and our shareholders ratified, our 1995 Employee
Stock Option Plan. The option plan, as amended, provides for the grant of
options to purchase an aggregate of 850,000 shares of our common stock to our
qualified employees, officers, directors, independent contractors, consultants
and other individuals. The exercise price of options must be at least 85% of
fair market value of the common stock on the date of grant (100% of fair market
value, in the case of incentive stock options). As of November 30, 2001, options
to purchase 689,500 shares were outstanding and 12,000 shares were available for
grant. Of the 689,500 shares subject to outstanding options granted under the
1995 Plan, an aggregate of 615,555 were held by our officers and directors as
follows:

o Ira Levy held options to purchase 315,555 shares,

o Steven J. Lubman held options to purchase 200,000 shares,

o David Siegel held options to purchase 40,000 shares,

o Mark Siegel held options to purchase 40,000 shares, and

o Alan Plafker held options to purchase 20,000 shares.

As of November 30, 2000, options to purchase an aggregate of 4,585,000
shares of a Superus tracking common stock had been granted under the Superus
plan. In January 2001, in connection with the deletion of Superus tracking
stocks from the authorized capital of Superus, options to purchase an aggregate
of 1,735,000 of such Superus shares were forfeited. In March 2001, in connection
with Surge's determination to not proceed with the proposed recapitalization
with Superus, Surge granted options to purchase 2,650,000 shares of common stock
(the issuance of such stock subject to shareholder approval) which are not
included above. The holders of the remaining 2,850,000 Superus options agreed to
forfeit their Superus options upon future shareholder approval of the new Surge
options. See "Item 12. Certain Relationships and Related Transactions."

Item 11. Security Ownership of Certain Beneficial Owners and Management.

Our common stock is the only class of our voting securities presently
outstanding. The following table sets forth information with respect to the
beneficial ownership of shares of our common stock, as of March 5, 2002, by:

o each person known by us to beneficially own 5% or more of the
outstanding shares of our common stock, based on filings with the
SEC and certain other information,

o each of our executive officers and directors, and

o all of our executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the
SEC and includes voting and investment power. In addition, under SEC rules, a
person is deemed to be the beneficial owner of securities which may be acquired
by such person upon the exercise of options, warrants or convertible securities
within 60 days from the date on which beneficial ownership is to be determined.

Except as otherwise indicated in the notes to the following table, we
believe that all shares are beneficially owned, and investment and voting power
is held by, the persons named as owners.

Amount and Percentage
Nature of Surge of Surge Common
Name and address of Common Stock Stock Beneficially
Beneficial Owner Beneficially Owned Owned(1)
---------------- ------------------ ------------------

Ira Levy(2) 568,855(3) 6.0%
Adam J. Epstein (4) 125,000(5) 1.3%
Steven J. Lubman (2) 455,000(6) 4.8%
Equilink Capital
Partners, LLC (7) (10) 810,000(8) 8.1%
Lawrence Chariton (2) 101,795(9) 1.1%
Alan Plafker (2) 20,916(10) *
David Siegel (2) 75,000(11) *
Mark Siegel (2) 101,998(12) 1.1%

All directors and executive
officers as a group (6 persons) 1,322,648(13) 13.5%

* Less than 1% of the issued and outstanding shares of Common Stock.

(1) Based on 9,185,235 shares of Surge common stock issued and outstanding
as of March 5, 2002.

(2) The business and mailing address for each of these individuals is c/o
Surge Components, Inc., 95 East Jefryn Boulevard, Deer Park, New York
11729.

(3) Includes 315,555 shares of Surge common stock issuable upon exercise of
options granted to Mr. Levy, which shares are exercisable within the next
60 days. Also includes shares of Surge common stock held by Mr. Levy which
are subject to certain voting and transfer restrictions pursuant to a stock
purchase agreement between Mr. Lubman and Mr. Levy. Does not include (a)
105,553 shares of Surge common stock issuable upon exercise of a Surge
option granted Mr. Levy, which shares are not exercisable within 60 days,
nor (b) 1,025,000 shares of Surge common stock issuable upon exercise of
options subject to shareholder approval.

(4) The business and mailing address of Mr. Epstein is 156 Lower Terrace,
San Francisco, California 94114. Mr. Epstein was Surge's Chief Executive
Officer until July 2001.

(5) Includes 125,000 shares of Surge common stock issuable upon exercise of
an option granted to Mr. Epstein in connection with his Termination and
Separation Agreement with Surge, which shares are exercisable within the
next 60 days. All other options held by Mr. Epstein were terminated
pursuant to such agreement.

(6) Includes 200,000 shares of Surge common stock issuable upon exercise of
options granted to Mr. Lubman, which shares are exercisable within the next
60 days. Also includes shares of Surge common stock held by Mr. Lubman
which are subject to certain voting and transfer restrictions pursuant to a
stock purchase agreement between Mr. Lubman and Mr. Levy. Does not include
1,000,000 shares of Surge common stock issuable upon exercise of options
granted subject to shareholder approval.

(7) The business and mailing address for Equilink is 488 Madison Avenue -
8th Floor, New York, New York 10022.

(8) Includes (a) 60,000 shares of Surge common stock issuable upon
conversion of Series C preferred stock issued to and currently owned by
Equilink and/or its assignees, and (b) 750,000 shares of Surge common stock
issuable upon exercise of warrants issued to and currently owned by
Equilink and/or its assignees.

(9) Includes 1,810 shares of Surge common stock issuable upon exercise of
warrants held by Mr. Chariton, which are exercisable within the next 60
days.

(10) Includes 20,000 shares of Surge common stock issuable upon exercise of
options granted to Mr. Plafker, which are exercisable within the next 60
days.

(11) Includes 40,000 shares of Surge common stock issuable upon exercise of
options granted to Mr. D. Siegel, which shares are exercisable within the
next 60 days. Does not include 400,000 shares of Surge common stock
issuable upon exercise of an option subject to shareholder approval.

(12) Includes 40,000 shares of Surge common stock issuable upon exercise of
options granted to Mr. M. Siegel, which shares are exercisable within the
next 60 days. Does not include 225,000 shares of common stock issuable upon
exercise of an option subject to shareholder approval.

(13) Includes an aggregate of 617,365 shares of Surge common stock issuable
upon exercise of options and warrants held by Surge's executive officers
and directors, which shares are exercisable within the next 60 days.

Item 12. Certain Relationships and Related Transactions.

Surge and Challenger's executive offices and warehouse facilities were
leased from Great American Realty of Deer Park Co., a company whose stock is
owned 33-1/3% each by Ira Levy and Steven J. Lubman, two of our executive
officers and directors, and Mark Siegel, one of our directors. Our monthly
rental cost for such lease was $6,654 during Fiscal 2001, $6,461 during Fiscal
2000, and $6,272 during Fiscal 1999. These leases were terminated when the
premises were vacated in April 2001.

In October 2000, we entered into a lease with Great American Realty of
95 Jefryn Blvd., LLC for a 23,250 square foot executive office and warehouse
facility, which we occupied in April 2001. The yearly rental for this facility
is approximately $175,000 for the first year, increasing by 3% annually to
approximately $228,000 in the final year of the lease. This lease expires on
September 30, 2010. Our monthly rental cost for such lease was $14,531 during
Fiscal 2001.

On July 7, 2000, the Board of Surge unanimously approved the guarantees
of certain loans and responsibilities of MailEncrypt. In particular, the Surge
board of directors approved the guarantee of up to $23,000 for a furniture
lease, and up to $30,360 towards a lease of equipment with Dell Computers. Adam
Epstein, Surge's Chairman of the Board and Acting Chief Executive Officer, was a
shareholder and director of MailEncrypt at the time of this board action.

In November 2000, Surge acquired MailEncrypt pursuant to which Surge
issued an aggregate of 182,140 shares of Surge Series B preferred stock. At the
time of such acquisition, Adam J. Epstein, Surge's Chairman of the Board and
Acting Chief Executive Officer was a director and stockholder of Superus. Mr.
Epstein received 372,768 shares of Series B preferred stock in his capacity as a
MailEncrypt stockholder. Such transaction was unwound in October 2001 as
described in Item 5, "Recent Sales of Unregistered Securities."

Information concerning employment agreements with Ira Levy and Steven
J. Lubman and termination and separation agreements with Adam J. Epstein and
Craig Carlson is provided under "Item 10. Executive Compensation."

On December 7, 1999, Mark Siegel and David Siegel were each granted
options to purchase 10,000 of Surge common stock and Ira Levy and Steven Lubman
were each granted options to purchase 50,000 shares of Surge common stock. These
four options are exercisable at $2.69 per share and expire on December 7, 2009.

On March 8, 2000, Ira Levy was granted an option to purchase 200,000
shares of a Superus tracking common stock, exercisable at $6.50 per share and
expiring on March 8, 2010.

On March 8, 2000, in connection with the execution of his employment
agreement, Adam J. Epstein was granted an option to purchase 1.5 million shares
of a Superus tracking common stock, exercisable at $6.50 per share and expiring
on March 8, 2010.

Pursuant to his employment agreement, Craig Carlson was granted an
option to purchase 200,000 shares of a Superus tracking common stock,
exercisable at $6.50 per share through March 20, 2010.

On November 3, 2000, Mr. Epstein was granted options to purchase 1
million shares of Surge common stock exercisable at $2.90 per share. Of such
option shares, 300,000 became exercisable immediately, and the remaining option
shares become exercisable on an equal monthly basis over the first 36 months
following the date of grant, subject to Mr. Epstein continuing to provide
services to us. The option becomes exercisable to the extent of 50% of the then
unexercisable portion of the option in the event of his termination of
employment without cause, and to the extent of 75% of the then unexercisable
portion of the option in the event of a change of control. On March 5, 2001, Mr.
Epstein was granted options to purchase an additional 500,000 shares of Surge
common stock, exercisable at $2.90 per share.

On November 3, 2000, Mr. Levy was granted an option to purchase 200,000
shares of Surge common stock at $2.90 per share. Of such option shares, 73,333
became exercisable immediately and the remaining 126,667 option shares become
exercisable ratably on a monthly basis over the first 36 months following the
date of grant, subject to his continuing to provide services to us.

On November 3, 2000, Mr. Carlson was granted an option to purchase
200,000 shares of Surge common stock exercisable at $2.90 per share. Of such
option shares, 45,000 became exercisable immediately, and the remaining 155,000
option shares become exercisable ratably on a monthly basis over the first 42
months following the date of grant, subject to his continuing to provide
services to us. The option becomes exercisable to the extent 25% of the then
unexercisable portion of the option in the event of his termination without
cause or involuntary termination and to the extent of 75% of the then
unexercisable portion of the option in the event of a change of control.

In January 2001, in connection with the deletion of Superus tracking
stocks from the authorized capital of Superus, Adam J. Epstein and Craig Carlson
forfeited all of the Superus options granted to them in March 2000.

On December 28, 1998, options to purchase an aggregate of 5.3 million
shares of Surge common stock were granted in connection with the proposed merger
of Surge with Orbit Network, Inc. These options were to become exercisable on
December 28, 2002, at $2.00 per share, and were to expire on December 28, 2003.
These options consisted of:

o an option to purchase 2.45 million shares granted to Ira Levy,
o an option to purchase 2.25 million shares granted to Steven J.
Lubman,
o an option to purchase 350,000 shares granted to David Siegel,
and
o an option to purchase 250,000 shares granted to Mark Siegel.

On March 8, 2000, options to purchase an aggregate of 2,650,000 shares
of Superus common stock were granted under the Superus plan. These March 2000
options had similar terms to the December 1998 options, except that these new
options were exercisable for a Superus tracking common stock and were
exercisable at $2.69 per share. These options consisted of:

o an option to purchase 1.025 million shares granted to Ira
Levy,
o an option to purchase 1 million shares granted to Steven J.
Lubman,
o an option to purchase 400,000 shares granted to David Siegel,
and
o an option to purchase 225,000 shares granted to Mark Siegel.

These options initially were not exercisable prior to December 28,
2002. However, upon Surge shareholder approval obtained in October 2000, these
options became immediately exercisable and the optionees forfeited their
December 1998 options.

In March 2001, in connection with the Company's determination to not
proceed with the proposed recapitalization of the Company in which Superus would
become the Delaware parent corporation, the Company granted options to purchase
2,650,000 shares to certain of its officers and directors. These options are
exercisable until December 28, 2003 at $2.00 per share, subject to shareholder
approval of their grants, in accordance with New York law and Nasdaq Marketplace
Rules. The officers and directors granted these March 2001 options agreed that,
immediately upon such shareholder approval, they will forfeit their options to
purchase 2,650,000 shares of Superus common stock granted to them on March 8,
2000 and more fully described in the preceding paragraph, as well as an
additional 200,000 share option granted to Ira Levy on March 8, 2000 by Superus.
Superus has subsequently filed for bankruptcy.

On January 15, 2001, Surge granted an option to purchase 25,000 shares
of Surge common stock to James Miller upon his appointment to the Board of
Directors. The option vests over a two-year period and is exercisable at $2.00
per share.

In March 2001, Mark Siegel and David Siegel were each granted options
to purchase 15,000 shares of Surge common stock and Ira Levy and Steven Lubman
were each granted options to purchase 25,000 shares of Surge common stock. These
options are exercisable at $2.00 per share for five years. In July 2001, Mark
Siegel, David Siegel, James Miller and Alan Plafker were each granted options to
purchase 20,000 shares of Surge common stock exercisable at the market price
for ten years.

We believe that the terms of each of the foregoing transactions were no
less favorable to us than we could have obtained from non-affiliated third
parties, although no independent appraisals were obtained. We anticipate that
all future transactions with our affiliates, if any, will be on terms believed
by our management to be no less favorable than are available from unaffiliated
third parties and will be approved by a majority of disinterested directors.

Item 13. Exhibits and Reports on Form 8-K.

(a) Exhibits.

Set forth below is a list of the exhibits to this Annual Report on Form 10-KSB.

Exhibit
Number Description

2.1 Merger Agreement and Plan of Reorganization, dated as of November 13,
2000, among Surge Components, Inc., Mail Acquisition Corp.,
MailEncrypt.com, Inc. and the stockholders and optionholders of
MailEncrypt.com, Inc. (1)

2.2 Agreement and Plan of Merger, dated as of November 29, 2000, among
Surge Components, Inc. and Superus Holdings, Inc. (1)

3.1 Composite of the Certificate of Incorporation of Surge Components,
Inc., as amended to date. (1)(2)

3.2 By-Laws of Surge Components, Inc., as amended to date. (2)

4.1 Form of Underwriter's Unit Purchase Option. (2)

4.2 Warrant Agreement, among Surge Components, Inc. Continental Stock
Transfe & Trust Company and Maidstone Financial, Inc. (2)

4.3 Specimen of the Surge common stock certificate. (2)

4.4 Specimen of the Surge Class A common stock purchase warrant
certificate. (2)

4.5 Form of 12% Convertible Promissory Notes issued in December 1999 to
March 2000 private placement. (4)

4.6 Warrant certificate, evidencing warrants to purchase 2 million shares
of Surge common stock registered in the name of Equilink Capital
Partners, LLC. (1)

4.7 Stockholder Protection Rights Plan Agreement, dated as of June 30,
1997. (5)

4.8 Security Agreement, dated December 1, 1999, by and among Surge
Components Inc., GDIS Acquisition Corp. and Global DataTel, Inc. (6)

4.9 Pledge Agreement, dated June 2, 2000, by and among Global DataTel,
Inc., Global DataTel Acquisition Corporation and Surge Components, Inc.
(7)

9.1 Stock Purchase Agreement, dated March 1992, between Ira H. Levy and
Steve J. Lubman. (2)

10.1 Surge Components 1995 Employee Stock Option Plan. (2)

10.2 Superus Holdings, Inc. Incentive Stock Plan. (3)

10.3 Employment Agreement, dated February 1, 1996, between Surge Components,
Inc. and Ira Levy. (2)

10.4 Employment Agreement, dated February 1, 1996, between Surge Components,
Inc. and Steven J. Lubman. (2)

10.5 Employment Agreement, effective February 16, 2000, between Superus
Holdings, Inc. and Adam J. Epstein. (3)

10.6 Employment Agreement, effective March 20, 2000, between Surge
Components, Inc. d/b/a Superus Holdings and Craig Carlson. (11)

10.7 Agreement, dated June 1, 1998, between Surge Components, Inc. and Great
American Realty of Deer Park. (8)

10.8 Amendment No. 1 to Employment Agreement, dated March 4, 1998, between
Surge Components, Inc. and Ira Levy. (8)

10.9 Amendment No. 1 to Employment Agreement, dated March 4, 1998, between
Surge Components, Inc. and Steven Lubman. (8)

10.10 Amendment No. 2 to Employment Agreement, dated October 8, 1999, between
Surge Components, Inc. and Ira Levy. (3)

10.11 Amendment No. 2 to Employment Agreement, dated October 8, 1999, between
Surge Components, Inc. and Steven Lubman. (3)

10.12 Form of sales representative agreement. (2)

10.13 Second Amended and Restated Pledge Agreement, dated as of May 31 2000,
among Richard Baker, Global DataTel, Inc. and Surge Components, Inc.
(3)

10.14 Investment Banking Agreement, dated as of November 24, 2000, between
Surge Components, Inc. and Equilink Capital Partners, Inc. (1)

10.15 Termination, Release and Debt Discharge Agreement, dated as of December
4, 2000, among Global DataTel, Inc. and all of its subsidiaries, Surge
Components, Inc., GDIS Acquisition Corp. and Superus Holdings, Inc.
(10)

10.16 Subordinated Convertible Promissory Note of Global DataTel, Inc. in the
principal amount of $1,250,000 and payable to Surge Components, Inc.
(10)

10.17 Lease, dated October 1, 2000, between Great American Realty of 95
Jefryn Blvd., LLC and Surge Components, Inc. (11)

10.18 Lease, dated October 1, 2000, between Great American Realty of 95
Jefryn Blvd., LLC and Surge/Challenge, Inc. (11)

10.19 Office Lease between One Embarcadero Center Venture and Superus
Holdings, Inc., dated March 27, 2000. (11)

10.20 Agreement, dated as of March 6, 2001, by, and among Surge Components,
Inc., MailEncrypt, Inc. and the former stockholders of MailEncrypt.com
Inc. (11)

10.21 Stock Exchange Agreement dated as of October 23, 2001, by and among
Surge Components, Inc. and David Bird, Adam J. Epstein, Chris Harano,
Michael Patchen and Thomas Taulli (12)

16.1 Letter of Surge Components, Inc., to Seligson & Giannattasio, LLP,
dated November 29, 2000 forwarded in accordance with Item 304(a)(3) of
Regulation S-B. (9)

16.2 Letter from Seligson & Giannattasio, LLP, dated November 30, 2000, as
received by Surge Components, Inc. (9)

21.1 Subsidiaries of Surge Components, Inc.

23.1 Consent of Richard A. Eisner & Company, LLP

(1) Incorporated by reference from our Current Report on Form 8-K (Date of
Report: November 16, 2000) filed with the SEC on December 1, 2000.

(2) Incorporated by reference from our Registration Statement on Form SB-2 (No.
333-630 NY) declared effective by the Securities and Exchange Commission on July
31, 1996, as amended by our Registration Statement on Form S-3 (No. 333-63371)
declared effective by the SEC on December 8, 1998.

(3) Incorporated by reference from our Registration Statement on Form S-4 (No.
333-32790) declared effective by the SEC on September 16, 2000.

(4) Incorporated by reference from our Annual Report on Form 10-K, for the
fiscal year ended November 30, 1999, filed with the SEC on September 25, 2000.

(5) Incorporated by reference from our Current Report on Form 8-K (Date of
Report: June 30, 1997) filed with the SEC on July 24, 1997.

(6) Incorporated by reference from our Current Report on Form 8-K (Date of
Report: December 8, 1999) filed with the SEC on December 17, 1999.

(7) Incorporated by reference from our Current Report on Form 8-K (Date of
Report: June 2, 2000) filed with the SEC on June 19, 2000.

(8) Incorporated by reference from our Annual Report on Form 10-KSB, for the
fiscal year ended November 31, 1998, filed with the SEC on March 1, 1999.

(9) Incorporated by reference from our Current Report on Form 8-K (Date of
Report: November 27, 2000) filed with the SEC on December 1, 2000.

(10) Incorporated by reference from our Current Report on Form 8-K (Date of
Report: December 4, 2000) filed with the SEC on December 4, 2000.

(11) Incorporated by reference from our Annual Report of Form 10-KSB, for the
fiscal year ended November 30, 2000, filed with the SEC on March 15, 2001.

(12) Incorporated by reference from our Current Report on Form 8-K (Date of
Report: October 23, 2001) filed with the SEC on November 2, 2001.

(b) Reports on Form 8-K

A Current Report on Form 8-K (Date of Report: September 27, 2001) was filed with
the SEC on September 27, 2001 reporting, as an Item 5 matter, the conclusion of
Surge's investigation as to certain questionable payments.

A Current Report on Form 8-K (Date of Report: October 23, 2001) was filed with
the SEC on November 2, 2001 as an Item 2 matter, completion of a stock exchange
transaction with the former shareholders of MailEncrypt.

A Current Report on Form 8-K (Date of Report: November 29, 2001) was filed with
the SEC on November 30, 2001 reporting, as an Item 5 matter, our notification
that Surge was being delisted from the Nasdaq Stock Market effective November
30, 2001.

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Contents

Page

Consolidated Financial Statements

Independent auditors' report F-2

Consolidated balance sheet as of November 30, 2001 F-3

Consolidated statements of operations and comprehensive loss for the years ended
November 30, 2001 and 2000 F-4

Consolidated statements of changes in shareholders' equity for the years ended
November 30, 2001 and 2000 F-5

Consolidated statements of cash flows for the years ended November 30, 2001 and 2000 F-6

Notes to consolidated financial statements F-7

Supplementary Information

Exhibit II - computation of earnings per common share F-22

F-1

INDEPENDENT AUDITORS' REPORT

To The Board of Directors and Shareholders
Surge Components, Inc.

We have audited the accompanying consolidated balance sheet of Surge Components,
Inc. and subsidiaries as of November 30, 2001 and the related consolidated
statements of operations and comprehensive loss, changes in shareholders' equity
and cash flows for each of the years in the two year period then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements enumerated above present fairly, in all
material respects, the consolidated financial position of Surge Components, Inc.
and subsidiaries as of November 30, 2001 and the consolidated results of their
operations and their consolidated cash flows for each of the years in the two
year period then ended in conformity with accounting principles generally
accepted in the United States of America.

Richard A. Eisner & Company, LLP

New York, New York
February 11, 2002

(except for Note A as to which the date is
March 8, 2002)

F-2

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Balance Sheet
November 30, 2001

ASSETS
Current assets:
Cash $ 1,030,181
Marketable securities - available for sale 1,176,534
Accounts receivable (net of allowance for doubtful accounts of $40,335) 1,610,032
Due under repurchase agreement 1,054,602
Inventory, net 2,311,412
Prepaid expenses and income taxes 142,454
------------

Total current assets 7,325,215

Fixed assets - net of accumulated depreciation and amortization of $475,706 1,478,886
Other assets 7,985
------------

$ 8,812,086
============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,315,760
Accrued expenses 1,113,479
------------

Total current liabilities 3,429,239

Deferred rent 28,910
------------

Total liabilities 3,458,149
------------

Commitments and contingencies

Shareholders' equity:
Preferred stock - $.001 par value stock, 1,000,000 shares authorized: Series
A - 260,000 shares authorized, none outstanding. Series B - 200,000
shares authorized, none outstanding, non-voting, convertible, redeemable.
Series C - 100,000 shares authorized, 62,000 shares issued and
outstanding, redeemable, convertible, and a liquidation preference of
$5 per share 62
Common stock - $.001 par value stock, 25,000,000 shares authorized, 9,022,448
shares issued and outstanding 9,023
Additional paid-in capital 23,080,835
Stock subscriptions receivable (9,200)
Accumulated other comprehensive loss - unrealized loss on
marketable securities - available for sale (61,912)
Accumulated deficit (17,664,871)
------------

Total shareholders' equity 5,353,937
------------

Total liabilities and shareholders' equity $ 8,812,086
============

See notes to financial statements F-3

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Loss

Year Ended
November 30,
----------------------------
2001 2000
------------ ------------

Net sales $ 15,722,613 $ 36,555,360
Cost of goods sold 12,000,469 26,871,416
------------ ------------
Gross profit 3,722,144 9,683,944
------------ ------------

Operating expenses:
Selling and shipping 1,308,517 1,953,087
General and administrative 6,037,413 5,599,016
Financial consulting services 2,333,676 1,645,782
Financial consulting services - terminated Global acquisition 3,704,999
Settlements (recovery) on termination of the Global acquisition and related
write-off (46,000) 6,027,603
Loss on MailEncrypt 902,919 875,000
------------ ------------
Total operating expenses 10,536,525 19,805,487
------------ ------------
Loss before other income (expense) and income taxes (6,814,381) (10,121,543)
------------ ------------

Other income (expense):
Other income 1,000,000
Investment income 232,680 516,787
Interest expense (including amortization of debt costs) (449,817) (1,684,299)
Loss on sale of securities (43,372)
------------ ------------
Other income (expense) 739,491 (1,167,512)
------------ ------------
Loss before income taxes (6,074,890) (11,289,055)
Income taxes 35,792 81,314
------------ ------------

Net loss (6,110,682) (11,370,369)
Dividends on preferred stock 6,625
------------ ------------

Net loss available to common shareholders $ (6,117,307) $(11,370,369)
============ ============

Other comprehensive loss:
Net loss $ (6,110,682) $(11,370,369)
Unrealized holding gain (loss) on investment securities
62,661 (71,717)
Reclassification adjustment - loss on sale of securities 43,371
------------ ------------

Comprehensive (loss) $ (6,004,650) $(11,442,086)
============ ============

Weighted average shares outstanding:
Basic 7,390,314 4,976,947
Diluted 7,390,314 4,976,947
(Loss) available to common shareholders, per share
Basic $ (.83) $ (2.28)
Diluted $ (.83) $ (2.28)

See notes to financial statements F-4

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Shareholders' Equity
Year Ended November 30, 2001 and 2000Net

Series C Preferred Common Additional
------------------ ---------------------- Paid-in
Shares Amount Shares Amount Capital
------- ------ --------- --------- -----------

Balance - December 1, 1999 4,858,894 $ 4,859 $ 6,386,063
Proceeds from options exercised 103,950 104 176,345
Warrants for financial consulting services -
convertible debt financing 226,812
Financial consulting services 20,000 $ 20 100,000 100 3,816,500
Financial consulting services - mail acquisition 5,000 5 200,000 200 606,983
Financial consulting services - terminated
Global acquisition 45,000 45 700,000 700 3,704,254
Compensatory options issued for consulting fees 186,352
Proceeds from exercise of underwriter-warrants 23,400 23 116,617
Proceeds from exercise of A warrants 1,031 1 5,154
Net unrealized loss on available for sale securities
Net loss
------- ----- ----------- ------ -----------
Balance - November 30, 2000 70,000 70 5,987,275 5,987 15,225,080
Repurchase and retirement of shares (8,000) (8) (423,000) (423) (649,569)
Proceeds from options exercised common stock 27,550 28 36,210
Loan to employee to exercise options
Conversion of debt 2,800,004 2,800 6,997,200
Conversion of interest payable 415,053 415 937,182
Conversion of promissory notes 200,566 201 513,247
Amortization of unearned compensation
Shares issued for non-employee services 15,000 15 28,110
Preferred stock dividends (6,625)
Net unrealized gains on available for sale securities
Net loss
------- ----- ----------- ------- -----------
Balance - November 30, 2001 62,000 $ 62 9,022,448 $ 9,023 $23,080,835
======= ===== =========== ======= ===========

Net
Unrealized Unearned
Stock Gain (Loss) Compensation
Subscriptions on Investment Equity Accumulated
Receivable Securities Instruments Deficit Total
--------- ------------ -------------- ------------ --------------

Balance - December 1, 1999 $ (52,856) $ (183,820) $ 6,154,246
Proceeds from options exercised 176,449
Warrants for financial consulting services -
convertible debt financing 226,812
Financial consulting services $(2,170,838) 1,645,782
Financial consulting services - mail acquisition 607,188
Financial consulting services - terminated
Global acquisition 3,704,999
Compensatory options issued for consulting fees 186,352
Proceeds from exercise of underwriter-warrants 116,640
Proceeds from exercise of A warrants 5,155
Net unrealized loss on available for sale securities (71,717) (71,717)
Net loss (11,370,369) (11,370,369)
--------- ------------ -------------- ------------ --------------
Balance - November 30, 2000 (124,573) (2,170,838) (11,554,189) 1,381,537
Repurchase and retirement of shares (650,000)
Proceeds from options exercised common stock 36,238
Loan to employee to exercise options $ (9,200) (9,200)
Conversion of debt 7,000,000
Conversion of interest payable 937,597
Conversion of Promissory Notes 513,448
Amortization of unearned compensation 2,170,838 2,170,838
Shares issued for non-employee services 28,125
Preferred stock dividends (6,625)
Net unrealized gains on available for sale securities 62,661 62,661
Net loss (6,110,682) (6,110,682)
--------- ------------ -------------- ------------ --------------
Balance - November 30, 2001 $ (9,200) $ (61,912) $ 0 $ (17,664,871) $ 5,353,937
--------- ------------ -------------- ------------ --------------

See notes to financial statements F-5

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Year Ended
November 30,
2001 2000
------------ ------------

Cash flows from operating activities:
Net loss $ (6,110,682) $(11,370,369)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 249,749 293,385
Provision for losses on accounts receivable 12,642 64,139
Inventory provision for losses on inventory 1,031,982
Amortization of loan costs 931,400
Deferred income taxes 89,223
Amortization of unearned compensation 2,170,838 1,645,783
Financial consulting services - terminated Global transaction 3,704,999
Option issued for consulting services 186,352
Settlement on termination of Global acquisition 5,134,828
Loss on sale of securities 43,372
Loss on MailEncrypt 830,158 875,000
Consulting services paid with stock 28,125
Changes in operating assets and liabilities:
Accounts receivable 1,396,114 (772,478)
Inventory (326,030) (1,575,297)
Prepaid expenses and taxes 663,950 (869,324)
Other assets 140,733 2,188
Accounts payable 119,672 913,021
Accrued expenses and taxes (45,255) 1,706,455
Deferred rent 28,910
------------ ------------

Net cash provided by operating activities 234,278 959,305
------------ ------------
Cash flows from investing activities:
Purchase of marketable securities (102,671) (143,992)
Sale of marketable securities 1,250,000
Other receivable (net) (1,054,602)
Acquisition of fixed assets (1,350,713) (265,607)
Loans to Global Datatel, Inc. (4,015,906)
Loans to MailEncrypt (222,970) (875,000)
------------ ------------

Net cash used in investing activities (1,480,956) (5,300,505)
------------ ------------
Cash flows from financing activities:
Proceeds from convertible notes payable 7,000,000
Proceeds from notes payable 494,378
Loan costs related to convertible notes (704,588)
Dividends on preferred stock (6,625)
Proceeds on exercise of warrants and options 27,038 298,244
Purchase and retirement of treasury stock (650,000)
------------ ------------

Net cash (used in) provided by financing activities (629,587) 7,088,034
------------ ------------

Net (decrease) increase in cash (1,876,265) 2,746,834
Cash at beginning of year 2,906,446 159,612
------------ ------------
Cash at end of year $ 1,030,181 $ 2,906,446
============ ============
Supplemental disclosure of cash flow information:
Income taxes paid $ 11,166 $ 515,975
Interest paid $ 31,911 $ 28,334

Noncash investing and financing activities:
Compensation for financial consulting services paid through issuance of warrants $ 2,170,838
Issuance of warrants for loan costs of convertible notes $ 226,812
Acquisition costs of MailEncrypt paid with stock $ 607,188
Repayment of notes and convertible notes payable through issuance of stock $ 7,513,448
Interest paid with common stock $ 937,597
Stock subscription receivable $ 9,200

See notes to financial statements
F-6

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
November 30, 2001 and 2000

NOTE A - ORGANIZATION, DESCRIPTION OF COMPANY'S BUSINESS AND BASIS OF
PRESENTATION

Surge Components, Inc. ("Surge") was incorporated in the State of New York and
commenced operations on November 24, 1981 as an importer of electronic products,
primarily capacitors and rectifiers, to customers located principally throughout
the United States. On June 24, 1988, Surge formed Challenge/Surge Inc.,
("Challenge") a wholly-owned subsidiary to engage in the distribution of
electronic component products from established brand manufacturers to customers
located principally throughout the United States.

In January 2000, Surge formed Mail Acquisition Corp. ("MAC") a Delaware
corporation, as a wholly-owned subsidiary. On November 16, 2000,
MailEncrypt.com, Inc. ("Mail"), a California based development stage company,
developing Web-based encrypted e-mail solutions was acquired conditionally by
MAC. On October 23, 2001, the Mail transaction was unwound (Note E). Mac is
currently inactive.

In January 2000, Surge formed GDIS Acquisition Corp., a Delaware corporation, as
a wholly owned subsidiary. On November 30, 2000, the entity, changed its name to
SolaWorks, Inc. ("SolaWorks"). SolaWorks is currently inactive.

In March 2000, Surge formed Superus Holdings, Inc. ("Superus"), a Delaware
corporation, as a wholly owned subsidiary. Superus, inactive at March 8, 2002,
filed a petition for bankruptcy under Chapter 7 of the Bankruptcy Code.

The accompanying financial statements have been prepared assuming that the
Company will be able to sustain its operations through November 30, 2002. While
the Company has experienced recurring net losses, management has estimated that
the Company will be able to reduce operating expenses and maintain adequate
liquidity based on information currently available, to meet its obligations
without having to dispose of assets in other than the normal course of business.
In addition, management is attempting to arrange financing under a line of
credit.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

[1] Principles of consolidation:

The consolidated financial statements include the accounts of Surge,
Challenge, SolaWorks, MAC and Superus (collectively the "Company"). All
material intercompany balances and transactions have been eliminated in
consolidation.

[2] Revenue recognition:

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements" which provides additional guidance for revenue
recognition. SAB 101 was effective beginning in the first quarter of
the fiscal year ended November 30, 2001 and did not have a material
impact on the Company's financial statements.

Revenue is recognized when product is shipped from the Company's
warehouse. For direct shipments, revenue is recognized when product is
shipped from the Company's supplier. The Company performs ongoing
credit evaluation of its customers and maintains reserves for potential
credit losses. During February 2002, the Company obtained $2,000,000 of
credit insurance covering most of their customers.

[3] Marketable securities:

The Company accounts for marketable securities in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt, and Equity Securities".
Under this standard, certain investments in debt and equity securities
are reported at fair value. The Company's marketable securities, which
consist primarily of mutual funds, are being reported as securities
available for sale. The unrealized gain (loss) on these securities is
reflected as a separate component of shareholders' equity and any
changes in their value are included in comprehensive loss. The value of
these securities at November 30, 2001 is as follows:

Cost $ 1,238,445
Cumulative unrealized loss (61,912)
------------
$ 1,176,533
============

F-7

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
November 30, 2001 and 2000

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[3] Marketable securities: (continued)

Cost used in the computation of realized gains and losses is determined
using the average cost method. During 2001, the Company sold $1,250,000
of the marketable securities and had a realized loss of $43,372. During
2000, there were no sales of these securities.

[4] Inventories:

Inventories, which consist solely of products held for resale, are
stated at the lower of cost (first-in, first-out method) or market.
Products are included in inventory when shipped from the supplier.
Inventory in transit principally from foreign suppliers at November 30,
2001 approximated $334,000. The Company, at November 30, 2001, has a
reserve against slow moving and obsolete inventory of approximately
$1,032,000.

[5] Depreciation and amortization:

Fixed assets are recorded at cost. Depreciation is generally provided
on a straight method for property and amortization of leasehold
improvements is provided for on the straight-line method over the
shorter of the lease term or the estimated useful lives of the various
assets as follows:

Furniture, fixtures and equipment 5 - 7 years
Computer equipment 5 years
Leasehold improvements Estimated useful life or lease
term, whichever is shorter

Maintenance and repairs are expensed as incurred while renewals and
betterments are capitalized.

[6] Concentration of credit risk:

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of notes and accounts
receivable. The Company maintains substantially all of its cash
balances in two financial institutions. The balances are each insured
by the Federal Deposit Insurance Corporation up to $100,000. At
November 30, 2001, the Company's uninsured cash balances totaled
approximately $893,000.

[7] Deferred acquisition costs:

Deferred acquisition costs consisted of expenses for financial
consulting services related to the acquisition of Mail. The costs were
expensed as a result of the Mail transaction being unwound during the
year ended November 30, 2001 (see Note E).

[8] Income taxes:

The Company's deferred income taxes arise primarily from the
differences in the recording of net operating losses, allowances for
bad debts, inventory reserves and depreciation expense for financial
reporting and income tax purposes. Income taxes are reported under the
liability method pursuant to SFAS No. 109 "accounting for income
taxes". A valuation allowance is provided when the likelihood of
realization of deferred tax assets is not assured.

F-8

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
November 30, 2001 and 2000

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[9] Cash equivalents:

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

[10] Use of estimates:

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.

[11] Loan costs:

Loan costs related to the convertible notes payable (Note G) were
amortized over the terms of the underlying debt.

[12] Accounting for stock-based compensation:

The Company accounts for its employee stock-based compensation plans
under Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees" and its related interpretations. In
October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation", which established a
fair value-based method of accounting for stock-based compensation
plans. The Company utilizes the intrinsic value method for grants to
employees and directors and has adopted the disclosure only alternative
under SFAS No. 123. SFAS No. 123 requires disclosure of the pro forma
effects on net income (loss) and net income (loss) per share as if the
stock-based compensation was measured utilizing the fair value method
as well as certain other information. The Company accounts for
stock-based compensation to nonemployees using the fair value method in
accordance with SFAS No. 123.

[13] Fair value of financial instruments:

Cash balances and the carrying amount of the due under repurchase
agreement and accrued expenses approximate their fair value based on
the nature of those items.

Estimated fair value of financial instruments are determined using
available market information. In evaluating the fair value information,
considerable judgment is required to interpret the market data used to
develop the estimates. The use of different market assumptions and/or
different valuation techniques may have a material effect on the
estimated fair value amounts. Accordingly, the estimates of fair value
presented herein may not be indicative of the amounts that could be
realized in a current market exchange.

[14] Earnings (loss) per share:

The Company calculates earnings (loss) per share in accordance with
SFAS No. 128, "Earnings Per Share". The earnings (loss) has been
adjusted for cumulative dividends on preferred stock. Basic earnings
(loss) per share was computed by dividing net income (loss) by the
weighted average number of common shares outstanding. Diluted earnings
per share is computed by dividing net income by the weighted average
number of common shares outstanding and is adjusted for the dilutive
effect of shares issuable upon the exercise of options and warrants and
the conversion of notes payable and preferred stock. The Company had a
net loss for the fiscal years ended November 30, 2001 and 2000, and
accordingly, potential common share equivalents are excluded from this
computation, as the effect would be anti-dilutive.

F-9

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
November 30, 2001 and 2000

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

[14] Earnings (loss) per share: (continued)

These potential dilutive common shares consist of the following:

Potential Dilutive
Common Shares
2001 2000
----------- -----------
Preferred Series C stock 620,000 2,521,400
Stock options 6,239,499 5,905,050
Warrants 5,423,969 5,482,169
Convertible notes payable -- 3,082,096
----------- -----------
12,283,468 16,990,715
=========== ===========

[15] Reclassifications:

Certain prior year information has been reclassified to conform to the
current year's repairing presentation.

[16] Recently issued accounting standards:

In June 2001, Statement of Financial Accounting Standards No. 141,
"Business Combinations", and No. 142, "Goodwill and Other Intangible
Assets", was issued and is effective for fiscal years beginning after
December 15, 2001. Under the new rules, the pooling of interests method
of accounting for acquisitions is no longer allowed and goodwill and
intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests. The Company
currently has no goodwill or intangible assets.

On October 3, 2001, Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"), was issued and is applicable to financial statements
issued for fiscal years beginning after December 15, 2001. New rules on
asset impairment supercede SFAS 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", and
portions of APB No. 30, "Reporting the Results of Operations". This
standard provides a single accounting model for long-lived assets to be
disposed of and significantly changes the criteria that would have to
be met to classify an asset as held-for-sale. Classification as
held-for-sale is an important distinction since such assets are stated
at the lower of fair value or carrying amount. This standard also
requires expected future operating losses from discontinued operations
to be displayed in the periods in which the losses are incurred, rather
than as of the measurement date as previously required. The Company is
currently assessing the potential impact of SFAS No. 144 on its
operating results and financial position.

NOTE C - DUE UNDER REPURCHASE AGREEMENT

In September 2001, the Company entered into an agreement with a subsidiary
("Maple Chase") of Invensys Plc pursuant to which the Company paid approximately
$1,250,000 for certain inventory held by Maple Chase who agreed to repay the
Company, in non-interest installments over 12 months for such inventory (the
"Repurchase Agreement"). For accounting purposes, the amount paid by the Company
under the Repurchase Agreement is being treated as a one year financing. As of
November 30, 2001, the Company received approximately $201,000, the first
scheduled payment from Maple Chase. In December 2001, the Company received the
second scheduled payment of approximately $260,000.

F-10

NOTE D - TERMINATED ACQUISITION OF GLOBAL DATATEL, INC.

In October 1999, the Company entered into a merger agreement with Global
Datatel, Inc. ("Global"). In December 1999, the parties terminated the merger
agreement and entered into an asset purchase agreement with Global. Among other
provisions, the Company agreed to purchase the assets of Global and its
subsidiaries ("Global Acquisition") in exchange for 239,000 shares of the
Company's Series A Redeemable Convertible Preferred Stock ("Series A
Preferred"), which were being held in escrow by Surge.

On November 3, 2000, due to the failure in obtaining regulatory and other
required approvals and various conditions not having been met by Global, the
Company terminated the Asset Purchase Agreement and the Series A preferred
shares were returned to the Company and cancelled. The Company entered into a
Termination, Release and Debt Discharge Agreement with Global in which
approximately $4,505,000 of Global indebtedness, plus interest of approximately
$119,000 as of November 3, 2000, due to the Company under a loan and pledge
agreement was settled. In connection with the settlement, the Company obtained a
new note for $1,250,000 due on December 4, 2001. The new note was to be
cancelled if no litigation was commenced against the Company relating to Global
and/or its termination of the Global agreement. Litigation has been commenced
against the Company related to Global (Note R). The Company provided a 100%
reserve for this remaining note due to doubtful collectibility. In addition, the
Company had given as collateral, a $500,000 certificate of deposit for Global
bank loans totaling $500,000. The Company had written off the value of the
certificate of deposit due to Global's inability to repay its loans during the
year ended November 30, 2000. In May 2001, the bank demanded payment per the
terms of the guarantee and claimed $454,000 of the certificate of deposit. The
remaining $46,000, which is shown as "Recovery of Global Settlement" on the
statement of operations, plus interest of approximately $25,000 were returned to
the Company.

During the fiscal year ended November 30, 2000, the Company recognized
approximately $9,733,000 in expenses comprised of the settlement on termination
of $6,028,000 and financial consulting fees of approximately $3,705,000 related
to the asset purchase agreement with Global DataTel, Inc. ("Global") which was
terminated on November 3, 2000.

NOTE E - TERMINATED ACQUISITION OF MAILENCRYPT.COM, INC.

In February 2000, the Company entered into a merger agreement to purchase Mail
in exchange for 1,821,400 shares of Superus Class B Common Stock. On November
16, 2000, the Company, Mail, Mail Acquisition Corp. and the former Mail
shareholders executed a Merger Agreement and Plan of Reorganization superseding
the February 2000 agreement to reflect the termination of the Global Acquisition
and the elimination of Superus Class B Common Stock. On November 16, 2000, the
Company issued 182,140 shares of Voting Redeemable Convertible Series B
Preferred Stock of the Company to the shareholders of Mail, subject to
shareholder approval. The Company paid a finder's fee of 100,000 shares of the
Company's Common Stock valued at $268,750, based upon the market price on the
date issued.

On October 23, 2001, the Company unwound the Mail transaction by returning the
100 shares of Mail common stock in exchange for the 182,140 shares of its Voting
Redeemable Convertible Series B Preferred Stock ("Series B Preferred") it had
issued pending completion of the Mail acquisition.

As of November 30, 2000, the Company had advanced $875,000 in loans to Mail for
which the Company provided a 100% reserve against these loans due to doubtful
collectibility. Subsequent to November 30, 2000, the Company advanced an
additional $222,970. These additional advances were expensed upon the unwinding
of the Mail acquisition. The Company received for these advances 7.32 Debt
Conversion Shares of Mail. Mail has an option through October 23, 2003 to
repurchase all (not any less) of these shares for the amount of the advances the
Company made ($1,097,970) plus a premium of 12% through the date of repurchase.
The shares have antidilution rights and have been valued at $0.

F-11

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
November 30, 2001 and 2000

NOTE F - FIXED ASSETS

Fixed assets consist of the following at November 30, 2001:

Furniture and fixtures $ 343,557
Leasehold improvements 851,649
Computer equipment 759,386
----------
1,954,592
Less accumulated depreciation 475,706
----------

Total fixed assets $1,478,886
==========

Depreciation and amortization expense for the years ended November 30, 2001 and
2000 was $249,749 and $293,385, respectively.

NOTE G - CONVERTIBLE NOTES PAYABLE

In March 2000, the Company completed a $7,000,000 private placement offering
("Private Placement") of convertible promissory notes (the "Notes"). The Notes
accrued interest at the rate of 12% per annum and were due on December 31, 2000,
or earlier upon shareholder approval, which was obtained on October 17, 2000.
Since the Global acquisition did not occur, these notes were to automatically
convert into shares of the Company's common stock at a conversion price of $2.50
per share. On February 1, 2001, Nasdaq advised the Company that in order to
comply with Nasdaq's rules, absent specific shareholder approval, the Company
must limit the delivery of the conversion shares to no greater than 19.9% of the
Company's outstanding shares at the time the Private Placement commenced.
Accordingly, in February 2001, the Company converted $2,478,655 principal amount
of the Notes into 991,462 shares of the Company's common stock. On July 10,
2001, the shareholders of the Company approved a proposal to authorize the
issuance and delivery of 1,808,542 shares of the Company's common stock,
pursuant to the automatic conversion of the Notes issued in the Private
Placement plus up to an additional 407,185 shares of the Company's common stock
in payment of accrued interest if the note holder chooses to receive shares.
Following the approval of such proposal, the Company issued to the holders of
the Notes (a) 1,808,542 shares of the Company's common stock in order to fully
satisfy the Company's delivery obligation in connection with the automatic
conversion of the principal amount of the Notes and (b) 60,753 shares to the
note holders who agreed to accept the Company's common stock for the payment of
the accrued interest due on the Notes through December 31, 2000. The Company
accrued additional interest through the dates the notes were converted of
approximately $282,000. In October and November 2001, 270,954 shares valued at
$740,000 for accrued interest were issued in partial payment of such accrued
interest to those who agreed to accept stock in lieu of cash. During the years
ended November 30, 2001 and 2000, the Company had approximately $313,000 and
$705,000, respectively, of interest expense on these notes.

NOTE H - CONVERTIBLE PROMISSORY NOTES PAYABLE

In November 2000, the Company raised approximately $513,000, including an
exchange for $262,000 of debt and accrued interest and issued convertible notes
due December 31, 2001. The notes paid interest at the rate of 6% per annum
through December 31, 2000 and thereafter at 12% until the outstanding principle
amount was converted into common stock. These notes were converted into common
stock at $2.56 per share. In November 2001, these notes were converted and a
portion of the interest due into 283,912 shares of the Company's common stock.
During the years ended November 30, 2001 and 2000, the Company had approximately
$104,000 and $19,000, respectively, of interest expense on these notes.

F-12

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
November 30, 2001 and 2000

NOTE I - RETIREMENT PLAN

In June 1997, the Company adopted a qualified 401(k) plan for all full-time
employees who are twenty-one years of age and have completed twelve months of
service. The Plan allows total employee contributions of up to fifteen percent
(15%) of the eligible employee's salary through salary reduction. The Company
makes a matching contribution of twenty percent (20%) of each employee's
contribution for each dollar of employee deferral up to five percent (5%) of the
employee's salary. Pension expense for the years ended November 30, 2001 and
2000 was $826 and $843, respectively.

NOTE J - SHAREHOLDERS' EQUITY

[1] Preferred stock:

In February 1996, the Company amended its Certificate of Incorporation
to authorize the issuance of 1,000,000 shares of preferred stock in one
or more series.

In January 2000, the Company authorized 260,000 shares of preferred
stock as Non-Voting Redeemable Convertible Series A Preferred Stock
which was to be issued in connection with the acquisition of Global
(Note D). None of the Series A preferred stock is outstanding as of
November 30, 2001.

In November 2000, the Company authorized 200,000 shares of preferred
stock as Voting Redeemable Convertible Series B Preferred Stock
("Series B Preferred") in connection with the acquisition of Mail. In
November 2000, 182,140 shares of the Series B Preferred were issued to
the former shareholders of Mail and were held in escrow until the Mail
merger was unwound (Note E).

In November 2000, the Company authorized 100,000 shares of preferred
stock as Non-Voting Redeemable Convertible Series C Preferred Stock
("Series C Preferred") in payment of financial consulting services.
Each share of Series C Preferred is automatically convertible into 10
shares of the Company's Common Stock upon shareholder approval. If the
Series C Preferred stock was not converted into common stock on or
before April 15, 2001, these shares are entitled to cumulative
dividends at the rate of $.50 per share per annum commencing April 15,
2001 payable on June 30 and December 31 of each year. In November 2000,
70,000 shares of the Series C Preferred were issued in payment of
financial consulting services to Equilink, a shareholder of the
Company. In April 2001, 8,000 shares of the preferred stock were
repurchased (see Redemption Agreement). The Company paid $6,625 in
dividends on June 30, 2001. The December 31, 2001 dividend of $15,500
has not been declared or paid.

[2] Warrants:

In connection with the Company's 1995 Private Placement, they issued
1,700,000 warrants with an exercise price of $5.00 per share these
warrants expire on July 31, 2003.

On August 8, 1996, the Company completed a public offering (the "Public
Offering") under the Securities Act of 1933 as amended. The offering
consisted of 1,725,000 units, at a selling price of $3.20 per unit.
Each unit consisted of one Common Share (the "Common Shares") and one
redeemable Class A Common Share Purchase Warrant (the "Warrants"). Each
Warrant entitles the holder to purchase one share of common stock for a
period of five years commencing two years after the July 31, 1996
effective date of the Public Offering at a price of $5.00 per share,
subject to redemption. At November 30, 2001, 1,031 of the warrants have
been exercised.

F-13

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
November 30, 2001 and 2000

NOTE J - SHAREHOLDERS' EQUITY (CONTINUED)

[2] Warrants: (continued)

In connection with the Company's Public Offering, the underwriters
received Unit Purchase Options ("UPOs") to purchase 172,500 of the
above units at $5.12 per unit. Each unit consists of one share of the
Company's common stock valued at $4.96 per share and one warrant valued
at $.16 per warrant to purchase a share of the Company's common stock
at $5.00 per share. In 2000, a portion of the UPO's aggregating 23,400
shares of the Company's common stock and 3,600 warrants were purchased
for aggregate proceeds of $116,640. The remaining unexercised
Underwriter Warrants expired in August 2001.

Warrant transactions for the years ended November 30, 2001 and 2000 are
as follows:

Warrants outstanding December 31, 1999 3,479,600
Granted 2,000,000
Issued from UPO's 3,600
Exercised (1,031)
-----------
Warrants outstanding November 30, 2000 5,482,169
Expired (58,200)
-----------

Warrants outstanding November 30, 2001 5,423,969
===========

[3] 1995 Employee Stock Option Plan:

In January 1996, the Company adopted, and shareholders ratified in
February 1996, the 1995 Employee Stock Option Plan ("Option Plan"). The
plan provides for the grant of options to qualified employees of the
Company, independent contractors, consultants and other individuals to
purchase an aggregate of 350,000 common shares. In March 1998, the plan
was amended to increase the number of aggregate common shares available
under the plan to 850,000.

Stock option incentive plan activity is summarized as follows:

Weighted
Average
Shares Exercise Price
------------- --------------

Options outstanding December 1, 1999 490,000 $1.59
Granted 219,000 $2.77
Exercised (103,950) $1.70
------------
Options outstanding November 30, 2000 605,050 $1.90
Granted 116,500 $1.91
Exercised (27,550) $1.32
Canceled (4,500) $2.69
------------

Options outstanding November 30, 2001 689,500 $1.99
============

Options exercisable November 30, 2001 606,791 $1.98
============

Exercise prices for options outstanding as of November 30, 2001 ranged
from $1.25 to $4.56. The weighted-average remaining contractual life of
these options is approximately four years.

F-14

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
November 30, 2001 and 2000

NOTE J - SHAREHOLDERS' EQUITY (CONTINUED)

[3] 1995 Employee Stock Option Plan: (continued)

Exercises prices for outstanding stock options at November 30, 2001 are
as follows:

Exercise
Shares Price
------------- -----------
170,000 $1.25
120,000 $1.46
115,000 $1.91
29,000 $2.00
20,000 $2.09
198,000 $2.69
27,500 $3.20
10,000 $4.56
-----------
689,500
===========

[4] Additional stock options granted:

In December 1998, the Company granted options to purchase 5,300,000
shares (the "December 1998 Options") of the Company's common stock to
certain of its officers and directors. The options are exercisable four
years from the grant date (December 28, 2002) at an exercise price of
$2 per share (market value on the date of the grant). The options
expire five years from the date of the grant.

In November 2000, the Company granted options to purchase 1,435,000
shares of the Company's common stock to certain of its officers and
employees. The options are exercisable for a five year period at an
exercise price of $2.875 per share (market value on the date of the
grant). The options vest at various dates over the next two years.

On January 15, 2001, the Company granted an option to purchase 25,000
shares of the Company's common stock to a director upon his appointment
to the Board of Directors. The option vests over a two year period and
is exercisable at $2.00 per share (the market price on the date of
grant).

In March 2001, the Company granted an officer/director an option to
purchase 500,000 shares, of which 375,000 were cancelled (see Note M),
of the Company's common stock at an exercise price of $2.90 per share
which exercise price exceeded the market price. In addition, the
Company issued to certain officers/directors options to purchase an
aggregate of 80,000 shares of the Company's common stock at an exercise
price of $2.00 per share.

In March 2001, the Company also granted options to certain
officers/directors to purchase an aggregate of 2,650,000 shares of the
Company's common stock exercisable at $2.00 per share. The exercise of
these options are subject to (i) obtaining shareholder approval and
(ii) the cancellation of options to purchase 2,650,000 shares of
Superus' common stock (see Note J[5]).

In July 2001, the Company granted options to certain officers/directors
to purchase 80,000 shares of the Company's common stock at the market
price.

F-15

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
November 30, 2001 and 2000

NOTE J - SHAREHOLDERS' EQUITY (CONTINUED)

[5] Superus stock option plan:

In February 2000, Superus adopted, and the Company as sole shareholder
ratified, the Superus 2000 Stock Incentive Plan (the "Superus Plan").
The Superus Plan provides for the grant of options to qualified
employees, independent contractors, consultants and other individuals
to purchase an aggregate of 15 million shares of common stock. During
March 2000, the same officers and directors, of the Company discussed
in [4] above, were granted 2,650,000 options to purchase a proposed
tracking stock, with the same terms as the December 1998 options,
except that the exercise price is $2.69 per share. Upon shareholder
approval in September 2000, the options became immediately exercisable.
In December 2000, the options became exercisable for Superus common
stock since a determination was made that no tracking stock would be
issued.

Superus Plan activity is summarized as follows:

Weighted
Average
Shares Exercise Price
------------ --------------

Options outstanding December 1, 1999
Granted 4,885,000 $4.31
Exercised
Canceled (300,000) $4.75
------------

Options outstanding November 30, 2000 4,585,000 $4.28
Canceled 1,735,000 $6.47
------------

Options exercisable November 30, 2001 2,850,000 $2.96
============

[6] Stock options:

The Company has determined its pro forma net (loss) and (loss) per
share information as required by SFAS No. 123 utilizing the
Black-Scholes option-pricing model with the following weighted average
assumptions:

2001 2000
---------- -----------

Expected volatility 172% - 179% 122% - 179%

Risk free interest rate 5.25% - 6% 6.75%

Expected life 2.5 - 10 Years 4 -5 years

The average fair value of the common stock options granted during the
years ended November 30, 2001 and 2000 was $1.75 and $2.53 per share,
respectively. The fair value aggregated $747,639 in 2001 and $5,681,952
in 2000.

The pro forma basic net loss and loss per share available to common
shareholders for the years ended November 30, 2001 and 2000 would have
been $(6,864,946) and $(17,052,321) and $(0.93) and $(3.43),
respectively, had the fair value method been applied.

The effects of applying SFAS 123 in the above pro forma disclosures are
not indicative of future amounts as they do not include the effects of
awards granted prior to 1997. Additionally, future amounts are likely
to be affected by the number of equity instruments granted and the
vesting of such awards.

F-16

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
November 30, 2001 and 2000

NOTE J - SHAREHOLDERS' EQUITY (CONTINUED)

[7] Redemption agreement: (continued)

Pursuant to a Redemption Agreement, dated as of April 3, 2001, with
Equilink Capital Partners, LLC ("Equilink") and B. DePalo, its sole
shareholder. The Company purchased from Equilink 423,000 shares of the
Company's common stock and 8,000 shares of the Company's Series C
Preferred Stock for $650,000 in cash. The purchase price for these
securities was based upon approximately 95% of the average closing
price of the Company's common stock for the five trading days ended on
April 2, 2001. The Company received general releases from Equilink, Mr.
DePalo and a third party and the company agreed not to pursue any
action against Equilink or Mr. DePalo, except in limited specified
situations, in connection with the closing of the redemption
transaction.

[8] Nasdaq and Boston Stock Markets Delisting

On November 30, 2001, the common stock of the Company was delisted from
the Nasdaq and Boston Stock Markets.

NOTE K - INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes using the enacted tax
rates in effect in the years in which the differences are expected to reverse.
As of November 30, 2001 the Company's deferred income taxes are comprised of the
following:

Deferred tax assets
Net operating losses $ 6,353,000
Allowance for bad debts 16,000
Inventory 412,000
Depreciation 16,000
Capital loss 34,000
-------------------

Total deferred tax assets 6,831,000
Valuation allowance 6,831,000
-------------------

Deferred tax assets $ 0
===================

The valuation allowance increased by $2,485,000 during the year ended November
30, 2001.

The Company has fully reserved the deferred tax asset resulting from the
unrealized loss on a available for sale securities reflected as a separate
component of shareholders' equity.

The Company's income tax expense (benefit) consists of the following:

Year Ended
November 30,
-------------------------------
2001 2000
------------- --------------

Current:
Federal
States $ 35,792 $ (7,909)
------------- --------------
35,792 (7,909)
------------- --------------
Deferred:
Federal 64,656
States 24,567
--------------
89,223
--------------

Provision for income taxes $ 35,792 $ 81,314
============= ==============

F-17

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
November 30, 2001 and 2000

NOTE K - INCOME TAXES (CONTINUED)

The Company files a consolidated income tax return with its wholly-owned
subsidiaries and has net operating loss carryforwards of approximately
$15,900,000 for federal and state purposes, which expire through 2021. The
utilization of this operating loss carryforward may be limited based upon
changes in ownership as defined in the Internal Revenue Code.

A reconciliation of the difference between the expected income tax rate using
the statutory federal tax rate and the Company's effective rate is as follows:

Year Ended
November 30,
----------------
2001 2000
------ ------

U.S. Federal income tax statutory rate (34)% (34)%
Valuation allowance 34 % 34 %
State income taxes 1 % 1 %
---- ----

Effective tax rate 1 % 1 %
==== ====

NOTE L - RENTAL COMMITMENTS

The Company leases its office and warehouse space through 2010 from a
corporation that is controlled by officers/shareholders of the Company ("Related
Company"). Annual minimum rental payments to related parties will approximate
$181,000 for the fiscal year ending November 30, 2002, and will increase at the
rate of three per cent per annum throughout the lease term.

Pursuant to the lease, rent expense charged to operations differs from rent paid
because of scheduled rent increases. Accordingly, the Company has recorded
deferred rent. Rent expense is calculated by allocating to rental payments,
including those attributable to scheduled rent increases, on a straight line
basis, over the lease term.

The future minimum rental commitments at November 30, 2001:

Year Ending
November 30,
------------

2002 $ 181,000
2003 186,000
2004 191,000
2005 197,000
2006 203,000
2007 and thereafter 837,000
------------

$ 1,795,000
============

Rental expense for the years ended November 30, 2001 and 2000, were $1,481,631
and $328,880, respectively, of which $245,936 and $100,369 were paid to the
Related Company.

F-18

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
November 30, 2001 and 2000

NOTE L - RENTAL COMMITMENTS (CONTINUED)

In March 2000, Superus entered into a lease agreement for office space through
2005. Surge had provided the landlord with a letter of credit guaranteed with a
certificate of deposit, in the amount of $344,604 for security, renewable on a
yearly basis. Superus vacated its San Francisco premises and on March 8, 2002
declared bankruptcy (Note A). In October 2001, the landlord utilized the letter
of credit for payment of Superus' obligations. The bank subsequently used the
certificate of deposit in payment of the Company's guarantee on the letter of
credit. During the year ended November 30, 2001, the Company has recognized as
an expense, approximately $631,000, representing the rent paid during the year
under the lease and the letter of credit utilized by the landlord.

NOTE M - EMPLOYMENT AND OTHER AGREEMENTS

The Company has employment agreements, with terms through July 30, 2003
(renewable on each July 30th for an additional one year period) with two
officers/stockholders of the Company which provides each with a base salary of
$200,000, subject to certain increases as defined, per annum plus fringe
benefits and bonuses. The bonuses are determined by the Compensation Committee
of the Company's Board of Directors. Bonuses for the year ended November 30,
2000 aggregated $1,179,184 for the two officer/stockholders. There were no such
bonuses paid in 2001. The agreement also contains provisions prohibiting the
officers from engaging in activities which are competitive with those of the
Company during employment and for one year following termination. The agreements
further provide that in the event of a change of control, as defined, or a
change in ownership of at least 25% of the issued and outstanding stock of the
Company, and such issuance was not approved by either officer, or if they are
not elected to the Board of Directors of the Company and/or are not elected as
an officer of the Company, then the non-approving officer may elect to terminate
his employment agreement. If he elects to terminate the agreement, he will
receive 2.99 times his annual compensation (or such other amount then permitted
under the Internal Revenue Code without an excess penalty), in addition to the
remainder of his compensation under his existing employment contract. In
addition, if the Company makes or receives a "firm commitment" for a public
offering of the Company's common stock, each officer will receive a warrant to
purchase, at a nominal value, up to 9.5% of the Company's common stock, provided
they do not voluntarily terminate employment.

On February 16, 2000, the Company entered into a three year employment agreement
with the Chairman of the Board and Chief Executive Officer. The agreement calls
for a base salary of $200,000 per annum and provides for an annual bonus at the
discretion of the Board of Directors. In addition, the agreement, also provided
for ten year options to purchase 1,500,000 shares of the Company's Common Stock
exercisable at $2.875 per share, 300,000 of which options are immediately
exercisable and the balance exercisable ratably on a monthly basis over 36
months.

On March 20, 2000, the Company entered into a four year employment agreement
with another individual to be the Vice President of Corporate Development and
calls for a base salary of $150,000 per annum and provides for an annual bonus
at the discretion of the Board of Directors. In addition, he also received four
year options to purchase 200,000 shares of the Company's Common Stock at $2.875
per share, 35,000 of which are exercisable six months after the Effective Date
of a proposed recapitalization and the balance exercisable ratably on a monthly
basis over 42 months the recapitalization was not consummated.

In July 2001, the Company entered into termination and settlement agreements
with its Chairman and Acting Chief Executive Officer and Vice President,
Corporate Development. Among other provisions, the agreements provide for the
Company to make severance payments totaling approximately $100,000 over six
months and $47,000 over three months, which have been charged to operations. The
agreements also cancelled options to purchase 1,459,999 shares of the Company's
common stock.

F-19

SURGE COMPONENTS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial statements
November 30, 2001 and 2000

NOTE N - FINANCIAL CONSULTING AGREEMENT

On November 24, 2000, the Company entered into an agreement with a financial
consultant, Equilink, for which the consultant received 900,000 shares of the
Company's common stock, 70,000 shares of the Series C preferred stock (see Note
J) and five year warrants to purchase 2,000,000 shares of the common stock at $3
per share for past and future services (over a six month period) and expenses.
Included in the past services are fees totaling $338,438 relating to services
and expenses of the Mail Merger, $302,812 relating to the terminated acquisition
of Orbit Networks, Inc. acquisition, $226,812 for expenses relating to the $7
million Convertible Notes and $3,704,999 relating to the terminated Global
acquisition. During the years ended November 30, 2001 and 2000, the Company
expensed approximately $2,171,000 and $5,916,000, respectively, related to
Equilink's services.

NOTE O - MAJOR CUSTOMERS

The Company has one customer, which is principally owned by an employee of the
Company. This customer accounted for 10% and 29% of net sales for the years
ended November 30, 2001 and 2000 respectively and accounted for 21% of accounts
receivable at November 30, 2000. The accounts receivable for this customer at
November 30, 2001 was less than 1%. The Company's personnel performs all
services incidental to the operations of this customer. The Company evaluates
its relationship with this customer at least annually which has resulted in
special billing arrangements enabling the Company to invoice an additional
$204,000 in the year ended November 30, 2000. There was no adjustment for the
year ended November 30, 2001 due to the decrease in sales.

NOTE P - MAJOR SUPPLIERS

During the year ended November 30, 2001 there were two foreign suppliers
accounting for 11% and 29% of total inventory purchased. There were no suppliers
accounting for 10% or more of purchases during the year ended November 30, 2000.

The Company purchases a significant portion of its products overseas. For the
year ended November 30, 2001, the Company purchased 41% from Taiwan, 20% from
Hong Kong, 14% from elsewhere in Asia and 1% overseas outside of Asia.

NOTE Q - EXPORT SALES

The Company's export sales approximated:

Year Ended
November 30,
--------------------------
2001 2000
--------------------------

Canada $ 871,000 $ 744,000
Asia 1,294,000 2,937,000
Europe 185,000 237,000
Central America 21,000

F-20

NOTE R - CONTINGENCIES AND OTHER MATTERS

In September 2000, Surge and Global were named in an arbitration instituted by
Efflux Inc. with the American Arbitration Association. The allegations by Efflux
relate solely to the relationship between Efflux and Global and certain services
allegedly provided by Efflux to Global under several written contracts, and
Global's alleged failure to pay for such services alleging damages of
approximately $286,000 plus expenses and consequential damages. Surge was
originally named as a "relief respondent" under the theory of successor
liability and conversion. Efflux also sought to enjoin Surge from converting
Efflux's work product, and for damages relating to any use of their product to
date. However, since Surge has terminated the acquisition of Global and has not
utilized any of Efflux's software, management upon consultation with counsel
believes the Company has meritorious defenses and that they will apply for
dismissal of this matter.

In December 2000, an arbitration claim filed in Mexico was instituted, naming
Superus Holdings and Global in an action asserted by two companies in Mexico.
The action alleges that Global did not consummate an agreement to purchase one
of the companies. Since the Global acquisition has been terminated, the Company
believes that Superus will be dismissed from such action. If the action is not
dismissed, the Company believes that is has a meritorious defense.

On September 8, 2000, the U.S. Attorney's Office issued a subpoena to Surge and
certain of its officers relating to Global and certain other persons/entities
affiliated with Global. The subpoena requested documents and testimony before a
grand jury in the U.S. District Court of New Jersey. Surge cooperated in every
respect with their investigation. The U.S. Attorney's office has not informed
the Company of any further action.

The accompanying financial statements make no provision for any liability that
might result from the outcome of these uncertainties.

During the year ended November 30, 2000 and the quarter ended February 28, 2001,
the Company made certain questionable payments of approximately $2,137,000 and
$774,000, respectively. These payments are currently the subject of an informal
inquiry by the Securities and Exchange Commission. The recipient of these
payments has repaid $1 million in cash to the Company which is included in other
income. There can be no assurance that the questionable payments and related
investigations will not lead to any other proceedings.

The Company has received letters from lawyers regarding various items including
requests for cash instead of stock for the payment of interest on the
convertible notes and promissory notes payable (Notes G and H). In addition, one
of the letters requested that $13,000 deposited into an escrow for the purchase
of convertible notes payable be returned. The Company has settled with one of
the noteholders by making an $80,000 interest payment and it has settled in
principle with another, subject to documentation. There can be no assurance that
the matters referred to in the correspondence will not result in formal
proceedings against the Company.

F-21

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Dated: March 15, 2002 Surge Components, Inc.

By: /s/ Ira Levy
--------------------------
Ira Levy, President

/s/ Ira Levy
________________________ President and Director
Ira Levy

/s/ Steven J. Lubman Vice President, Secretary,
________________________ Chief Financial Officer and
Steven J. Lubman Director (Principal Accounting
Officer)

________________________ Director
Lawrence Chariton

/s/ David Siegel
________________________ Director
David Siegel

/s/ Mark Siegel
________________________ Director
Mark Siegel

/s/ Alan Plafker
________________________ Director
Alan Plafker

Surge Components, Inc.

ANNUAL REPORT ON FORM 10-K
Fiscal Year Ended November 30, 2001

EXHIBIT INDEX

21.1 Subsidiaries of Surge Components, Inc.

23.1 Consent of Richard A. Eisner & Company, LLP