**SECURITIES
AND EXCHANGE COMMISSION**


**Washington,
D.C. 20549**





**FORM
10-K**





**x ANNUAL REPORT UNDER SECTION
13**


**OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**


**FOR
THE YEAR ENDED DECEMBER 31, 2004**





**Commission
File No. 0-17973**


________________




**ACCERIS
COMMUNICATIONS INC.**


(Name of
Registrant as Specified in Its Charter)





**Florida**
    **52-2291344**(State
      or Other Jurisdiction
    (I.R.S.
      Employerof
      Incorporation or Organization)
    Identification
      No.)**1001
      Brinton Road, Pittsburgh, PA**
    **15221**(Address
      of Principal Executive Offices)
    (Zip
      Code)





**(412)
244-2100**


(Registrant’s
Telephone Number, Including Area Code)





Securities
registered pursuant to Section 12(b) of the Exchange Act: **None.**





Securities
registered pursuant to Section 12(g) of the Exchange Act: **Common
Stock, $0.01 par value.**





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes þ No o





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





Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2).


Yes o No þ





The
aggregate market value of Common Stock held by non-affiliates based upon the
closing price of $1.45 per share on June 30, 2004, as reported by the OTC -
Bulletin Board, was approximately $ 27,893,846.





As of
March 1, 2005, there were 19,237,135 shares of Common Stock, $0.01 par value,
outstanding.














**TABLE
OF CONTENTS**





PAGEPART
      IItem
      1.
    Business.
    3Item
      2.
    Properties.
    12Item
      3.
    Legal
      Proceedings.
    12Item
      4.
    Submission
      of Matters to a Vote of Security Holders.
    13PART
      IIItem
      5.
    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities.
    14Item
      6.
    Selected
      Financial Data.
    17Item
      7.
    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.
    19Item
      7A.
    Quantitative
      and Qualitative Disclosures About Market Risk.
    46Item
      8.
    Financial
      Statements and Supplementary Data.
    46Item
      9.
    Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure.
    46Item
      9A.
    Controls
      and Procedures.
    46Item
      9B.
    Other
      Information.
    47PART
      IIIItem
      10.
    Directors
      and Executive Officers of the Registrant.
    48Item
      11.
    Executive
      Compensation.
    52Item
      12.
    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters.
    56Item
      13.
    Certain
      Relationships and Related Transactions.
    58Item
      14.
    Principal
      Accountant Fees and Services.
    62PART
      IVItem
      15.
    Exhibits
      and Financial Statement Schedules.
    64








2





**PART
I**





(All
dollar amounts are presented in thousands USD, unless otherwise indicated,
except per share amounts)





**Item
1. Business.**





**Overview**





Acceris
Communications Inc. (“Acceris” or the “Company”) currently operates two distinct
but related businesses: a Voice over Internet Protocol (“VoIP”) technologies
business (“Technologies”) and a telecommunications business
(“Telecommunications”).





Our **Technologies
business** offers a
proven network convergence solution for voice and data in VoIP communications
technology and includes a portfolio of communications patents. Included in this
portfolio are two foundational patents in VoIP - U.S. Patent Nos. 6,243,373 and
6,438,124 (together the “VoIP Patent Portfolio”). This segment of our business
is primarily focused on licensing our technology, supported by our patents, to
carriers and equipment manufacturers and suppliers in the internet protocol
(“IP”) telephony market.





Over the
past five years, we have been licensing, on a fully paid-up basis, our
technology and patents internationally and domestically. We have also identified
and put on notice a number of domestic enterprises that we believe are
infringing our patents, and licensing discussions are underway. Unfortunately,
there are enterprises which, while infringing on our patents, have neither given
recognition to our patents nor have been willing to pay a licensing fee for
their use to this point. In those situations, after failing to reach agreement
on a licensing arrangement, we have taken, and will continue to take, the
necessary steps to ensure that those enterprises cease and desist infringing our
patents and compensate the Company for past infringement.





Our **Telecommunications
business** , which
generated substantially all of our revenue in 2004, is a broad-based
communications segment servicing residential, small and medium-sized businesses,
and corporate accounts in the United States. We provide a range of products,
including local dial tone, domestic and international long distance voice
services and fully managed, integrated data and enhanced services, to
residential and commercial customers through a network of independent agents,
telemarketing and our direct sales force. We are a U.S. facilities-based carrier
with points of presence in 30 major U.S. cities. Our voice capabilities include
nationwide Feature Group D (“FGD”) access. Our data network consists of 17
Nortel Passports that have recently been upgraded to support multi-protocol
label switching (“MPLS”). Additionally, we have relationships with multiple tier
I and tier II providers in the U.S. and abroad which afford Acceris the
opportunity for least cost routing on telecommunications services to our
clients.





Our
markets are characterized by the presence of numerous competitors which are of
significant size relative to Acceris, while many others are similar or smaller
in size. Acceris is a price taker in the markets in which it operates, and is
affected by the global price compression brought on by technology advancements
and deregulation in the telecommunications industry both domestically and
internationally. To manage the effects of price compression, the Company
endeavours to work with suppliers to reduce telecommunications costs and to
regularly optimize its U.S. based network to reduce its fixed costs of
operations, while working to integrate the back office functions of the
business.




We have
built our Telecommunications business through the acquisition of distressed or
bankrupt assets, integrating the back office, broadening product/service
offerings that consumers are demanding, and developing alternative channels to
market. Our plan to become profitable on an operating income basis during 2004
was not achieved primarily due to our decision to halt the geographic expansion
of our local dial tone offering as a direct result of regulatory uncertainty in
our domestic markets, particularly in the areas of the Unbundled Network Element
Platform (“UNE-P”), and growing Universal Service Fund (“USF”) contribution
levels for traditional carriers. In 2004, the Company commenced offering local
services in five states and realized revenue of $6,900, finishing the year with
approximately 22,000 local subscribers. In March 2005, the Company decided to
suspend efforts to attract new local customers in Pennsylvania, New Jersey, New
York, Florida and Massachusetts, while continuing to support its existing local
customers in those states. The decision was a result of the Federal
Communications Commission’s (“FCC”) revision of its wholesale rules, originally
designed to introduce competition in local markets, which went into effect on
March 11, 2005. The reversal of local competition policy by the FCC has
permitted the Regional Bell Operating Companies (“RBOCs”) to substantially raise
wholesale rates for the services known as unbundled network elements (“UNEs”),
and required the Company to re-assess its local strategy while it attempts to
negotiate long-term agreements for UNEs on competitive terms. Should the Company
not enter into a wholesale contract for UNE services in the future, the natural
attrition cycle will result in a reduction in the number of local customers and
related revenues in 2005.




Domestic
regulatory uncertainty, coupled with continued international deregulation of
telecommunication services and technology advancements, is changing the
underlying business model for our Telecommunications business.  We believe
that to bring long term sustainable success to our Telecommunications business
we need to acquire additional scale through acquisition.  However, we do
not believe that we have the ability to raise, on acceptable terms, the capital
required for telecommunications acquisitions. In conjunction with the advice of
our strategic advisors, we are looking to merge with competitors or to
dispose of the Telecommunications business or assets of the Telecommunications
segment. There is no certainty that a merger or disposal can occur on a timely
basis on favorable terms. For more information on the assets and operations of
the Telecommunications business, please refer to Note 19 of the financial
statements included in Item 15 of this Form 10-K.





3


The table
below presents information about net loss and segment assets used by the Company
as of and for the three years ended December 31, 2004.


**For
      the Year ended December 31, 2004****Telecommunications**
    
    
    **Technologies**
    
    
    **Total****Reportable****Segments**Revenues
      from external customers
    
    $
    112,595
    
    $
    540
    
    $
    113,135Other
      income
    
    
    985
    
    
    —
    
    
    985Interest
      expense
    
    
    2,797
    
    
    1,424
    
    
    4,221Depreciation
      and amortization expense
    
    
    6,956
    
    
    20
    
    
    6,976Segment
      income (loss) from continuing operations
    
    
    (12,207
    )
    
    (3,120
    )
    
    (15,327
    )Other
      significant non-cash items:Provision
      for doubtful accounts
    
    
    5,229
    
    
    —
    
    
    5,229Expenditures
      for long-lived assets
    
    
    731
    
    
    —
    
    
    731Segment
      assets
    
    
    22,400
    
    
    1,181
    
    
    23,581






**For
      the Year ended December 31, 2003****Telecommunications**
    
    
    **Technologies**
    
    
    **Total****Reportable****Segments**Revenues
      from external customers
    
    $
    133,765
    
    $
    2,164
    
    $
    135,929Other
      income
    
    
    2
    
    
    —
    
    
    2Interest
      expense
    
    
    2,710
    
    
    —
    
    
    2,710Depreciation
      and amortization expense
    
    
    7,125
    
    
    —
    
    
    7,125Segment
      income (loss) from operations
    
    
    (20,396
    )
    
    1,014
    
    
    (19,382
    )Other
      significant non-cash items:Provision
      for doubtful accounts
    
    
    5,432
    
    
    6
    
    
    5,438Expenditures
      for long-lived assets
    
    
    2,800
    
    
    —
    
    
    2,800Segment
      assets
    
    
    35,454
    
    
    1,215
    
    
    36,669





**For
      the Year ended December 31, 2002****Telecommunications**
    
    
    **Technologies**
    
    
    **Total****Reportable****Segments**Revenues
      from external customers
    
    $
    85,252
    
    $
    2,837
    
    $
    88,089Other
      income
    
    
    357
    
    
    —
    
    
    357Interest
      expense
    
    
    3,298
    
    
    —
    
    
    3,298Depreciation
      and amortization expense
    
    
    4,214
    
    
    11
    
    
    4,225Segment
      income (loss) from operations
    
    
    (7,344
    )
    
    976
    
    
    (6,368
    )Other
      significant non-cash items:Provision
      for doubtful accounts
    
    
    5,999
    
    
    —
    
    
    5,999Expenditures
      for long-lived assets
    
    
    6,849
    
    
    —
    
    
    6,849Segment
      assets
    
    
    37,450
    
    
    173
    
    
    37,623







A **going
concern qualification** has been
included by the Company’s independent registered public accounting firms in
their audit opinions for each of 2002, 2003 and 2004. Readers are encouraged to
take due care when reading the independent registered public accountants’
reports included in Item 15 of this report and management’s discussion and
analysis included in Item 7 of this report. In the absence of a substantial
infusion of capital, or a merger or disposal of our Telecommunications business,
the Company may not be able to continue as a going concern.





Since
2001, the Company has restated its consolidated financial statements three times
and has also reported material deficiencies in internal controls, all of which
have since been remedied.





4




**History
and Development of the Business**





Acceris
was incorporated in Florida in 1983 under the name MedCross, Inc., which was
changed to I-Link Incorporated in 1997, and to Acceris Communications Inc. in
2003. Our development and transition is articulated below:





*Technologies:*





In 1994,
we began operating as an Internet service provider and quickly identified that
the emerging internet protocol (“IP”) environment was a promising basis for
enhanced service delivery. We soon turned to designing and building an IP
telecommunications platform consisting of proprietary software, hardware and
leased telecommunications lines. The goal was to create a platform with the
quality and reliability necessary for voice transmission.





In 1997,
we started offering enhanced services over a mixed IP-and-circuit-switched
network platform. These services offered a blend of traditional and enhanced
communication services and combined the inherent cost advantages of an IP-based
network with the reliability of the existing Public Switched Telephone Network
(“PSTN”).





In
August 1997, we acquired MiBridge, Inc. (“MiBridge”), a communications
technology company engaged in the design, development, integration and marketing
of a range of software telecommunications products that support multimedia
communications over the PSTN, local area networks (“LANs”) and IP networks. The
acquisition of MiBridge permitted us to accelerate the development and
deployment of IP technology across our network platform.





In 1998,
we first deployed our real-time IP communications network platform. With this
new platform, all core operating functions such as switching, routing and media
control became software-driven. This new platform represented the first
nationwide, commercially viable VoIP platform of its kind. Following the launch
of our software-defined VoIP platform in 1998, we continued to refine and
enhance the platform to make it even more efficient and capable for our partners
and customers.





In 2002,
the U.S. Patent and Trademark Office issued a patent (No. 6,438,124, the
“Acceris Patent”) for the Company’s Voice Internet Transmission System. Filed in
1996, the Acceris Patent reflects foundational thinking, application, and
practice in the VoIP Services market. In simple terms, the Acceris Patent
encompasses the technology that allows two parties to converse phone-to-phone,
regardless of the distance in between them, by transmitting voice/sound via the
Internet. No special telephone or computer is required at either end of the
call. The apparatus that makes this technically possible is a system of Internet
access nodes, or Voice Engines (VoIP Gateways). These local Internet Voice
Engines provide digitized, compressed, and encrypted duplex or simplex Internet
voice/sound. The end result is a high-quality calling experience whereby the
Internet serves only as the transport medium and as such, can lead to reduced
toll charges. In conjunction with the issuance of our core foundational Acceris
Patent, we disposed of our domestic U.S. VoIP network in a transaction with
Buyers United, Inc. (“BUI”), which closed on May 1, 2003. The sale included
the physical assets required to operate our nationwide network using our
patented VoIP technology (constituting the core business of the I-Link
Communications Inc. (“ILC”) business) and included a fully paid non-exclusive
perpetual license to our proprietary software-based network convergence solution
for voice and data. The sale of the ILC business removed essentially all
operations that did not pertain to our proprietary software-based convergence
solution for voice and data. As part of the sale, we retained all of our
intellectual and property rights and patents.





In 2003,
we added to our VoIP Patent Portfolio when we acquired U.S. Patent No. 6,243,373
(the “VoIP Patent”), which included a corresponding foreign patent and related
international patent applications. The VoIP Patent, together with the existing
Acceris Patent and its related international patent applications, form our
international VoIP Patent Portfolio that covers the basic process and technology
that enables VoIP communication as it is used in the market today.
Telecommunications companies that enable their customers to originate a phone
call on a traditional handset, transmit any part of that call via IP, and then
terminate the call over the traditional telephone network, are utilizing
Acceris’ patented technology. We intend to aggressively pursue recognition in
the marketplace of our intellectual property via a focused licensing program.
The comprehensive nature of the VoIP Patent, which is titled *“Method
and Apparatus for Implementing a Computer Network/Internet Telephone
System”* , is
summarized in the patent’s abstract, which describes the technology as follows:
“A method and apparatus are provided for communicating audio information over a
computer network. A standard telephone connected to the public switched
telephone network (PSTN) may be used to communicate with any other
PSTN-connected telephone, where a computer network, such as the Internet, is the
transmission facility instead of conventional telephone transmission
facilities”. In conjunction with the acquisition, we also agreed to give up 35%
of the net residual rights to our VoIP Patent Portfolio.





**Intellectual
property** - The
Company currently owns a number of issued patents and utilizes the technology
supported by those patents in providing its products and services. The Company
also has a number of non-U.S. patents and patent applications pending. Included
in its U.S. portfolio of patents are:





5





·
    U.S.
      Patent No. 6,438,124 (issued in 2002)


·
    U.S.
      Patent No. 6,243,373 (issued in 2001)


·
    U.S.
      Patent No. 5,898,675 (issued in 1999)


·
    U.S.
      Patent No. 5,754,534 (issued in 1998)





U.S.
patents generally expire 17 years after issuance.





Together,
these patented technologies have been successfully deployed and commercially
proven in a nationwide IP network and in Acceris’ unified messaging service,
Application Program Interface (“API”) and software licensing businesses. The
Company is using the technology supported by its VoIP patents in its business
and is also engaged in licensing discussions with third parties domestically and
internationally.





*Telecommunications:*





Acceris’
Telecommunications business has been built through the acquisition of
predecessor businesses, which have been and are continuing to be integrated,
consolidated and organized to provide the highest level of service to customers
with the maximum level of operational efficiency.





In June
2001, the Company entered this business by acquiring, from bankruptcy, certain
assets of WorldxChange Communications Inc. (“WorldxChange”). WorldxChange was a
facilities-based telecommunications carrier providing international and domestic
long distance service to retail customers. At acquisition, the business
consisted primarily of a dial-around product that allowed a customer to make a
call from any phone by dialling a 10-10-XXX prefix. Since the acquisition, we
expanded the product offering to include 1+ products (1+ products are those
which enable a customer to directly dial a long distance number from their
telephone by dialling 1-area code-phone number). Historically, WorldxChange
marketed its services through consumer mass marketing techniques, including
direct mail and direct response television and radio. In 2002, we revamped our
channel strategy by de-emphasizing the direct mail channel and devoting our
efforts to pursuing more profitable methods of attracting and retaining
customers. Today we use a network of independent commission agents in
multi-level marketing (“MLM”), telemarketing and commercial agent channels to
attract and retain customers.





In
December 2002, we completed the purchase of certain assets of RSL COM USA
Inc. (“RSL”) from a bankruptcy proceeding. The purchase included the assets used
by RSL to provide long distance voice and data services, including frame relay,
to their commercial customers, and the assets used to provide long distance and
other voice services to small businesses and the consumer/residential market.





In
July 2003, the Company completed purchase of Local Telcom Holdings, LLC
(“Transpoint”), a financially distressed company. The purchase of Transpoint
provided us with further penetration into the commercial agent channel and
access to a larger commercial customer base.





In 2004
we added offerings of local communications products to our residential and small
business customers, achieving revenue of $6,900 and completing the year with
approximately 22,000 customers. The local dial tone service is provided under
the terms of the Unbundled Network Element Platform (“UNE-P”) authorized by the
Telecommunications Act of 1996, as amended, (the “1996 Act”) and is available in
New York, New Jersey, Pennsylvania, Massachusetts and Florida, while our long
distance services (1+ and 10-10-XXX) are available nationwide. In March 2005,
the Company decided to suspend efforts to attract new local customers in
Pennsylvania, New Jersey, New York, Florida and Massachusetts, while continuing
to support its existing local customers in those states. The decision was a
result of the Federal Communications Commission’s (“FCC”) revision of its
wholesale rules, originally designed to introduce competition in local markets,
which went into effect on March 11, 2005. The reversal of local competition
policy by the FCC has permitted the Regional Bell Operating Companies (“RBOCs”)
to substantially raise wholesale rates for the services known as unbundled
network elements (“UNEs”), and required the Company to re-assess its local
strategy while it attempts to negotiate long-term agreements for UNEs on
competitive terms. Should the Company not enter into a wholesale contract for
UNE services in the future, the natural attrition cycle will result in a
reduction in the number of local customers and related revenues in
2005.





**Employees**





As of
December 31, 2004, Acceris had approximately 277 employees with whom the Company
feels it has a good relationship. The Company is not subject to any collective
bargaining agreements. During 2004 the Company reduced its staff by 63 employees
and, as appropriate, we intend to make further adjustments to our staff levels
as we continue to integrate, consolidate and organize our Telecommunications
business in order to ensure that operating costs come into line with revenue.





6








**Industry**





Historically,
the communications services industry has transmitted voice and data over
separate networks using different technologies. Traditional carriers have
typically built telephone networks based on circuit switching technology, which
establishes and maintains a dedicated path for each telephone call until the
call is terminated.





The
communications services industry continues to evolve, both domestically and
internationally, providing significant opportunities and risks to the
participants in these markets. Factors that have been driving this change
include:





•
    
    entry
      of new competitors and investment of substantial capital in existing and
      new services, resulting in significant price
competition•
    
    technological
      advances resulting in a proliferation of new services and products and
      rapid increases in network capacity•
    
    the
      1996 Act; and•
    
    growing
      deregulation of communications services markets in the United States and
      in selected countries around the world





VoIP is a
technology that can replace the traditional telephone network. This type of data
network is more efficient than a dedicated circuit network because the data
network is not restricted by the one-call, one-line limitation of a traditional
telephone network. This improved efficiency creates cost savings that can be
either passed on to the consumer in the form of lower rates or retained by the
VoIP provider. In addition, VoIP technology enables the provision of enhanced
services such as unified messaging.





**Competition**





Competition
in the telecommunications industry is based upon, among other things, pricing,
customer service, billing services and perceived quality. We compete against
numerous telecommunications companies that offer essentially the same services
as we do. Many of our competitors, including the incumbent local exchange
carriers (“ILECs”), are substantially larger and have greater financial,
technical and marketing resources. Our success will depend upon our continued
ability to provide high quality, high value services at prices competitive with,
or lower than, those charged by our competitors.





We
believe the recent proposed combination of national long distance carriers and
local providers (SBC’s proposed purchase of AT&T, Verizon and Qwest’s bids
for MCI and Sprint’s proposed merger with wireless carrier Nextel) may provide
the combined companies with a greater potential to offer targeted price plans to
residential and small business customers — our primary target market — with
significantly simplified rate structures and with bundles of local services with
long-distance, which may continue to lower overall local and long-distance
prices. Competition is also fierce for the commercial customers that we serve.
This market was typically dominated by AT&T, Sprint and MCI (national
long-distance carriers) but the recently proposed combination of some of these
carriers with ILECs now offers the potential for additional growth opportunities
for the incumbents, as they will be able to leverage the acquired long distance
networks to service multi-location customers with offices located outside of
their local calling area.





Pricing
pressure has existed for several years in the telecommunications industry and is
expected to continue. This is coupled with the introduction of new technologies,
such as VoIP, that seek to provide voice communications at a cost below that of
traditional circuit-switched service. In addition, wireless carriers have seen
further consolidation in their industry and are increasingly marketing their
services as an alternative to traditional long distance and local services,
further increasing competition and consumer choice. Reductions in prices charged
by competitors may have a material adverse effect on us. Cable companies have
entered the telecommunications business, primarily for residential services, and
this development may increase the competition faced by the Company in this
market.





The ILECs
are well-capitalized, well-known companies whose recent mergers will provide
some of them with increased capabilities and assets to “bundle” services, such
as local and wireless telephone services and high speed Internet access, with
long- distance telephone services. The ILECs’ name recognition in their existing
markets, the established relationships that they have with their existing local
service customers, their ability to leverage the long-distance networks from
newly acquired carriers and traditional relationships to provide product and
price competition, and evolving interpretations of the 1996 Act that appear
favorable to the ILECs, also make it more difficult for us to compete with
them.





7




**Government
Regulation**





**Telecommunications
Industry**





The
telecommunications industry is subject to government regulation at federal,
state and local levels. Any change in current government regulation regarding
telecommunications pricing, system access, consumer protection or other relevant
legislation could have a material impact on our results of operations. Most of
our current operations are subject to regulation by the Federal Communications
Commission (“FCC”) under the Communications Act of 1934, as amended (the
“Communications Act”). In addition, certain of our operations are subject to
regulation by state public utility or public service commissions. Changes in, or
changes in interpretation of, legislation affecting us could negatively impact
our operations.





The 1996
Act, among other things, allows the Regional Bell Operating Companies (“RBOCs”)
and others to enter the long-distance business. Entry of the RBOCs or other
entities, such as electric utilities and cable television companies, into the
long-distance business, either through recently proposed mergers or
technological advances in the transmission of data communications over
high-voltage electrical lines, may likely have a negative impact on our business
and our ability to compete for customers. We anticipate that some of these
entrants will prove to be strong competitors because they are better
capitalized, already have substantial customer bases, and enjoy cost advantages
relating to local telecom lines and access charges. In addition, the 1996 Act
provides that state proceedings may in certain instances determine access
charges that we are required to pay to the local exchange carriers. If these
proceedings occur, rates could increase which could lead to a loss of customers
and weaker operating results.





**Overview
of Federal Regulation**





As a
carrier offering telecommunications services to the public, we are subject to
the provisions of the Communications Act, and FCC regulations issued thereunder.
These regulations require us, among other things, to offer our regulated
services to the public on a non-discriminatory basis at just and reasonable
rates. We are subject to FCC requirements that we obtain prior FCC approval for
transactions that would cause a transfer of control of one or more regulated
subsidiaries. Such approval requirements may delay, prevent or deter
transactions that could result in a transfer of control of our
business.





*International
Service Regulation.* We
possess authority from the FCC, granted pursuant to Section 214 of the
Communications Act, to provide international telecommunications service. The FCC
has streamlined regulation of competitive international services and has removed
certain restrictions against providing certain services. Presently, the FCC is
considering a number of international service issues that may further alter the
regulatory regime applicable to us. For instance, the FCC is considering
revisions to the rules regarding the rates that international carriers like us
pay for termination of calls to mobile phones located abroad. As of the date of
this report, no resolutions of these issues have been announced.





Pursuant
to FCC rules, we have cancelled our international and domestic FCC tariffs and
replaced them with a general service agreement and price lists. As required by
FCC rules, we have posted these materials on our Internet web site, *http://www.Acceris.com* . The
“detariffing” of our services has given us greater pricing flexibility for our
services, but we are not entitled to the legal protection provided by the “filed
rate doctrine,” which generally provides protections to carriers from legal
actions by customers that challenge the terms and conditions of
service.





*Interstate
Service Regulation.* As an
inter-exchange carrier (“IXC”), our interstate telecommunications services are
regulated by the FCC. While we are not required to obtain FCC approval to begin
or expand our interstate operations, we are required to obtain FCC approvals for
certain transactions that would affect our ownership or the services we provide.
Additionally, we must file various reports and pay certain fees and assessments.
We are subject to the FCC’s complaint jurisdiction and must contribute to the
federal Universal Service Fund (“USF”). We must also comply with the
Communications Assistance for Law Enforcement Act (“CALEA”), and certain FCC
regulations which require telecommunications common carriers to modify their
networks to allow law enforcement authorities to perform electronic
surveillance.





**Overview
of State Regulation**





Through
certain of our subsidiaries, we are authorized to provide intrastate
interexchange telecommunications services and, in certain states, are authorized
to provide competitive local exchange services by virtue of certificates granted
by state public service commissions. Our regulated subsidiaries must comply with
state laws applicable to all similarly certified carriers including the
regulation of services, payment of regulatory fees, and preparation and
submission of reports. The adoption of new regulations or changes to existing
regulations may adversely affect our ability to provide telecommunications
services. Consumers may file complaints against us at the public service
commissions. The certificates of authority we hold can be generally conditioned,
modified, cancelled, terminated or revoked by state public service commissions.
Further, many states require prior approval or notification for certain stock or
asset transactions, or in some states, for the issuance of securities, debts,
guarantees or other financial transactions. Such approvals can delay or prevent
certain transactions.





8


**Overview
of Ongoing Policy Issues**





*Local
Service* . Through
the 1996 Act, Congress sought to establish a competitive and deregulated
national policy framework for advanced telecommunications and information
technologies. To date, local exchange competition has not progressed to a point
where significant regulatory intervention is no longer required. Regulators
believed that a “hands-off” policy would drive local exchange service into an
adequately competitive market, but there continues to be a strong need for
policy issue clarification and construction. Some policy changes have been
addressed through the court system, not the regulatory system. For instance, the
FCC has attempted several times to develop a list of Unbundled Network Elements
(“UNEs”) which are portions of the ILEC networks and services that must be sold
separately to competitors. On several occasions, the courts have rejected the
FCC’s approach to defining UNEs. The FCC’s most recent attempt to develop rules,
the Triennial Review Order, was vacated by the U.S. Circuit Court of Appeals in
Washington D.C. on March 4, 2004. The Court’s ruling went into effect on
June 16, 2004. In response, several competitive carriers filed appeals with
the U.S. Supreme Court, to seek a stay and review of the U.S. Circuit Court’s
ruling. Those requests for appeal were denied.





On August
20, 2004, the FCC issued interim UNE rules to replace those vacated by the D.C.
Circuit Court as well as a Notice of Proposed Rulemaking ("NPRM") seeking
comments on new UNE rules. On December 15, 2004 the FCC adopted new rules
governing access to UNEs. The rules the FCC adopted replaced the interim rules.
On February 4, 2005, the FCC released the text of the *TRO
Remand Order* (the
“Order”), adopted on December 15, 2004. The *Order* replaces
rules that were vacated or remanded by the D.C. Circuit in *USTA
II* on March
2, 2004. In short, the *Order* (1)
reduces the availability of dedicated transport and high-capacity loops as UNEs,
(2) eliminates UNE-P mass market switching, and (3) establishes transition
periods and pricing for those UNEs no longer available after the *Order* becomes
effective. Per its terms, the *Order* became
effective on March 11, 2005.





Dedicated
Transport - The FCC classifies the impairment status of dedicated transport
services based on the revenue opportunities generated at either end of the
underlying routes, based on “reasonable” inferences from previously successful
competitive deployments. The Commission treats the various categories of routes
as follows:





·  DS1
Transport - carriers are impaired without access only if at least one end-point
of the route is a wire center containing fewer than 38,000 business lines and
fewer than four fiber-based collocators.




·  DS3
Transport - carriers are impaired without access only if at least one end-point
of the route is a wire center containing fewer than 24,000 business lines and
fewer than three fiber-based collocators.





·  Dark
Fiber Transport - carriers are impaired without access only if at least one
end-point of the route is a wire center containing fewer than 24,000 business
lines and fewer than three fiber-based collocators.




·  Entrance
Facilities - carriers are not impaired without access to entrance
facilities.




The FCC
also places the following limits on the number of DS1 and DS3 lines that a
competitor can access as UNEs:




·  If DS3
transport is not available as a UNE, competitors can lease up to 10 DS1s. The
Commission reasons that if a competitor wishes to lease more than 10 DS1s, it
would be economic for that competitor to provide or lease a DS3
instead.




·  If DS3
transport is available as a UNE, competitors can lease up to 12
DS3s.




High
capacity loops - The FCC categorizes high-capacity loops as
follows:




·  DS1 Loops
- carriers are impaired without access to DS1 loops at any location within the
service area of an ILEC wire center containing fewer than 60,000 business lines
or fewer than four fiber-based collocators.




·  DS3 Loops
- carriers are impaired without access to DS3 loops at any location within the
service area of an ILEC wire center containing fewer than 38,000 business lines
or fewer than four fiber-based collocators.




·  Dark
Fiber Loops - carriers are not impaired without access to unbundled dark fiber
loops.




The FCC
also places limits on the number of high-capacity loops that a competitor may
access. Competitors can lease one DS3 and ten DS1s per building
location.




Mass
Market Switching (UNE-P) - The FCC concludes that competitors are not impaired
without access to ILEC circuit switching, relying on both the overall number of
competitive circuit switches available, and the availability of alternatives to
these switches. Specifically, the FCC notes that competitors can access packet
switches and VoIP technology to serve mass-market customers. The FCC also notes
that batch hot cuts are no longer an issue, given evidence of RBOC hot cut
performance in the Section 271 context. Accordingly, mass market switching is
eliminated as a UNE.




9


Conversions
and New Orders - The FCC refuses to place any limitations on a competitor’s
right to convert special access arrangements into UNEs and UNE combinations,
apart from the conditions and eligibility requirements placed on the UNEs
themselves. Further, competitors may self-certify their eligibility for UNEs,
which must then be provided by the relevant ILEC.




Transition
- The FCC establishes the following transition procedures to phase-out existing
UNEs that are eliminated by the *Order* :




·  DS1 and
DS3 Loops and Transport - competitors will be permitted to continue their use of
already-installed UNEs that have been eliminated for 12 months. As of March 11,
2005, the price for these UNEs will increase to 115% of the greater of (1) the
rate paid on June 15, 2004, or (2) a new rate, if higher, set by a state
commission after June 16, 2004.




·  Dark
Fiber Loops and Transport - competitors will be permitted to continue their use
of already-installed UNEs that have been eliminated for a period of 18 months.
As of March 11, 2005, the price for these UNEs will increase to 115% of the
greater of (1) the rate paid on June 15, 2004, or (2) a new rate, if higher, set
by a state commission after June 16, 2004.




·  Mass
Market Switching (as UNE-P) - competitors will be permitted to continue their
use of already-installed UNEs that have been eliminated for 12 months, with the
price for installed UNEs being the higher of: (1) the June 15, 2004 rate, or (2)
any rate set after June 16, 2004, plus one dollar.




On
February 24, 2005, the day the order was published in the Federal Register,
United States Telecom Association, BellSouth Corporation, Qwest Communications
International, Inc., SBC Communications, Inc. and the Verizon Telephone
Companies filed a consolidated Petition for Review of the FCC Order with the
Court of Appeals for the District of Columbia Circuit. The Petition states that
the Order exceeds the FCC’s jurisdiction or authority, violates the
Communications Act of 1934 or the Administrative Procedures Act, fails to comply
with prior judicial orders related to the triennial review process or are
arbitrary, capricious, an abuse of discretion or otherwise contrary to law. The
Petitioners ask the court to hold unlawful, vacate, enjoin, and set aside those
portions of the order that are unlawful. Other parties may file appeals prior to
the deadline of April 25, 2005.




Competitors
that utilize UNE-P will see an immediate increase in their wholesale costs for
existing UNE-P customers. In addition, competitors will not be able to add new
UNE-P lines unless they have entered into a commercial agreement with the ILECs
in their service territory. Many of these commercial agreements allow for the
continued provision of a UNE-P like service, but at a higher rate, generally
structured to have annual rate increases during the term, and at times with
minimum volume commitments. Without a commercial agreement, beginning March 11,
2005, it is likely that new orders submitted to the ILECs will be rejected or
processed at the higher resale rate. There is some question whether ILECs can
unilaterally implement the new FCC rules or whether they will have to go through
the change of law procedures required by interconnection
agreements.




A few
facilities-based competitors have announced plans to provide
non-facilities-based competitors with access to a UNE-P like platform using DSL
or VoIP. However, there is no certainty that the pricing or availability for
such services will be acceptable to the Company. The Company believes that the
new FCC rules may adversely affect its ability to obtain access to local
facilities on the same basis as under the Interim rules and/or prior to the USTA
II decision.





*Universal
Service Fund (“USF”)* . In
1997, the FCC issued an order implementing Section 254 of the 1996 Act,
regarding the preservation of universal telephone service. Section 254 and
related regulations require all interstate and certain international
telecommunications carriers to contribute toward the USF, a fund that provides
subsidies for the provision of service to schools and libraries, rural health
care providers, low income consumers and consumers in high cost
areas.





Quarterly,
the Universal Service Administrative Company (“USAC”), which oversees the USF,
reviews the need for program funding and determines the applicable USF
contribution percentage that interstate telecommunications carriers must
contribute. While carriers are permitted to pass through the USF charges to
consumers, the FCC has strictly limited amounts passed through to consumers in
excess of a carrier’s determined contribution percentage. In April 2005, the
applicable USF contribution percentage will be raised to 11.1%. Throughout 2004
the rate was in the 9% range and in early 2003 the rate was 7.3%.





As
discussed below, the industry is relying less on traditional circuit-switched
telephone service and more on digitized IP-based communications for long
distance transport and local services. It is possible that this trend could
threaten the amount of revenues USAC can collect through the USF system, and
that the resulting revenue shortfall could prevent the system from meeting its
funding demands. Separately from the FCC’s inquiry into the regulation of
IP-based voice service, the FCC could exercise its so called “permissive
authority” under the 1996 Act and assess USF contributions on VoIP providers. To
date, only some VoIP providers contribute to the USF, and do so at their
discretion. If VoIP providers were exempted from USF contributions,
telecommunications carriers would likely pay significantly higher USF
contributions; conversely, if VoIP providers were required to contribute,
traditional telecommunications carriers would contribute less. In addition to
the FCC, Congress is reviewing a series of matters related to VoIP. Current
Congressional debates are divided over whether IP-based telephony service
providers should be required to contribute to the USF and other fees and
surcharges applicable now only to traditional circuit-based networks and
services. A decision to require VoIP providers to contribute to the USF, and pay
other fees and surcharges from which they are now exempted, may adversely affect
our provision of VoIP services.





10


*VoIP
Notice of Proposed Rule Making.* In March
2004, the FCC issued the VoIP Notice of Proposed Rulemaking (the “VoIP NPRM”) to
solicit comments on many aspects of the regulatory treatment of VoIP services.
The FCC continues to consider the possibility of regulating access to IP-based
services, but has not yet decided on the appropriate level of regulatory
intervention for IP-based service applications. It has, through several
decisions, sought to exercise its pre-emptive authority to designate VoIP as an
interstate service, thus pre-empting state regulation of VoIP and placing the
FCC as the sole regulator of the service - a position that has been challenged
by several state public utility commissions. Should the FCC rule that our
software-based solution for VoIP deployment, and other similar service
applications should be further regulated, or if the courts overturn the FCC’s
pre-emptive authority to prevent state regulation of VoIP, our ability to
provide VoIP services may be adversely affected.





Further,
the VoIP NPRM will likely address the applicability of access charges to VoIP
services. Access charges provide compensation to local exchange carriers for
traffic that originates or terminates on their networks. Certain LECs have
argued that certain types of VoIP carriers provide the same basic functionality
as traditional telephone service carriers, in that they carry a customer’s call
from an origination point to a termination destination. Any ruling or decision
from the FCC requiring VoIP carriers to pay access charges to ILECs for local
loop use may adversely affect our VoIP services.





The VoIP
NPRM is also expected to address the extent to which CALEA will be applicable to
VoIP services. Recently, in a separate proceeding, the Federal Bureau of
Investigation and other federal agencies have asked the FCC to clarify that VoIP
is a telecommunications service, for the purpose of subjecting VoIP to CALEA’s
wiretapping requirements.





*Broadband
Deployment* .
Broadband refers to any platform capable of providing high bandwidth-intensive
content and advanced telecommunications capability. The FCC’s stated goal for
broadband services is to establish regulatory policies that promote competition,
innovation and investment in broadband services and facilities. Broadband
technologies encompass evolving high-speed digital technologies that offer
integrated access to voice, high-speed data, video-on-demand or interactive
delivery services. The FCC is seeking to 1) encourage the ubiquitous
availability of broadband access to the Internet, 2) promote competition across
different platforms for broadband services, 3) ensure that broadband services
exist in a minimal regulatory environment that promotes investment and
innovation and 4) develop an analytical framework that is consistent, to the
extent possible, across multiple platforms. The FCC has opened several inquiries
to determine how to promote the availability of advanced telecommunications
capability with the goal of removing barriers to deployment, encouraging
competition and promoting broadband infrastructure investment. For instance, the
FCC is considering the appropriate regulatory requirements for ILEC provision of
domestic broadband telecommunications services. The FCC’s concern is whether the
application of traditional common carrier regulations to ILEC-provided broadband
telecommunications services is appropriate. On October 14, 2004, the FCC adopted
an Order concluding that fiber-to-the-curb ("FTTC") loops shall be treated in
the same manner as fiber-to-the-home ("FTTH") loops. Accordingly, ILECs will not
be required to offer FTTC to competitors as UNEs. The FCC defined FTTC as "a
local loop consisting of fiber optic cable connecting to a copper distribution
plant that is not more than 500 feet from the customer's premises or, in the
case of predominantly residential multiple dwelling units (“MDUs”), not more
than 500 feet from the MDUs.” The FCC also clarified that ILECs are not required
to build TDM capabilities into new packetized transmission facilities or add
them to facilities where they never existed. Under other existing regulations,
ILECs are treated as dominant carriers absent a specific finding to the contrary
for a particular market and, as dominant carriers, shall still be subject to
numerous regulations, such as tariff filing and pricing
requirements.





On
February 7, 2002, the FCC released its third biennial report on the
availability of broadband, in which it concluded that broadband is being
deployed in a reasonable and timely manner. The report showed that the advanced
telecommunications services market continues to grow and that the availability
of and subscribership to high-speed services increased significantly since the
last report. Additionally, the report noted that investment in infrastructure
for advanced telecommunications remains strong. The data in the report is
gathered largely from standardized information from providers of advanced
telecommunications capability including wireline telephone companies, cable
providers, wireless providers, satellite providers, and any other
facilities-based providers of 250 or more high-speed service lines (or wireless
channels) in a given state.





*Internet
Service Regulation* . The
demand for high-speed internet access has increased significantly over the past
several years as consumers increase their Internet use. The FCC is active in
reviewing the need for regulatory oversight of Internet services and to date has
advocated less regulation and more market-based competition for broadband
providers. The FCC’s stated policy is to promote the continued development of
the Internet and other interactive computer-based communications services. We
cannot be certain that the FCC will continue to take a deregulatory approach to
the Internet. Should the FCC increase regulatory oversight of Internet services,
our costs could increase for providing those services.





11


*Other
Legislation.* Recent
legislation in the United States including the Sarbanes-Oxley Act of 2002
(“Sarbanes Oxley”) is increasing the scope and cost of work provided to us by
our independent registered public accountants and legal advisors. Many
guidelines have not yet been finalized and there is a risk that we will incur
significant costs in the future to comply with legislative requirements or
rules, pronouncements and guidelines by regulatory bodies, including the cost of
restating previously reported financial results, thereby reducing
profitability.





**Available
Information**





Acceris
is subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), which requires that Acceris file reports,
proxy statements and other information with the Securities and Exchange
Commission (“SEC”). The SEC maintains a website on the Internet at *http://www.sec.gov* that
contains reports, proxy and information statements, and other information
regarding issuers, including Acceris, which file electronically with the SEC. In
addition, Acceris’ Exchange Act filings may be inspected and copied at the SEC’s
Public Reference Room at 450 Fifth Street, NW, Washington, D.C. 20549. The
Company makes available free of charge through its Internet web site, *http://www.acceris.com* (follow
Investor Relations tab to link to “SEC Filings”) its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after such material has been
electronically filed with, or furnished to, the SEC.





**Item
2. Properties.**





The
Company, in its telecommunications business, rents approximately 46,000 square
feet of office space in Pittsburgh, Pennsylvania under a lease expiring on June
30, 2005, at a cost of approximately $54 per month. The Company uses this space
primarily for its network operations center, administrative staff and other
employees. Should the Company not renew its existing lease, ample alternative
space is available.





The
Company, in its telecommunications business, rents approximately 24,000 square
feet of office space in San Diego, California under commercial leases which
terminate on April 30, 2006. The rental fee is approximately $31 per month. The
Company uses this space primarily for its sales and marketing team, certain
network resources and certain administrative staff.





The
Company, in its telecommunications business, rents approximately 12,000 square
feet of office space in Somerset, New Jersey under a lease expiring September
30, 2008, at a cost of approximately $11 per month. The Company uses this space
to operate its local service offering as well as for certain of its information
technology operations.





The
Company, in its telecommunications business, also leases several other
co-location facilities throughout the United States to house its network
equipment, as well as some additional office space. Such spaces vary in size and
length of term. The total combined square footage of the spaces under these
agreements is no greater than 29,000 square feet at a cost of approximately $95
per month.





**Item
3. Legal Proceedings.**





On
April 16, 2004, certain stockholders of the Company (the “Plaintiffs”)
filed a putative derivative complaint in the Superior Court of the State of
California in and for the County of San Diego, (the “Complaint”) against the
Company, WorldxChange Corporation (sic), Counsel Communications LLC, and Counsel
Corporation as well as certain present and former officers and directors of the
Company, some of whom also are or were directors and/or officers of the other
corporate defendants (collectively, the “Defendants”). The Complaint alleges,
among other things, that the Defendants, in their respective roles as
controlling stockholder and directors and officers of the Company committed
breaches of the fiduciary duties of care, loyalty and good faith and were
unjustly enriched, and that the individual Defendants committed waste of
corporate assets, abuse of control and gross mismanagement. The Plaintiffs seek
compensatory damages, restitution, disgorgement of allegedly unlawful profits,
benefits and other compensation, attorneys’ fees and expenses in connection with
the Complaint. The Company believes that these claims are without merit and
intends to continue to vigorously defend this action. There is no assurance that
this matter will be resolved in the Company’s favor and an unfavorable outcome
of this matter could have a material adverse impact on its business, results of
operations, financial position or liquidity.





Acceris
and several of Acceris’ current and former executives and board members were
named in a securities action filed in the Superior Court of the State of
California in and for the County of San Diego on April 16, 2004, in which
the plaintiffs made claims nearly identical to those set forth in the Complaint
in the derivative suit described above. The Company believes that these claims
are without merit and intends to vigorously defend this action. There is no
assurance that this matter will be resolved in the Company’s favor and an
unfavorable outcome of this matter could have a material adverse impact on its
business, results of operations, financial position or liquidity.





12


In
connection with the Company’s efforts to enforce its patent rights, Acceris
Communications Technologies Inc., our wholly owned subsidiary, filed a patent
infringement lawsuit against ITXC Corp. (“ITXC”) in the United States District
Court of the District of New Jersey on April 14, 2004. The complaint
alleges that ITXC’s VoIP services and systems infringe the Company’s U.S. Patent
No. 6,243,373, entitled *“Method
and Apparatus for Implementing a Computer Network/Internet Telephone
System.”* On
May 7, 2004, ITXC filed a lawsuit against Acceris Communications
Technologies Inc., and the Company, in the United States District Court for the
District of New Jersey for infringement of five ITXC patents relating to VoIP
technology, directed generally to the transmission of telephone calls over the
Internet and the completion of telephone calls by switching them off the
Internet and onto a public switched telephone network. The Company believes that
the allegations contained in ITXC’s complaint are without merit and the Company
intends to continue to provide a vigorous defense to ITXC’s claims. There is no
assurance that this matter will be resolved in the Company’s favor and an
unfavorable outcome of this matter could have a material adverse impact on its
business, results of operations, financial position or liquidity.





At our
Adjourned Meeting of Stockholders held on December 30, 2003, our
stockholders, among other things, approved an amendment to our Articles of
Incorporation, deleting Article VI thereof (regarding liquidations,
reorganizations, mergers and the like). Stockholders who were entitled to vote
at the meeting and advised us in writing, prior to the vote on the amendment,
that they dissented and intended to demand payment for their shares if the
amendment was effectuated, were entitled to exercise their appraisal rights and
obtain payment in cash for their shares under Sections 607.1301 - 607.1333
of the Florida Business Corporation Act (the “Florida Act”), provided their
shares were not voted in favor of the amendment. In January 2004, we sent
appraisal notices in compliance with Florida corporate statutes to all
stockholders who had advised us of their intention to exercise their appraisal
rights. The appraisal notices included our estimate of fair value of our shares,
at $4.00 per share on a post-split basis. These stockholders had until
February 29, 2004 to return their completed appraisal notices along with
certificates for the shares for which they were exercising their appraisal
rights. Approximately 33 stockholders holding approximately 74,000 shares of our
stock returned completed appraisal notices by February 29, 2004. A
stockholder of 20 shares notified us of his acceptance of our offer of $4.00 per
share, while the stockholders of the remaining shares did not accept our offer.
Subject to the qualification that, in accordance with the Florida Act, we may
not make any payment to a stockholder seeking appraisal rights if, at the time
of payment, our total assets are less than our total liabilities, stockholders
who accepted our offer to purchase their shares at the estimated fair value will
be paid for their shares within 90 days of our receipt of a duly executed
appraisal notice. If we should be required to make any payments to dissenting
stockholders, Counsel will fund any such amounts through the purchase of shares
of our common stock. Stockholders who did not accept our offer were required to
indicate their own estimate of fair value, and if we do not agree with such
estimates, the parties are required to go to court for an appraisal proceeding
on an individual basis, in order to establish fair value. Because we did not
agree with the estimates submitted by most of the dissenting stockholders, we
have sought a judicial determination of the fair value of the common stock held
by the dissenting stockholders. On June 24, 2004, we filed suit against the
dissenting stockholders seeking a declaratory judgment, appraisal and other
relief in the Circuit Court for the 17 th Judicial
District in Broward County, Florida. On February 4, 2005, the declaratory
judgment action was stayed pending the resolution of the direct and derivative
lawsuits filed in California. This decision was made by the judge in the Florida
declaratory judgment action due to the similar nature of certain allegations
brought by the defendants in the declaratory judgment matter and the California
lawsuits described above. When the declaratory judgment matter resumes, there is
no assurance that this matter will be resolved in our favor and an unfavorable
outcome of this matter could have a material adverse impact on our business,
results of operations, financial position or liquidity.





The
Company is involved in various other legal matters arising out of its operations
in the normal course of business, none of which are expected, individually or in
the aggregate, to have a material adverse effect on the Company.





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





None.





13








**PART
II**





**Item
5. Market for Registrant’s Common Equity, Related Stockholder
Matters**  **and
Issuer Purchases of Equity Securities.**





**Price
Range of Common Stock**





Shares of
Acceris’ common stock, $0.01 par value per share, are traded on the OTC Bulletin
Board (“OTC-BB”) under the symbol ACRS.OB.





The
following table sets forth the high and low prices for our common stock for the
period as quoted on the OTC-BB, from January 1, 2003 through December 31, 2004
(adjusted for a 1-for-20 reverse stock split that was approved by our
stockholders on November 26, 2003) based on interdealer quotations, without
retail markup, markdown, commissions or adjustments, and may not represent
actual transactions:


**Quarter
      Ended**
    
    
    **High**
    
    
    **Low**March
      31, 2003
    
    $
    3.40
    
    $
    2.00June
      30, 2003
    
    
    5.60
    
    
    2.00September
      30, 2003
    
    
    6.00
    
    
    3.00December
      31, 2003
    
    
    4.80
    
    
    1.20March
      31, 2004
    
    $
    5.10
    
    $
    2.12June
      30, 2004
    
    
    3.70
    
    
    1.45September
      30, 2004
    
    
    1.60
    
    
    0.75December
      31, 2004
    
    
    1.04
    
    
    0.52





On March
1, 2005, the closing price for a share of the Company’s common stock was
$0.60.





**Holders**





As of
March 1, 2005, the Company had approximately 914 holders of common stock of
record.





**Dividends**





To date,
we have not paid dividends on our common stock nor do we anticipate that we will
pay dividends in the foreseeable future. As of December 31, 2004, we do not have
any preferred stock outstanding which has any preferential dividends. The Loan
and Security Agreements with our lenders restrict the ability of one of our
subsidiaries to make distributions or declare or pay any dividends to us. So
long as 25% of principal amount of the Note held by Laurus Master Fund, Ltd.,
described below remains outstanding, we agreed not to pay any dividends on our
common stock. Additionally, under the Florida Business Corporation Act (the
“Florida Act”), we cannot pay dividends while we have negative stockholders’
equity.





**Dissenters’
Appraisal Rights**





At our
Adjourned Meeting of Stockholders held on December 30, 2003, our stockholders,
among other things, approved an amendment to our Articles of Incorporation,
deleting Article VI thereof (regarding liquidations, reorganizations, mergers
and the like). Stockholders who were entitled to vote at the meeting and advised
us in writing prior to the vote on the amendment, that they dissented and
intended to demand payment for their shares if the amendment was effectuated,
were entitled to exercise their appraisal rights and obtain payment in cash for
their shares under Sections 607.1301 - 607.1333 of the Florida Act, provided
their shares were not voted in favor of the amendment.





In
January 2004, we sent appraisal notices in compliance with Florida corporate
statutes to all stockholders who had advised us of their intention to exercise
their appraisal rights. The appraisal notices included our estimate of fair
value of our shares, at $4.00 per share on a post-split basis. These
stockholders had until February 29, 2004 to return their completed appraisal
notices along with certificates for the shares for which they were exercising
their appraisal rights. Approximately 33 stockholders holding approximately
74,000 shares of our stock returned completed appraisal notices by February 29,
2004. A stockholder of 20 shares notified us of his acceptance of our offer of
$4.00 per share, while the stockholders of the remaining shares did not accept
our offer. Subject to the qualification that, in accordance with the Florida
Act, we may not make any payment to a stockholder seeking appraisal rights if,
at the time of payment, our total assets are less than our total liabilities,
stockholders who accepted our offer to purchase their shares at the estimated
fair value will be paid for their shares within 90 days of our receipt of a duly
executed appraisal notice. If we should be required to make any payments to
dissenting stockholders, Counsel will fund any such amounts through the purchase
of shares of our common stock. Stockholders who did not accept our offer were
required to indicate their own estimate of fair value, and if we do not agree
with such estimates, the parties are required to go to court for an appraisal
proceeding on an individual basis, in order to establish fair value. Because we
did not agree with the estimates submitted by most of the dissenting
stockholders, we have sought a judicial determination of the fair value of the
common stock held by the dissenting stockholders. On June 24, 2004, we
filed suit against the dissenting stockholders seeking a declaratory judgment,
appraisal and other relief in the Circuit Court for the 17 th Judicial
District in Broward County, Florida. On February 4, 2005, the declaratory
judgment action was stayed pending the resolution of the direct and derivative
lawsuits filed in California. This decision was made by the judge in the Florida
declaratory judgment action due to the similar nature of certain allegations
brought by the defendants in the declaratory judgment matter and the California
lawsuits described in Item 3 above. When the declaratory judgment matter
resumes, there is no assurance that this matter will be resolved in our favor
and an unfavorable outcome of this matter could have a material adverse impact
on our business, results of operations, financial position or
liquidity.





14


**Recent
Sales of Unregistered Securities; Use of Proceeds from
Registered**  **Securities.**





During
the twelve months ended December 31, 2004, 421,350 options have been granted to
employees, directors and consultants under the 2003 Employee Stock Option and
Appreciation Rights Plan. These options were issued with exercise prices that
equalled or exceeded fair market value on the date of the grant and vest over a
4-year period subject to the grantee’s continued employment with the Company.
The Company relied on an exemption from registration under Section 4(2) of
the Securities Act of 1933, as amended (the “1933 Act”).





During
the twelve months ended December 31, 2004, 650,000 warrants have been issued to
a limited number of participants under the Acceris Communications Inc. Platinum
Agent Program at an exercise price of $3.50 per share. The Company relied on an
exemption from registration under Regulation D under the 1933 Act. Warrants
vest to the benefit of program participants based on improvements in revenue
generated by program members. As of December 31, 2004, none of these warrants
have met the requirements for vesting.





On
October 14, 2004, the Company entered into an agreement for the sale by the
Company of a convertible debenture (the “Note”) with detachable warrants to
Laurus Master Fund, Ltd. (the “Purchaser” or “Laurus”), in the principal amount
of $5,000, due October 14, 2007. The Note provides that the principal amount
outstanding bears interest at the prime rate as published in the Wall Street
Journal plus 3% (but not less than 7% per annum) decreasing by 2% (but not less
than 0%) for every 25% increase in the Market Price (as defined therein) above
the fixed conversion price following the effective date of the registration
statement covering the common stock issuable upon conversion of the Note. Should
the Company default under the agreement and fail to remedy the default on a
timely basis, interest under the Note will increase by 2% per month and the Note
may become immediately due inclusive of a 20% premium to the then outstanding
principal. Interest is payable monthly in arrears, commencing November 1, 2004.
Principal is payable at the rate of approximately $147 per month commencing
January 1, 2005, in cash or registered common stock. Payment amounts will be
converted into stock if (i) the average closing price for five trading days
immediately preceding the repayment date is at least 100% of the Fixed
Conversion Price, (ii) the amount of the conversion does not exceed 25% of the
aggregate dollar trading volume for the 22-day trading period immediately
preceding the repayment date, (iii) a registration statement is effective
covering the issued shares and (iv) no Event of Default exists and is
continuing. In the event the monthly payment must be paid in cash, then the
Company shall pay 102% of the amount due in cash. The Company has the right to
prepay the Note, in whole or in part, at any time by giving seven business days
written notice and paying 120% of the outstanding principal amount of the Note.
The holder may convert the Note, in whole or in part, into shares of common
stock at any time upon one business day’s prior written notice. The Note is
convertible into shares of the Company’s common stock at a fixed conversion
price of $0.88 per share of common stock (105% of the average closing price for
the 30 trading days prior to the issuance of the Note) not to exceed, however,
4.99% of the outstanding shares of common stock of the Company (including
issuable shares from the exercise of the warrants, payments of interest, or any
other shares owned). However, upon an Event of Default as defined in and in
respect of the Note, the 4.99% ownership restriction is automatically rendered
null and void. Laurus may also revoke the 4.99% ownership restriction upon 75
days prior notice to the Company. In accordance with Statement of Financial
Accounting Standards No. 133, *Accounting
for Derivative Instruments and Hedging Activities* (“SFAS
133”) and Emerging Issues Task Force Issue No. 00-19, *Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock* (“EITF
00-19”), the
Company analyzed the various embedded derivative elements of the debt at
inception of the Note and concluded that all of the individual elements should
be characterized as debt for accounting purposes and that the embedded
derivative elements had nominal value. The value of the embedded derivative
elements of the debt is reassessed on a quarterly basis on a mark-to-market
basis. At the end of 2004, the Company concluded that the value of the embedded
derivatives remained nominal.





In
addition, the Company issued a common stock purchase warrant (the “Warrant”) to
the Purchaser, entitling the Purchaser to purchase up to one million shares of
common stock, subject to adjustment. The Warrant entitles the Purchaser to
purchase the stock through the earlier of (i) October 13, 2009 or
(ii) the date on which the average closing price for any consecutive ten
trading dates shall equal or exceed 15 times the Exercise Price. The Exercise
Price shall equal $1.00 per share as to the first 250,000 shares, $1.08 per
share for the next 250,000 shares and $1.20 per share for the remaining 500,000
shares, or 125%, 135% and 150% of the average closing price for ten trading days
immediately prior to the date of the Warrant, respectively. The Company
concluded that, pursuant to EITF
00-19, the Warrant should be characterized as debt for accounting purposes. The
Company ascribed $430 of the proceeds of the Note as the market value of the
Warrant at inception. The value of the Warrant is reassessed on a quarterly
basis on a mark-to-market basis. The Company adjusted the value of the Warrant
to $322 at the end of 2004 and recorded $108 in income.





15


The
Company filed a registration statement under the 1933 Act to register the
6,681,818 shares issuable upon conversion of the Note as well as those issuable
pursuant to the Warrant. This registration statement was declared effective by
the SEC on January 18, 2005. To our knowledge, none of the shares have been sold
as of the date of this report.





Pursuant
to a Master Security Agreement, the Company granted a blanket lien on all its
property and that of certain of its subsidiaries, subordinated to the existing
asset-based facility with Wells Fargo Foothill, Inc., to secure repayment of the
obligation and, pursuant to a Stock Pledge Agreement, Counsel Communications LLC
and Counsel Corporation (US) pledged the shares of the Company held by them
as further security. In addition, Acceris Communications Technologies, Inc.,
Acceris Communications Corp., Counsel Corporation and Counsel Communications LLC
and Counsel Corporation (US) jointly and severally guaranteed the
obligations to the Lender. So long as 25% of principal amount of the Note is
outstanding, the Company agreed, among other things, that it will not pay
dividends on its common stock.








16








**Item
6. Selected Financial Data.**





The
following selected consolidated financial information was derived from the
audited consolidated financial statements and notes thereto. The information set
forth below is not necessarily indicative of the results of future operations
and should be read in conjunction with Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” as well as the
Consolidated Financial Statements and Notes thereto included in Item 15 in this
report.





**2000**
    
    **2001**
    
    **2002**
    
    **2003**
    
    **2004****Statement
      of Operations Data :**Revenues:Telecommunications
      services
    
    $
    —
    
    $
    50,289
    
    $
    85,252
    
    $
    133,765
    
    $
    112,595Technology
      licensing and development
    
    
    8,972
    
    
    5,697
    
    
    2,837
    
    
    2,164
    
    
    540Other
    
    
    864
    
    
    —
    
    
    —
    
    
    —
    
    
    —Net
      sales
    
    
    9,836
    
    
    55,986
    
    
    88,089
    
    
    135,929
    
    
    113,135Operating
      costs and expenses:Telecommunications
      network expense (exclusive of depreciation and amortization,
      below)
    
    
    —
    
    
    35,546
    
    
    50,936
    
    
    86,006
    
    
    60,067Selling,
      general, administrative and other
    
    
    15,139
    
    
    30,790
    
    
    33,015
    
    
    57,264
    
    
    54,430Provision
      for doubtful accounts
    
    
    —
    
    
    2,861
    
    
    5,999
    
    
    5,438
    
    
    5,229Research
      and development
    
    
    4,220
    
    
    2,332
    
    
    1,399
    
    
    —
    
    
    442Depreciation
      and amortization
    
    
    3,991
    
    
    6,409
    
    
    4,270
    
    
    7,125
    
    
    6,976Total
      operating costs and expenses
    
    
    23,350
    
    
    77,938
    
    
    95,619
    
    
    155,833
    
    
    127,144Operating
      loss
    
    
    (13,514
    )
    
    (21,952
    )
    
    (7,530
    )
    
    (19,904
    )
    
    (14,009
    )Other
      income (expense):Interest
      expense - related party
    
    
    —
    
    
    (1,823
    )
    
    (4,515
    )
    
    (10,878
    )
    
    (8,488
    )Interest
      expense - third party
    
    
    (1,487
    )
    
    (2,870
    )
    
    (3,680
    )
    
    (2,391
    )
    
    (2,861
    )Other
      income (expense)
    
    
    (152
    )
    
    670
    
    
    395
    
    
    1,216
    
    
    2,471Other
      expense, net
    
    
    (1,639
    )
    
    (4,023
    )
    
    (7,800
    )
    
    (12,053
    )
    
    (8,878
    )Loss
      from continuing operations
    
    
    (15,153
    )
    
    (25,975
    )
    
    (15,330
    )
    
    (31,957
    )
    
    (22,887
    )Income
      (loss) from discontinued operations
    
    
    (10,599
    )
    
    (18,522
    )
    
    (12,508
    )
    
    529
    
    
    104Net
      loss
    
    $
    (25,752
    )
    $
    (44,497
    )
    $
    (27,838
    )
    $
    (31,428
    )
    $
    (22,783
    )Net
      income (loss) per common share - basic and diluted:Loss
      from continuing operations
    
    $
    (12.60
    )
    $
    (2.17
    )
    $
    (2.63
    )
    $
    (4.56
    )
    $
    (1.19
    )Income
      (loss) from discontinued operations
    
    
    (7.95
    )
    
    (3.73
    )
    
    (2.15
    )
    
    0.08
    
    
    0.01Net
      loss per common share
    
    $
    (20.55
    )
    $
    (5.90
    )
    $
    (4.78
    )
    $
    (4.48
    )
    $
    (1.18
    )**Balance
      Sheet Data:**Working
      capital deficit
    
    $
    (30,061
    )
    $
    (40,812
    )
    $
    (17,244
    )
    $
    (26,576
    )
    $
    (21,352
    )Furniture,
      fixtures, equipment and software, net
    
    
    10,983
    
    
    21,024
    
    
    11,479
    
    
    8,483
    
    
    4,152Intangible
      assets, net
    
    
    3,939
    
    
    1,331
    
    
    2,747
    
    
    4,417
    
    
    2,524Total
      assets
    
    
    21,657
    
    
    46,780
    
    
    41,446
    
    
    39,054
    
    
    24,009Total
      current liabilities
    
    
    35,960
    
    
    64,117
    
    
    40,852
    
    
    50,887
    
    
    36,362Total
      long-term obligations:Related
      party
    
    
    —
    
    
    8,133
    
    
    53,231
    
    
    28,717
    
    
    46,015Third
      party
    
    
    2,802
    
    
    11,528
    
    
    5,179
    
    
    2,403
    
    
    3,597Stockholders’
      deficit
    
    
    (28,839
    )
    
    (36,998
    )
    
    (57,816
    )
    
    (42,953
    )
    
    (61,965
    )**Cash
      Flow Data :**Net
      cash used in operating activities, excluding changes innon-cash
      working capital and asset-based lending facility
    
    $
    (17,957
    )
    $
    (21,120
    )
    $
    (4,302
    )
    $
    (9,424
    )
    $
    (4,653
    )Net
      cash provided by (used in) operating activities
    
    
    1,869
    
    
    (29,283
    )
    
    (4,871
    )
    
    (8,315
    )
    
    (10,252
    )Net
      cash provided by (used in) investing activities
    
    
    (6,881
    )
    
    (15,410
    )
    
    (9,233
    )
    
    (1,827
    )
    
    2,850Net
      cash provided by financing activities
    
    
    4,171
    
    
    47,200
    
    
    13,061
    
    
    8,555
    
    
    5,827Cash
      and cash equivalents at end of period
    
    
    2,156
    
    
    4,663
    
    
    3,620
    
    
    2,033
    
    
    458




Significant
Acquisitions and Dispositions:





On April
17, 2001, the Company acquired WebToTel and its subsidiaries (including Nexbell
Communications, Inc. (“Nexbell”)) in a stock for stock transaction. However, as
WebToTel (which was a subsidiary of Counsel Corporation) and Acceris were under
common control as of March 1, 2001 (the date Counsel obtained its ownership in
Acceris), the Company has accounted for the acquisition using the
pooling-of-interests method of accounting as of March 1, 2001. Accordingly, the
financial results of WebToTel and its subsidiaries (including Nexbell, which was
subsequently sold in December 2001) are included herein subsequent to March 1,
2001.





17


On June
4, 2001, Acceris, through its wholly-owned subsidiary, WorldxChange Corp.
(renamed Acceris Communications Corp. in 2004, “ACC”) purchased certain assets
and assumed certain liabilities from a debtor, WorldxChange Communication Inc.,
in a bankruptcy proceeding. ACC is a facilities-based telecommunications carrier
that provides international and domestic long distance service to residential
and commercial customers. ACC’s operations are part of the Telecommunications
segment.





On
December 6, 2002, Acceris entered into an agreement, which closed on May 1,
2003, to sell substantially all of the assets of I-Link Communications Inc.
(“ILC”). The sale included the physical assets required to operate Acceris’
nationwide network using its patented VoIP technology (constituting the core
business of ILC) and a license in perpetuity to use Acceris’ proprietary
software platform. Additionally, Acceris sold its customer base that was
serviced by ILC. Pursuant to Statement of Financial Accounting Standards No.
144, *Accounting
for the Impairment or*  *Disposal
of Long-Lived Assets* , the
operating results of ILC have been reclassified to discontinued
operations.





On
December 10, 2002, Acceris completed the purchase of the Enterprise and Agent
business of RSL. The acquisition included the Enterprise business assets used by
RSL to provide long distance voice and data services, including frame relay, to
small and medium size businesses, and the Agent business assets used to provide
long distance and other voice services to small businesses and the
consumer/residential market, together with the existing customer base of the
Enterprise and Agent business.





On July
28, 2003, the Company completed the purchase of all of the outstanding stock of
Transpoint. The acquisition provided the Company with further penetration into
the commercial agent channel, as well as a larger residential customer
base.





No
acquisitions occurred during 2004.





2003
Reverse Stock Split





On
November 26, 2003, Acceris stockholders approved a 1-for-20 reverse stock split.
Accordingly, the earnings per share for years prior to 2003 have been restated
to reflect the reverse split. All references to share numbers reflect the
reverse stock split unless otherwise noted. In connection with the reverse stock
split, the par value of the Company’s common stock changed from $0.007 to
$0.01.





Adoption
of Significant Accounting Pronouncements





In
December 2004, the FASB issued SFAS No. 123 (revised 2004), *Share-Based
Payment* (“SFAS
123(R)”). SFAS 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS 123(R) covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS 123(R) replaces FASB Statement No. 123, *Accounting
for Stock-Based Compensation* (“SFAS
123”), and supersedes APB Opinion No. 25, *Accounting
for Stock Issued to Employees* (“APB
25”).





SFAS 123,
as originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, SFAS 123 permitted entities the option of continuing to apply the
guidance of APB 25, as long as the footnotes to financial statements disclosed
what net income would have been had the preferable fair-value-based method been
used. Public entities (other than those filing as small business issuers) will
be required to apply SFAS 123 (R) as of the first interim or annual reporting
period that begins after June 15, 2005. We are currently evaluating the effect
that adoption of SFAS 123(R) will have on our overall results of operations and
financial position.





Significant
Risks and Material Uncertainties





Significant
risks and material uncertainties exist in Acceris’ business model and
environment that may cause the data reflected herein to not be indicative of the
Company’s future financial condition. These risks and uncertainties include, but
are not limited to, those presented below in Item 7, entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”.
Readers are encouraged to read and to obtain the necessary advice in their
circumstances before becoming a stakeholder in the Company.





18








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





**Forward-Looking
Information**





*This
report contains certain “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Exchange Act of 1934, as amended, that are based on management’s exercise of
business judgment as well as assumptions made by, and information currently
available to, management. When used in this document, the words “may”,* " *will”,
“anticipate”, “believe”, “estimate”, “expect”, “intend”, and words of similar
import, are intended to identify any forward-looking statements. You should not
place undue reliance on these forward-looking statements. These statements
reflect our current view of future events and are subject to certain risks and
uncertainties as noted below. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, our actual
results could differ materially from those anticipated in these forward-looking
statements. We undertake no obligation and do not intend to update, revise or
otherwise publicly release any revisions to these forward-looking statements to
reflect events or circumstances after the date hereof or to reflect the
occurrence of any unanticipated events. Although we believe that our
expectations are based on reasonable assumptions, we can give no assurance that
our expectations will materialize.*





**Business
Overview, Recent Developments and Outlook**





We
currently operate two distinct but related businesses: a Voice over Internet
Protocol (“VoIP”) technologies business (“Technologies”) and a
telecommunications business (“Telecommunications”).





Our **Technologies
business** offers a
proven network convergence solution for voice and data in VoIP communications
technology and includes a portfolio of communications patents. Included in this
portfolio are two foundational patents in VoIP - U.S. Patent Nos. 6,243,373 and
6,438,124 (together the “VoIP Patent Portfolio”). This segment of our business
is primarily focused on licensing our technology, supported by our patents, to
carriers and equipment manufacturers and suppliers in the internet protocol
(“IP”) telephony market.





Over the
past five years, we have been licensing, on a fully paid-up basis, our
technology and patents internationally and domestically. We have also identified
and put on notice a number of domestic enterprises that we believe are
infringing our patents, and licensing discussions are underway. Unfortunately,
there are enterprises which, while infringing on our patents, have neither given
recognition to our patents nor have been willing to pay a licensing fee for
their use to this point. In those situations, after failing to reach agreement
on a licensing arrangement, we have taken, and will continue to take, the steps
necessary to ensure that those enterprises cease and desist infringing our
patents and compensate the Company for past infringement.





To
achieve our goals in our Technologies business we plan to:





*License
our intellectual property:* We have a
number of issued patents and pending patent applications, which we utilize to
provide our proprietary solutions. We believe that we hold the foundational
patents for the manner in which a significant portion of VoIP traffic is routed
in the marketplace today. We have licensed portions of our technology to third
parties on a non-exclusive basis. We plan to further monetize our intellectual
property by offering licenses to service providers, equipment companies and
end-users who are deploying VoIP networks for phone-to-phone
communications.





Our **Telecommunications
business** , which
generated substantially all of our revenue in 2004, is a broad-based
communications segment servicing residential, small and medium-sized businesses,
and corporate accounts in the United States. We provide a range of products,
including local dial tone, domestic and international long distance voice
services and fully managed, integrated data and enhanced services, to
residential and commercial customers through a network of independent agents,
telemarketing and our direct sales force. We are a U.S. facilities-based carrier
with points of presence in 30 major U.S. cities. Our voice capabilities include
nationwide Feature Group D (“FGD”) access. Our data network consists of 17
Nortel Passports that have recently been upgraded to support multi-protocol
label switching (“MPLS”). Additionally, we have relationships with multiple tier
I and tier II providers in the U.S. and abroad which afford Acceris the
opportunity for least cost routing on telecommunications services to our
clients.





Our
markets are characterized by the presence of numerous competitors which are of
significant size relative to Acceris, while many others are similar or smaller
in size. Acceris is a price taker in the markets in which it operates, and is
affected by the global price compression brought on by technology advancements
and deregulation in the telecommunications industry both domestically and
internationally. To manage the effects of price compression, the Company
endeavours to work with suppliers to reduce telecommunications costs and to
regularly optimize its U.S. based network to reduce its fixed costs of
operations, while working to integrate the back office functions of the
business.





19


We have
built our Telecommunications business through the acquisition of distressed or
bankrupt assets, integrating the back office, broadening product/service
offerings that consumers are demanding, and developing alternative channels to
market. Our plan to become profitable on an operating income basis during 2004
was not achieved primarily due to our decision to halt the geographic expansion
of our local dial tone offering as a direct result of regulatory uncertainty in
our domestic markets, particularly in the areas of the Unbundled Network Element
Platform (“UNE-P”), and growing Universal Service Fund (“USF”) contribution
levels for traditional carriers. In 2004, the Company commenced offering local
services in five states and realized revenue of $6,900, finishing the year with
approximately 22,000 local subscribers. In March 2005, the Company decided to
suspend efforts to attract new local customers in Pennsylvania, New Jersey, New
York, Florida and Massachusetts, while continuing to support its existing local
customers in those states. The decision was a result of the Federal
Communications Commission’s (“FCC”) revision of its wholesale rules, originally
designed to introduce competition in local markets, which went into effect on
March 11, 2005. The reversal of local competition policy by the FCC has
permitted the Regional Bell Operating Companies (“RBOCs”) to substantially raise
wholesale rates for the services known as unbundled network elements (“UNEs”),
and required the Company to re-assess its local strategy while it attempts to
negotiate long-term agreements for UNEs on competitive terms. Should the Company
not enter into a wholesale contract for UNE services in the future, the natural
attrition cycle will result in a reduction in the number of local customers and
related revenues in 2005.





Domestic
regulatory uncertainty, coupled with continued international deregulation of
telecommunication services and technology advancements, is changing the
underlying business model for our Telecommunications business.  We believe
that to bring long term sustainable success to our Telecommunications business
we need to acquire additional scale through acquisition.  However, we do
not believe that we have the ability to raise, on acceptable terms, the capital
required for telecommunications acquisitions. In conjunction with the advice of
our strategic advisors, we are looking to merge with competitors or to
dispose of the Telecommunications business or assets of the Telecommunications
segment. There is no certainty that a merger or disposal can occur on a timely
basis on favorable terms. For more information on the assets and operations of
the Telecommunications business, please refer to Note 19 of the financial
statements included in Item 15 of this Form 10-K.





A **going
concern qualification** has been
included by the Company’s independent registered public accounting firms in
their audit opinions for each of 2002, 2003 and 2004. Readers are encouraged to
take due care when reading the independent registered public accountants’
reports included in Item 15 of this report and this management’s discussion and
analysis. In the absence of a substantial infusion of capital, or a merger or
disposal of our Telecommunications business, the Company may not be able to
continue as a going concern.





Additionally,
since 2001, the Company has restated its consolidated financial statements three
times and has also reported material deficiencies in internal controls, all of
which have since been remedied.





**History
and Development of the Business**





Acceris
was incorporated in Florida in 1983 under the name MedCross, Inc., which was
changed to I-Link Incorporated in 1997, and to Acceris Communications Inc. in
2003. Our development and transition is articulated below:





*Technologies:*





In 1994,
we began operating as an Internet service provider and quickly identified that
the emerging internet protocol (“IP”) environment was a promising basis for
enhanced service delivery. We soon turned to designing and building an IP
telecommunications platform consisting of our proprietary software, hardware and
leased telecommunications lines. The goal was to create a platform with the
quality and reliability necessary for voice transmission.





In 1997,
we started offering enhanced services over a mixed IP-and-circuit-switched
network platform. These services offered a blend of traditional and enhanced
communication services and combined the inherent cost advantages of an IP-based
network with the reliability of the existing Public Switched Telephone Network
(“PSTN”).





In
August 1997, we acquired MiBridge, Inc. (“MiBridge”), a communications
technology company engaged in the design, development, integration and marketing
of a range of software telecommunications products that support multimedia
communications over the PSTN, local area networks (“LANs”) and IP networks. The
acquisition of MiBridge permitted us to accelerate the development and
deployment of IP technology across our network platform.





In 1998,
we first deployed our real-time IP communications network platform. With this
new platform, all core operating functions such as switching, routing and media
control became software-driven. This new platform represented the first
nationwide, commercially viable VoIP platform of its kind. Following the launch
of our software-defined VoIP platform in 1998, we continued to refine and
enhance the platform to make it even more efficient and capable for our partners
and customers.





20


In 2002,
the U.S. Patent and Trademark Office issued a patent (No. 6,438,124, the
“Acceris Patent”) for the Company’s Voice Internet Transmission System. Filed in
1996, the Acceris Patent reflects foundational thinking, application, and
practice in the VoIP Services market. In simple terms, the Acceris Patent
encompasses the technology that allows two parties to converse phone-to-phone,
regardless of the distance in between them, by transmitting voice/sound via the
Internet. No special telephone or computer is required at either end of the
call. The apparatus that makes this technically possible is a system of Internet
access nodes, or Voice Engines (VoIP Gateways). These local Internet Voice
Engines provide digitized, compressed, and encrypted duplex or simplex Internet
voice/sound. The end result is a high-quality calling experience whereby the
Internet serves only as the transport medium and as such, can lead to reduced
toll charges. In conjunction with the issuance of our core foundational Acceris
Patent, we disposed of our domestic U.S. VoIP network in a transaction with
Buyers United, Inc. (“BUI”), which closed on May 1, 2003. The sale included
the physical assets required to operate our nationwide network using our
patented VoIP technology (constituting the core business of the I-Link
Communications Inc. (“ILC”) business) and included a fully paid non-exclusive
perpetual license to our proprietary software-based network convergence solution
for voice and data. The sale of the ILC business removed essentially all
operations that did not pertain to our proprietary software-based convergence
solution for voice and data. As part of the sale, we retained all of our
intellectual and property rights and patents.





In 2003,
we added to our VoIP Patent Portfolio when we acquired U.S. Patent No. 6,243,373
(the “VoIP Patent”), which included a corresponding foreign patent and related
international patent applications. The VoIP Patent, together with the existing
Acceris Patent and its related international patent applications, form our
international VoIP Patent Portfolio that covers the basic process and technology
that enables VoIP communication as it is used in the market today.
Telecommunications companies that enable their customers to originate a phone
call on a traditional handset, transmit any part of that call via IP, and then
terminate the call over the traditional telephone network, are utilizing
Acceris’ patented technology. We intend to aggressively pursue recognition in
the marketplace of our intellectual property via a focused licensing program.
The comprehensive nature of the VoIP Patent, which is titled *“Method
and Apparatus for Implementing a Computer Network/Internet Telephone
System”* , is
summarized in the patent’s abstract, which describes the technology as follows:
“A method and apparatus are provided for communicating audio information over a
computer network. A standard telephone connected to the public switched
telephone network (PSTN) may be used to communicate with any other
PSTN-connected telephone, where a computer network, such as the Internet, is the
transmission facility instead of conventional telephone transmission
facilities”. In conjunction with the acquisition, we also agreed to give up 35%
of the net residual rights to our VoIP Patent Portfolio.





**Intellectual
property** - The
Company currently owns a number of issued patents and utilizes the technology
supported by those patents in providing its products and services. The Company
also has a number of non-U.S. patents and patent applications pending. Included
in its U.S. portfolio of patents are:





·
    U.S.
      Patent No. 6,438,124 (issued in 2002)


·
    U.S.
      Patent No. 6,243,373 (issued in 2001)


·
    U.S.
      Patent No. 5,898,675 (issued in 1999)


·
    U.S.
      Patent No. 5,754,534 (issued in 1998)





U.S.
patents generally expire 17 years after issuance.





Together,
these patented technologies have been successfully deployed and commercially
proven in a nationwide IP network and in Acceris’ unified messaging service,
Application Program Interface (“API”) and software licensing businesses. The
Company is using the technology supported by its VoIP patents in its business
and is also engaged in licensing discussions with third parties domestically and
internationally.





*Telecommunications:*





Acceris’
Telecommunications business has been built through the acquisition of
predecessor businesses, which have been and are continuing to be integrated,
consolidated and organized to provide the highest level of service to customers
with the maximum level of operational efficiency.





In June
2001, the Company entered this business by acquiring, from bankruptcy, certain
assets of WorldxChange Communications Inc. (“WorldxChange”). WorldxChange was a
facilities-based telecommunications carrier providing international and domestic
long distance service to retail customers. At acquisition, the business
consisted primarily of a dial-around product that allowed a customer to make a
call from any phone by dialling a 10-10-XXX prefix. Since the acquisition, we
expanded the product offering to include 1+ products (1+ products are those
which enable a customer to directly dial a long distance number from their
telephone by dialling 1-area code-phone number). Historically, WorldxChange
marketed its services through consumer mass marketing techniques, including
direct mail and direct response television and radio. In 2002, we revamped our
channel strategy by de-emphasizing the direct mail channel and devoting our
efforts to pursuing more profitable methods of attracting and retaining
customers. Today we use a network of independent commission agents in
multi-level marketing (“MLM”) telemarketing and commercial agent channels to
attract and retain customers.





21


In
December 2002, we completed the purchase of certain assets of RSL COM USA
Inc. (“RSL”) from a bankruptcy proceeding. The purchase included the assets used
by RSL to provide long distance voice and data services, including frame relay,
to their commercial customers, and the assets used to provide long distance and
other voice services to small businesses and the consumer/residential market.





In
July 2003, we completed the purchase of Local Telcom
Holdings, LLC (“Transpoint”), a financially distressed company. The
purchase of Transpoint provided us with further penetration into the commercial
agent channel and a larger commercial customer base.





In 2004
we added offerings of local communications products to our residential and small
business customers, achieving revenue of $6,900 and completing the year with
approximately 22,000 customers. The local dial tone service is provided under
the terms of the UNE-P authorized by the Telecommunications Act of 1996, as
amended, (the “1996 Act”) and is available in New York, New Jersey,
Pennsylvania, Massachusetts and Florida, while our long distance services (1+
and 10-10-XXX) are available nationwide. In March 2005, the Company decided to
suspend efforts to attract new local customers in Pennsylvania, New Jersey, New
York, Florida and Massachusetts, while continuing to support its existing local
customers in those states. The decision was a result of the Federal
Communications Commission’s (“FCC”) revision of its wholesale rules, originally
designed to introduce competition in local markets, which went into effect on
March 11, 2005. The reversal of local competition policy by the FCC has
permitted the Regional Bell Operating Companies (“RBOCs”) to substantially raise
wholesale rates for the services known as unbundled network elements (“UNEs”),
and required the Company to re-assess its local strategy while it attempts to
negotiate long-term agreements for UNEs on competitive terms. Should the Company
not enter into a wholesale contract for UNE services in the future, the natural
attrition cycle will result in a reduction in the number of local customers and
related revenues in 2005.





**Liquidity
and Capital Resources**





As a
result of our substantial operating losses and negative cash flows from
operations, we had a stockholders’ deficit of $61,965 (2003 - $42,953) and
negative working capital of $21,352 (2003 - $26,576) at December 31, 2004. 
Operations in 2004 were financed through a combination of related party debt,
third party financing and the sale of securities in Buyers United Inc.
("BUI").  The Company had third party debt of $10,855 at December 31, 2004,
a reduction from the $14,171 owed at December 31, 2003.  Scheduled debt
payments in 2005 are expected to be $8,094 compared to $3,933 in 2004. 
Related party debt owing to our 91% common stock owner, Counsel Corporation
(collectively, with its subsidiaries, Counsel), at December 31, 2004 is $52,100
compared to $35,220 at December 31, 2003.  During 2004, Counsel extended
the maturity of its debt from 2005 to January 2006.  Interest on the
related party debt is rolled into the principal amounts outstanding.  This
debt is supplemented by Counsel’s Keep Well, which requires Counsel to fund,
through long-term intercompany advances or equity contributions, all capital
investment, working capital or other operational cash requirements.  The
Keep Well obligates Counsel to continue its financial support of Acceris until
June 30, 2005.  The Keep Well is not expected to be extended beyond its
current maturity.  The related party debt is subordinated to the Wells
Fargo Foothill, Inc. (“Foothill”) credit facility and to the Laurus Master Fund,
Ltd. of New York (“Laurus”) convertible debenture. Additionally, both of these
financial instruments are guaranteed by Counsel through their respective
maturities of June 2005 and October 2007, respectively.  The
current debt arrangements with Laurus prohibit the repayment of Counsel debt
prior to the repayment or conversion of the Laurus debt.  The Laurus debt,
to the extent that it is not converted, is due in October 2007.  The
current asset-based facility with Foothill matures in June 2005 and is not
expected to be extended beyond its current maturity.  No additional
borrowings are available under this facility at December 31, 2004. Payments
cannot be made to Counsel while the Foothill facility remains
outstanding.





The
independent registered public accounting firm’s report on the consolidated
financial statements included in the Company’s annual report on Form 10-K for
each of the years ended December 31, 2002, 2003 and 2004 contained an
explanatory paragraph wherein they expressed the opinion that there is
substantial doubt about the Company’s ability to continue as a going concern.
 Readers are encouraged to take due care when reading the independent
registered public accountants’ reports included in Item 15 of this report.
 Stockholders are urged to obtain the necessary advice before becoming or
continuing as a stockholder in the Company.





Organically,
we do not expect to see telecommunications revenue grow in 2005.  We expect
to continue our ongoing product migration from 10-10-XXX and 1+ products to a
broader product portfolio that includes long distance and enhanced services for
our residential customers while we continue to expand the breadth of our data
and managed services offerings for our enterprise customers.  This
migration is expected to significantly improve revenue and contribution per
continuing customer.  In 2004, the Company commenced offering local
services in five states and realized revenue of $6,900; and the Company finished
2004 with approximately 22,000 local subscribers.  In March 2005, the
Company decided to suspend efforts to attract new local customers in
Pennsylvania, New Jersey, New York, Florida and Massachusetts, while continuing
to support its existing local customers in those states. The decision was a
result of the Federal Communications Commission’s (“FCC”) revision of its
wholesale rules, originally designed to introduce competition in local markets,
which went into effect on March 11, 2005. The reversal of local competition
policy by the FCC has permitted the Regional Bell Operating Companies (“RBOCs”)
to substantially raise wholesale rates for the services known as unbundled
network elements (“UNEs”), and required the Company to re-assess its local
strategy while it attempts to negotiate long-term agreements for UNEs on
competitive terms. Should the Company not enter into a wholesale contract for
UNE services in the future, the natural attrition cycle will result in a
reduction in the number of local customers and related revenues in 2005.
Additionally, we remain concerned about the continuing increases in the
contribution rates of the Universal Service Fund (“USF”), coupled with the
exclusion from USF contributions of communications companies whose product
offerings provide the same service as traditional telecommunications
companies.





22


There is
significant doubt about the Company’s ability to obtain additional financing
beyond June 30, 2005 to support its Telecommunications operations once the Keep
Well from Counsel expires. Additionally, the Company does not at this time have
an ability to obtain additional financing for its Telecommunications business to
pursue expansion through acquisition. Due to these financial constraints, and
with the belief that the Company does not have sufficient scale to create
positive cash flow, management and its strategic advisors are looking to merge
or dispose of the Telecommunications business. There is no certainty that a
merger or disposal can occur on a timely basis on favorable terms. For more
information on the assets and operations of the Telecommunications business,
please refer to Note 19 of the financial statements included in Item 15 of this
Form 10-K.





*Ownership
Structure and Capital Resources*





·
    The
      Company is approximately 91% owned by Counsel. The remaining 9% is owned
      by public stockholders.





·
    The
      Company has total gross debt of $62,955 at December 31, 2004. 83% or
      $52,100 of this debt is owed to Counsel and an additional 16% or $10,050
      is guaranteed by Counsel leaving 1% or $805 of the Company’s debt
      outstanding to third parties.





·
    Since
      becoming controlling stockholder in 2001, Counsel has invested over
      $90,000 in Acceris to fund the completion of Acceris’ technology and to
      fund the building of Acceris’ telecommunications business. In 2004,
      Counsel invested approximately $12,584 in Acceris and continues to have a
      commitment to provide the necessary funding to ensure the continued
      operations of the Company through June 30, 2005. In addition, Counsel has
      subordinated its debt, and guaranteed our obligations, to Laurus and
      Foothill.





·
    In
      2004, the Company successfully completed a $5,000 financing with Laurus,
      an unrelated third party. Proceeds were used to fund
      operations.




*Cash
Position*





Cash and
cash equivalents as of December 31, 2004 were $458 compared to $2,033 in 2003
and $3,620 in 2002.





*Cash
flow from operating activities*





Our
working capital deficit decreased to $21,352 at December 31, 2004 from $26,576
as of December 31, 2003. The decrease in working capital deficit is primarily
related to (1) the reduction in deferred revenues of $4,719, (2) the reduction
in amounts owing to Foothill of $7,402, (3) the reduction in accounts payable,
accrued liabilities of $1,023, offset by (4) the reduction in our current assets
of $9,301 due to lower revenues and improved collections of accounts receivable,
the sale of securities in BUI and the reduction in the cash
reserves.





Cash used
by operating activities (excluding non-cash working capital and the asset-based
lending facility) during 2004 was $4,653 (2003 - $9,424, 2002 - $4,302). The
reduction in operating cash requirements in 2004 was primarily due to a
reduction in the level of operating losses compared to 2003.





*Cash
utilized in investing activities*





Net cash
contributed from investing activities in 2004 was $2,850 (2003 - ($1,827), 2002
- ($9,233)). In 2004, cash used by investing activities relates to the purchase
of equipment in the amount of $731 (2003 - $2,036), offset by the proceeds from
the disposition of securities held in BUI of $3,581 (2003 - $nil). In 2003, we
invested a net $100 in cash and gave up 35% of the net residual rights to our
VoIP Patent Portfolio as part of the purchase price for U.S. Patent No.
6,243,373.





*Cash
provided by financing activities*





Financing
activities provided net cash of $5,827 (2003 - $8,555; 2002 - $13,061). The
decrease in 2004 from 2003 primarily relates to the reduction of $7,402 in debt
owing under our asset-based facility with Foothill, scheduled lease payments of
$2,714, and the $1,104 settlement of a note payable to the Estate of RSL,
relating to the 2002 acquisition of RSL’s Agent and Enterprise business. This
was offset primarily by increased financing from Counsel in 2004 which totaled
$12,584 compared to $7,896 provided in 2003 (2002 - $16,823), and by the
proceeds of $4,773 (2003 - nil; 2002 - nil)) from the issuance of a convertible
note with detachable warrants to Laurus, an unrelated third party.





23





*Contractual
Obligations*





We have
various commitments in addition to our debt. The following table summarizes our
contractual obligations at December 31, 2004:





**Payment
      due by period****Contractual
      obligations:**
    
    **Total**
    
    **Less
      than 1****year**
    
    **1-3****years**
    
    **3-5****years**
    
    **More
      than 5****years**Long
      term debt obligations - related party
    
    $
    52,100
    
    $
    —
    
    $
    52,100
    
    $
    —
    
    $
    —Long
      term debt obligations - third party
    
    $
    10,855
    
    $
    6,653
    
    $
    3,964
    
    $
    238
    
    $
    —Capital
      lease obligations
    
    $
    1,441
    
    $
    1,441
    
    $
    —
    
    $
    —
    
    $
    —Operating
      leases for office space and equipment
    
    $
    4,268
    
    $
    1,856
    
    $
    1,887
    
    $
    525
    
    $
    —Purchase
      commitments for telecommunicationsservices (1)
    
    $
    12,000
    
    $
    12,000
    
    $
    —
    
    $
    —
    
    $
    —




(1) From
time to time, Acceris has various agreements with national carriers to lease
local access spans and to purchase carrier services. The agreements include
minimum usage commitments with termination penalties. At December 31, 2004 the
Company has minimum purchase commitments of $12,000 between December 2004 and
November 2005. $6,000 of the commitments must be completed by June 2005. Failure
to achieve either element of the commitments will result in a penalty of $187
per failure event. The Company expects to meet these commitments and accordingly
has not recorded any expense related to these commitments.





24




**Consolidated
Results of Operations**





We have
provided information on an annual and rolling quarter basis as we believe that
this is an appropriate way to review the financial results of the
business.





Key
selected financial data for the three years ended December 31, 2002, 2003 and
2004 are as follows:





**Percentage
      Change****2002**
    
    
    **2003**
    
    
    **2004**
    
    
    **2003
      vs. 2002**
    
    
    **2004 vs. 2003**Revenues:Telecommunications
      services
    
    $
    85,252
    
    $
    133,765
    
    $
    112,595
    
    
    57
    %
    
    (16
    )%Technology
      licensing and development
    
    
    2,837
    
    
    2,164
    
    
    540
    
    
    (24
    )
    
    (75
    )Total
      revenues
    
    
    88,089
    
    
    135,929
    
    
    113,135
    
    
    54
    
    
    (17
    )Operating
      costs and expenses:Telecommunications
      network expense (exclusive of depreciation and amortization shown
      below)
    
    
    50,936
    
    
    86,006
    
    
    60,067
    
    
    69
    
    
    (30
    )Selling,
      general, administrative and other
    
    
    33,015
    
    
    57,264
    
    
    54,430
    
    
    73
    
    
    (5
    )Provision
      for doubtful accounts
    
    
    5,999
    
    
    5,438
    
    
    5,229
    
    
    (9
    )
    
    (4
    )Research
      and development
    
    
    1,399
    
    
    —
    
    
    442
    
    
    N/A
    
    
    N/ADepreciation
      and amortization
    
    
    4,270
    
    
    7,125
    
    
    6,976
    
    
    67
    
    
    (2
    )Total
      operating costs and expenses
    
    
    95,619
    
    
    155,833
    
    
    127,144
    
    
    63
    
    
    (18
    )Operating
      loss
    
    
    (7,530
    )
    
    (19,904
    )
    
    (14,009
    )
    
    164
    
    
    (30
    )Other
      income (expense):Interest
      expense - related party
    
    
    (4,515
    )
    
    (10,878
    )
    
    (8,488
    )
    
    141
    
    
    (22
    )Interest
      expense - third party
    
    
    (3,680
    )
    
    (2,391
    )
    
    (2,861
    )
    
    (35
    )
    
    20Other
      income
    
    
    395
    
    
    1,216
    
    
    2,471
    
    
    208
    
    
    103Total
      other expense, net
    
    
    (7,800
    )
    
    (12,053
    )
    
    (8,878
    )
    
    55
    
    
    (26
    )Loss
      from continuing operations
    
    
    (15,330
    )
    
    (31,957
    )
    
    (22,887
    )
    
    108
    
    
    (28
    )Income
      (loss) from discontinued operations, net of $0 tax
    
    
    (12,508
    )
    
    529
    
    
    104
    
    
    (104
    )
    
    (80
    )Net
      loss
    
    $
    (27,838
    )
    $
    (31,428
    )
    $
    (22,783
    )
    
    13
    
    
    (28
    )




***2004
Compared to 2003***





In order
to more fully understand the comparison of the results of continuing operations
for 2004 as compared to 2003, it is important to note the following significant
changes in our operations that occurred in 2004 and 2003:





•
    
    In
      July 2003, we completed the acquisition of Transpoint.The
      operations of Transpoint from July 28, 2003 to December 31, 2003 were
      included in the statement of operations for 2003.The
      operations of Transpoint have been included in the statement of operations
      for 2004.•
    
    In
      November 2002, we began to sell a network service offering obtained
      from a new supplier. The sale of that product ceased in July 2003.
      Revenue from this offering is recognized using the unencumbered cash
      method. In 2004, $6,714 was recognized in revenue compared to $7,629 in
      2003. Expenses associated with this offering were recorded when incurred.
      In 2004 the Company recorded a recovery of expense amounting to $203,
      which is included in telecommunications network costs, compared to
      incurring costs of $9,107 in 2003. The cessation of this product offering
      does not qualify as discontinued operations under generally accepted
      accounting principles.•
    
    In
      January 2004, the Company commenced offering local dial tone services
      via the UNE-P, bundled with long distance, which contributed approximately
      $6,900 in revenue. At December 31, 2004 services were being offered in
      five states and the Company had approximately 22,000 local customers. In
      2003, no similar product revenue stream existed.





**Telecommunications
services revenue** declined
to $112,595 in 2004 from $133,765 in 2003 due primarily to the
following:





·
    In
      2004 we introduced a local and long distance bundled offering which
      contributed $6,900 in revenue compared to no revenue in 2003. The Company
      rolled out this product offering to five states in 2004. It had been the
      Company’s plan to roll out this product nationwide in 2004. However, we
      held off implementing this growth plan pending resolution of regulatory
      uncertainty surrounding UNE-P. We finished the year with approximately
      22,000 customers, and in the fourth quarter we received approximately
      $46.00 of average monthly revenue per customer (“ARPU”). In March 2005,
      the Company decided to suspend efforts to attract new local customers in
      Pennsylvania, New Jersey, New York, Florida and Massachusetts, while
      continuing to support its existing local customers in those states. The
      decision was a result of the Federal Communications Commission’s (“FCC”)
      revision of its wholesale rules, originally designed to introduce
      competition in local markets, which went into effect on March 11, 2005.
      The reversal of local competition policy by the FCC has permitted the
      Regional Bell Operating Companies (“RBOCs”) to substantially raise
      wholesale rates for the services known as unbundled network elements
      (“UNEs”), and required the Company to re-assess its local strategy while
      it attempts to negotiate long-term agreements for UNEs on competitive
      terms. Should the Company not enter into a wholesale contract for UNE
      services in the future, the natural attrition cycle will result in a
      reduction in the number of local customers and related revenues in
      2005.




25





·
    In
      2004, we experienced attrition in our 1+ customer base which declined from
      approximately 161,000 customers at the beginning of the year to
      approximately 153,000 customers at the end of the year. We also
      experienced a reduction in ARPU from approximately $26.00 in the fourth
      quarter of 2003 to approximately $22.00 in the fourth quarter of 2004. The
      reduction in the number of customers is due to the Company focusing its
      customer acquisition programs on the local and long distance bundled
      offering, described above, in five states versus focusing on long distance
      nationwide as in prior years. The reduction in the ARPU relates to the
      continued reduction of long distance rates for services, primarily in
      various international destinations to which customers are making outbound
      long distance calls.





·
    Since
      2001, the Company has not actively marketed its 10-10-XXX or dial around
      products. Accordingly, the Company continued to experience an erosion of
      this customer base. The Company started 2004 with approximately 193,000
      customers in this category and finished the year with approximately
      121,000 customers. Consistent with our 1+ product offering, we saw the
      ARPU declining from the fourth quarter of 2003 from approximately $23.00
      to approximately $18.00 by the fourth quarter of 2004.





·
    In
      2004, direct sales were $20,200, down from $25,700 in 2003. The reduced
      revenue is due to the non-renewal of some customer contracts, price
      concessions provided on contract renewals, and an overall lower average
      volume of traffic. The customer base grew from 227 in 2003 to 234 in
      2004.





·
    In
      both 2004 and 2003, the Company recognized revenue from its network
      service offering. Revenue in 2004 and 2003 was $6,714 and $7,629
      respectively. No additional revenue is expected from this product, which
      was discontinued in July 2003.





·
    Overall,
      the Company continued to experience price erosion in 2004 in a very
      competitive long distance market. Our number of subscribers decreased from
      354,248 at December 31, 2003 to 295,931 at December 31, 2004. In 2004, we
      recognized approximately $76,551 of domestic and international long
      distance revenues (including monthly recurring charges and USF fees) on
      approximately 952,700,000 minutes, resulting in a blended rate of
      approximately $0.08 per minute. In 2003, we recognized approximately
      $97,756 of domestic and international long distance revenues on
      approximately 907,000,000 minutes, resulting in a blended rate of
      approximately $0.11 per minute.





**Technologies
revenue** is
derived from licensing and related services revenue. Utilizing our patented
technology, VoIP enables telecommunications customers to originate a phone call
on a traditional handset, transmit any part of that call via the Internet, and
then terminate the call over the traditional telephone network. Our VoIP Patent
Portfolio is an international patent portfolio covering the basic process and
technology that enables VoIP communications, and makes Acceris a major
participant in the provision of VoIP solutions. We have commenced the aggressive
pursuit of recognition of our intellectual property in the marketplace through a
focused licensing program. Revenue and contributions from this business to date
have been based on the sales and deployments of our VoIP solutions, which will
continue. The timing and sizing of various projects will result in a continued
pattern of fluctuating financial results. We expect growth in revenue in this
business as we gain recognition of the underlying value in our VoIP Patent
Portfolio.





Technologies
earned revenues of $540 in 2004 compared to $2,164 in 2003. The revenues in 2003
relate to two contracts. The first contract was entered into in the first
quarter of 2003, for which acceptance was obtained in the second quarter of
2003. The contract involves both technology licensing and the provision of
services. Revenue from the contract was recognized over the service period
starting with acceptance in the second quarter of 2003 and continued throughout
the period of our continued involvement. In 2003 we recognized $1,564 in revenue
from this customer. The second contract was entered into with a Japanese
company. In the third quarter of 2003 when delivery, acceptance and payment were
all completed, revenue of $600 was recognized. Revenue of $540 was recognized
from this contract in 2004.





**Telecommunications
network expense** was
$60,067 for the year ended December 31, 2004 as compared to $86,006 for the year
ended December 31, 2003, a decrease of $25,939. On a comparative percentage
basis, telecommunications costs totalled 53% of telecommunications services
revenue in 2004, compared to 64% of revenue in 2003. Telecommunications services
margins (telecommunications services revenues less telecommunications network
expenses), fluctuate significantly from period to period, and are expected to
continue to fluctuate significantly for the foreseeable future. Predicting
whether margins will increase or decline is difficult to estimate with
certainty. Factors that have affected and continue to affect margins include:




26





•
    
    Costs
      associated with our network service offering were ($203) in 2004 compared
      to $9,107 in 2003. The network service offering is a product that was sold
      from November 2002 to July 2003. Costs associated with this product were
      expensed as incurred, while revenue was recorded using the unencumbered
      cash receipts method. This method of accounting resulted in the recording
      of expenses upfront and the recording of revenue over time as cash
      receipts from services provided became unencumbered. Revenue from this
      product in 2003 and in 2004was
      $7,629 and $6,714, respectively.•
    
    Differences
      in attributes associated with the various long-distance programs in place
      at the Company. The effectiveness of each offering can change margins
      significantly from period to period. Some factors that affect the
      effectiveness of any program include the ongoing deregulation of phone
      services in various countries where customer traffic terminates, actions
      and reactions by competitors to market pricing, the trend toward bundled
      service offerings and the increasing level of wireline to cellular
      connections. In addition, changes in customer traffic patterns also
      increase and decrease our margins.•
    
    Our
      voice and frame relay networks. Each network has a significant fixed cost
      element and a minor variable per minute cost of traffic carried element;
      significant fluctuations in the number of minutes carried on-net from
      month to month can significantly affect the margin percentage from period
      to period. The fixed network monthly cost is approximately $697 as of
      December 2004 compared to $1,099 in December 2003. Fixed network costs
      represent the fixed cost of operating the voice and data networks that
      carry customer traffic, regardless of the volume of
    traffic.•
    
    Changes
      in contribution rates to the USF and other regulatory changes associated
      with the fund. Such changes include increases and decreases in
      contribution rates, changes in the method of determining assessments,
      changes in the definition of assessable revenue, and the limitation that
      USF contributions collected from customers can no longer exceed
      contributions.Although
      USF rates are increasing - they were 7.28% in the first quarter of 2003
      and will be raised to 11.1% in April 2005 - the USF expense in 2004
      decreased to $5,475 compared to $8,219 in 2003, due to lower assessable
      revenues.•
    
    During
      the fourth quarter of 2004, the Company resolved network service disputes
      with two service providers related to telecommunications services
      delivered to the Company in current and prior years. This resulted in a
      reduction of telecommunications expense and the related obligation
      recorded by the Company in 2004 of $1,869.





In
connection with the 2003 acquisition of U.S. Patent No. 6,243,373, the Company
agreed to remit to the former owner of the patent 35% of the net proceeds from
future revenue derived from the licensing of the VoIP Patent Portfolio, composed
of U.S. Patent Nos. 6,243,373 and 6,438,124. Net proceeds are defined as revenue
from licensing the patent portfolio less costs necessary to obtain the licensing
arrangement. As patent licensing revenues grow, these costs will affect
margins.





**Selling,
general, administrative and other expense** was
$54,430 for the year ended December 31, 2004 as compared to $57,264 for the year
ended December 31, 2003. The significant changes included:





·
    Compensation
      expense was $21,806 compared to $23,299 in 2003, including bonuses of $512
      in 2004 and $349 in 2003. The reduction is primarily attributed to lower
      staff levels in 2004 compared to 2003. In 2004 we finished the year with
      277 employees compared to 340 employees in
2003.





·
    External
      commissions totaled $7,499 in 2004 compared to $9,441 in 2003. Lower
      commission costs were experienced in 2004 due to lower revenues.





·
    Customer
      acquisition costs, including telemarketing, totaled $2,857 in 2004
      compared to $2,316 in 2003. The Company incurred higher telemarketing
      costs relating to our focused efforts to encourage customers to acquire
      local dial tone and long distance bundled services throughout
      2004.





·
    Legal
      expenses in 2004 were $2,593 compared to $940 in 2003. The increase in
      legal costs primarily related to the Company taking legal action against
      ITXC for infringement of the VoIP Patent Portfolio and legal fees
      associated with the direct and derivative actions against the Company.





·
    Billings
      and collections expenses decreased from approximately $7,843 in the year
      ended December 31, 2003 to approximately $6,590 in the year ended December
      31, 2004, relating to the reduction in revenue in the respective
      periods.




27





·
    Accounting
      and tax consulting expenses remained relatively flat, year over year, at
      approximately $1,460 in the year ended December 31, 2003 and approximately
      $1,450 in the year ended December 31, 2004.





·
    We
      incurred restructuring expenses of $510 in the year ended December 31,
      2004, relating primarily to severance costs paid to reduce the Company’s
      work force by approximately 20 percent in August 2004. There were no
      similar expenses in 2003.





·
    Included
      in the year ended December 31, 2003 are integration expenses of
      approximately $700, relating to the 2002 acquisition of certain assets of
      the estate of RSL. There were no similar expenses in
  2004.


`


**Provision
for doubtful accounts** -The
$209 decrease is primarily due to lower revenue levels in 2004 compared to 2003.
The provision for doubtful accounts as a percentage of total revenue was 4.6% in
2004 compared to 4.0% in 2003.





**Depreciation
and amortization** - This
expense was relatively flat between 2003 and 2004. In 2004, depreciation from
property, plant and equipment was lower than in 2003 as more assets reached the
end of their accounting life. This was offset by an increase in amortization of
the intangibles asset known as Agent Relationships. In the fourth quarter of
2004, management assessed the future cash flows expected to be derived from the
Commercial Agent Channel based on both the continued margin compression and the
high commission levels paid to third party agents. Based on this assessment,
management made the decision to write down Agent Relationships to $360. The
writedown resulted in an increase of $637 in the depreciation and amortization
expense for 2004. In conjunction with this impairment assessment the Company has
also reduced the amortization life of the intangible asset from 36 months to 30
months. The monthly amortization in 2005 will be $30 per month.





**Research
and development costs (“R&D”)** - In
2004, the Company resumed R&D activities related to its VoIP platform.
R&D expense was $442 in 2004 compared to $nil in 2003.





The
changes in **other
income (expense)** are
primarily related to the following:





·
    Related
      party interest expense - This totaled $8,488 in 2004 compared to $10,878
      in 2003. The reduction of $2,390 is largely attributed to a lower average
      loan balance with our majority stockholder and major creditor, Counsel,
      due to the fact that $40,673 of debt was converted to equity in November
      2003. Included in related party interest expense in 2004 is $4,126 of
      amortization of the beneficial conversion feature, related to Counsel’s
      ability to convert $16,714 of debt at $5.02 per share. In 2003,
      amortization of the beneficial conversion feature was $5,590 on $15,291
      debt to Counsel convertible at $6.15 per
share.





·
    Third
      party interest expense - This totaled $2,861 in 2004 compared to $2,391 in
      2003. The increase of $470 is attributed to a higher average third party
      debt in 2004 compared to 2003.





·
    Other
      income - In 2004, other income is primarily comprised of gains of $1,376
      recognized on the disposition of the Company’s ownership in BUI, coupled
      with $767 in gains resulting from the discharge of certain obligations
      associated with our former participation with a consortium of owners in an
      indefeasible right of usage, and a gain of $204 from the estate of
      WorldxChange’s agreement to offset an unrecorded receivable of the Company
      against a legal obligation to the estate relating to the 2001 acquisition
      of the WorldxChange business from bankruptcy. In 2003, the other income
      was primarily related to the discharge of obligations from two settlement
      agreements completed during 2003 with network carriers, which totaled
      $1,141.




***2003
Compared to 2002***





When
considering the review of the results of continuing operations for 2003 compared
to 2002, it is important to note the following significant changes in our
operations that occurred in 2003 and 2002. Namely:





·
    In
      July 2003, we completed the acquisition of Transpoint. The operations of
      Transpoint from July 28, 2003 to December 31, 2003 were included in the
      statement of operations for 2003. However, there were no such operations
      in 2002.





·
    On
      December 10, 2002, we purchased certain assets of RSL, including the
      assumption of certain liabilities. The RSL operations from January 1, 2003
      to December 31, 2003 were included in the statement of operations for
      2003. In 2002, the operations of RSL were included for the period December
      10, 2002 to December 31, 2002.




28




·
    On
      December 6, 2002, we entered into an agreement to sell substantially all
      of the assets and customer base of ILC. The sale closed on May 1, 2003. As
      a result of the agreement, the operational results related to ILC were
      reclassified as discontinued operations in 2003 and prior years, and
      accordingly are not included in the following analysis of continuing
      operations for 2003 or 2002.





·
    In
      November 2002, we began to sell a network service offering provided by a
      new supplier. The sale of that service offering ceased in late July 2003.
      Revenue from this offering is recognized using the unencumbered cash
      method. In 2003, $7,629 was recognized in revenue, compared to no revenue
      being recognized in 2002. Expenses associated with this offering were
      recorded when incurred. In 2003 the Company recorded expenses of $9,107,
      which is included in telecommunications network costs, compared to
      incurring costs of $1,995 in 2002. The cessation of this product offering
      does not qualify as discontinued operations under generally accepted
      accounting principles.




**Telecommunications
services revenue** increased to $133,765 in 2003 from $85,252 in 2002 due primarily to the
following:





·
    In
      December 2002, we acquired certain assets of RSL from a bankruptcy
      proceeding. The acquisition was accounted for under the purchase method of
      accounting and, accordingly, revenue subsequent to the acquisition was
      included in our revenue. There is a full year of RSL revenue included in
      2003, versus less than one month in 2002. The operations of RSL provided
      approximately $15,300 in Telecommunications revenues in 2003, compared to
      approximately $2,500 for December 2002.





·
    Additionally,
      the operations of Transpoint which began in July 2003 provided
      approximately $2,055 in Telecommunications revenue during 2003, which was
      not present in 2002.





·
    In
      2003, revenues from our dial around product were approximately $54,900
      versus approximately $66,800 in 2002. We experienced a decline in revenue
      from 10-10-XXX dial around services and from a related direct mail program
      that was launched in 2001 and curtailed in early 2002.





·
    Revenues
      from our 1+ product were approximately $44,400 in 2003 versus
      approximately $15,791 in 2002. We experienced growth in our revenue from
      customers acquiring 1+ services through our growing commercial, ethnic and
      MLM channels on which we began to focus in early 2002.





·
    In
      2003, direct sales were $25,700, compared to $1,500 in 2002. The increase
      in revenue year over year is due to the December 2002 acquisition of the
      customer base from a third party. The customer base in 2003 declined from
      276 to 227 due to the non-renewal of contracts by customers preceding and
      following the acquisition of the customer
base.





·
    We
      launched a network service offering in 2002, which we curtailed in July
      2003. In 2003 we recognized revenues of approximately $7,629 as cash
      receipts from this offering became unencumbered, compared to recognizing
      no revenues in 2002.





·
    Our
      customer and traffic growth outpaced the price compression in a very
      competitive long distance market in 2003. The increase in number of
      subscribers from 279,532 at December 31, 2002 to 354,248 at December 31,
      2003, coupled with the increase in traffic per user, drove the remainder
      of our year-over-year increase in revenue. In 2003, we recognized
      approximately $97,756 of domestic and international long distance revenues
      (including monthly recurring charges and USF fees) on approximately
      907,000,000 minutes, resulting in a blended rate of approximately $0.11
      per minute. In 2002, we recognized approximately $82,466 of domestic and
      international long distance revenues on approximately 680,480,000 minutes,
      resulting in a blended rate of approximately $0.12 per
    minute.





**Technology
licensing and development revenues** decreased $673 to $2,164 in 2003 from $2,837 in 2002. The decrease was related
to having revenue from two contracts outstanding in 2003 compared to three
contracts in 2002. Technology licensing revenues are project-based and, as such,
these revenues will vary from year to year based on the timing and size of the
projects and related payments.





**Telecommunications
network expense** - The
$35,070 increase related primarily to the inclusion of a full year of the
operations of the RSL assets in 2003 as opposed to less than one month in 2002.
In 2003, the operations of RSL’s Enterprise business incurred approximately
$15,279 in telecommunications network expense versus approximately $1,190 in
December of 2002. The inclusion of a full year of activity for the Agent
business of RSL resulted in an increase of approximately $8,734. Additionally,
we recognized an increase of approximately $7,112 in telecommunications network
expense associated with our network service offering in 2003 over
2002.





29


**Selling,
general, administrative and other (“SG&A”)** - The
$24,249 increase related primarily to the inclusion of a full year of the
operations of RSL in 2003 as opposed to less than one month in 2002. In 2003,
the operations of RSL’s Enterprise business incurred approximately $10,378 in
SG&A versus approximately $810 in December of 2002. The inclusion of a full
year of activity for the Agent business of RSL combined with our existing costs
resulted in an increase in SG&A from 2002 to 2003 of $13,471.





**Provision
for doubtful accounts** -The
$561 decrease was primarily due to lower bad debt experience levels for our
direct billed customers because of the Company’s implementation of a dedicated
collection team in 2003. The provision for doubtful accounts as a percentage of
total revenue was 4.0% in 2003 compared to 6.8% in 2002. This percentage
decrease was also due to the revenue from our network service offering being
recognized on an unencumbered cash receipts method, which was $7,629 in 2003 and
none in 2002. Additionally, in 2003 we recognized $25,615 in revenues from our
Enterprise segment, compared to $1,547 in 2002. Enterprise customers
consistently have a lower bad debt rate than residential customers. The revenues
for our Enterprise segment have a significantly lower bad debt experience than
our retail revenues.





**Depreciation
and amortization** - The
increase related primarily to tangible and intangible assets acquired pursuant
to the RSL and Transpoint acquisitions. Depreciation and amortization on the
assets purchased from RSL was approximately $1,800 for all of 2003, which was
present for less than one month in 2002. Additionally, the intangible assets
associated with the Transpoint purchase incurred additional amortization of
approximately $245 during 2003, which was not present in 2002. The remainder of
the increase was associated with depreciation on the purchase of new furniture,
fixtures, equipment and software during the year.





**Research
and development costs (“R&D”)** - We had
no R&D expenses in 2003, compared to $1,399 in 2002, because we ceased our
R&D activities in 2002. We resumed investing in R&D in the second
quarter of 2004.





The
changes in **other
income (expense)** were
primarily related to the following:





·
    Related
      party interest expense - This totaled $10,878 in 2003 compared to $4,515
      in 2002. The increase of $6,363 is largely attributed to a larger average
      loan balance with our majority stockholder and major creditor, Counsel.
      Included in related party interest expense in 2003 is $5,590 of
      amortization of the beneficial conversion feature related to Counsel’s
      ability to convert $15,291 of debt at $6.15 per share. In 2002,
      amortization of the beneficial conversion feature was $305 on $13,989 debt
      to Counsel convertible at $7.80 per share. In November 2003, $40,673 of
      Counsel debt was converted into equity. The Counsel debt carried an
      interest rate of 10%; therefore the conversion led to approximately $4,000
      in annual interest savings. Such savings were reduced by increases in debt
      due to advances by Counsel during 2004.





·
    Third
      party interest expense - This totaled $2,391 in 2003 compared to $3,680 in
      2002. The decrease of $1,289 is attributed to a lower average third party
      debt in 2003 compared to 2002.





·
    Other
      income - The $821 increase in other income was primarily related to the
      discharge of obligations from two settlement agreements with network
      carriers, completed during 2003, which totaled $1,141. In 2002, other
      income included approximately $200 in income recorded when we were
      informed that we had funds on deposit with vendors that we had not known
      previously existed. The changes year to year in other income related to
      items which are non-recurring.





30








***Supplemental
Analysis***





Management
believes that the most appropriate way to analyze Acceris is to examine the
changes in the business quarter over quarter. Accordingly, we have presented the
consolidated and segmented viewpoints on this basis.




**2003****(unaudited)**
    
    **2004****(unaudited)**
    
    **Full
      Year****(audited)******
    
    **Q1**
    
    **Q2**
    
    **Q3**
    
    **Q4**
    
    **Q1**
    
    **Q2**
    
    **Q3**
    
    **Q4**
    
    **2002**
    
    **2003**
    
    **2004**Revenues:Telecommunications
    
    $
    30,367
    
    $
    31,853
    
    $
    31,923
    
    $
    31,993
    
    $
    28,360
    
    $
    26,229
    
    $
    27,229
    
    $
    24,063
    
    $
    85,252
    
    $
    126,136
    
    $
    105,881Network
      service offering
    
    
    —
    
    
    4,142
    
    
    3,079
    
    
    408
    
    
    6,363
    
    
    190
    
    
    161
    
    
    —
    
    
    —
    
    
    7,629
    
    
    6,714Technologies
    
    
    —
    
    
    1,050
    
    
    1,049
    
    
    65
    
    
    450
    
    
    90
    
    
    —
    
    
    —
    
    
    2,837
    
    
    2,164
    
    
    540Total
      revenues
    
    
    30,367
    
    
    37,045
    
    
    36,051
    
    
    32,466
    
    
    35,173
    
    
    26,509
    
    
    27,390
    
    
    24,063
    
    
    88,089
    
    
    135,929
    
    
    113,135Operating
      costs and expenses:Telecommunications
      network expense (exclusive of depreciation and amortization shown
      below)
    
    
    19,543
    
    
    19,154
    
    
    19,266
    
    
    18,936
    
    
    16,635
    
    
    15,680
    
    
    15,349
    
    
    12,606
    
    
    48,941
    
    
    76,899
    
    
    60,270Network
      service offering
    
    
    6,205
    
    
    2,165
    
    
    807
    
    
    (70
    )
    
    —
    
    
    (203
    )
    
    —
    
    
    —
    
    
    1,995
    
    
    9,107
    
    
    (203
    )Selling,
      general, administrative and other
    
    
    14,225
    
    
    14,617
    
    
    13,981
    
    
    14,441
    
    
    14,763
    
    
    14,074
    
    
    13,992
    
    
    11,601
    
    
    33,015
    
    
    57,264
    
    
    54,430Provision
      for doubtful accounts
    
    
    1,175
    
    
    1,131
    
    
    1,466
    
    
    1,666
    
    
    1,227
    
    
    1,740
    
    
    941
    
    
    1,321
    
    
    5,999
    
    
    5,438
    
    
    5,229Research
      and development
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    106
    
    
    119
    
    
    217
    
    
    1,399
    
    
    —
    
    
    442Depreciation
      and amortization
    
    
    1,826
    
    
    1,758
    
    
    1,993
    
    
    1,548
    
    
    1,704
    
    
    1,653
    
    
    1,520
    
    
    2,099
    
    
    4,270
    
    
    7,125
    
    
    6,976Total
      operating costs and expenses
    
    
    42,974
    
    
    38,825
    
    
    37,513
    
    
    36,521
    
    
    34,329
    
    
    33,050
    
    
    31,921
    
    
    27,844
    
    
    95,619
    
    
    155,833
    
    
    127,144Operating
      income (loss)
    
    
    (12,607
    )
    
    (1,780
    )
    
    (1,462
    )
    
    (4,055
    )
    
    844
    
    
    (6,541
    )
    
    (4,531
    )
    
    (3,781
    )
    
    (7,530
    )
    
    (19,904
    )
    
    (14,009
    )Other
      income (expense):Interest
      expense
    
    
    (2,915
    )
    
    (3,394
    )
    
    (3,398
    )
    
    (3,562
    )
    
    (3,533
    )
    
    (2,486
    )
    
    (2,562
    )
    
    (2,768
    )
    
    (8,195
    )
    
    (13,269
    )
    
    (11,349
    )Other
      income
    
    
    2
    
    
    1
    
    
    53
    
    
    1,160
    
    
    1,377
    
    
    811
    
    
    226
    
    
    57
    
    
    395
    
    
    1,216
    
    
    2,471Total
      other income (expense)
    
    
    (2,913
    )
    
    (3,393
    )
    
    (3,345
    )
    
    (2,402
    )
    
    (2,156
    )
    
    (1,675
    )
    
    (2,336
    )
    
    (2,711
    )
    
    (7,800
    )
    
    (12,053
    )
    
    (8,878
    )Loss
      from continuing operations
    
    
    (15,520
    )
    
    (5,173
    )
    
    (4,807
    )
    
    (6,457
    )
    
    (1,312
    )
    
    (8,216
    )
    
    (6,867
    )
    
    (6,492
    )
    
    (15,330
    )
    
    (31,957
    )
    
    (22,887
    )Gain
      (loss) from discontinued operations, net of $0 tax
    
    
    (277
    )
    
    371
    
    
    213
    
    
    222
    
    
    104
    
    
    —-
    
    
    —
    
    
    —
    
    
    (12,508
    )
    
    529
    
    
    104Net
      loss
    
    $
    (15,797
    )
    $
    (4,802
    )
    $
    (4,594
    )
    $
    (6,235
    )
    $
    (1,208
    )
    $
    (8,216
    )
    $
    (6,867
    )
    $
    (6,492
    )
    $
    (27,838
    )
    $
    (31,428
    )
    $
    (22,783
    )


31




***Supplemental
- Segmented Analysis:***





***Telecommunications***


**2003****(unaudited)**
    
    **2004****(unaudited)**
    
    **Full
      Year****(audited)******
    
    **Q1**
    
    **Q2**
    
    **Q3**
    
    **Q4**
    
    **Q1**
    
    **Q2**
    
    **Q3**
    
    **Q4**
    
    **2002**
    
    **2003**
    
    **2004**Revenues:Retail
    
    $
    30,367
    
    $
    31,853
    
    $
    31,923
    
    $
    31,993
    
    $
    28,360
    
    $
    26,229
    
    $
    27,229
    
    $
    24,063
    
    $
    85,252
    
    $
    126,136
    
    $
    105,881Network
      service offering
    
    
    —
    
    
    4,142
    
    
    3,079
    
    
    408
    
    
    6,363
    
    
    190
    
    
    161
    
    
    —
    
    
    —
    
    
    7,629
    
    
    6,714Total
    
    
    30,367
    
    
    35,995
    
    
    35,002
    
    
    32,401
    
    
    34,723
    
    
    26,419
    
    
    27,390
    
    
    24,063
    
    
    85,252
    
    
    133,765
    
    
    112,595Operating
      costs and expenses:Telecommunications
      network expense (exclusive of depreciation and amortization shown
      below)
    
    
    19,543
    
    
    19,154
    
    
    19,266
    
    
    18,936
    
    
    16,635
    
    
    15,680
    
    
    15,349
    
    
    12,606
    
    
    48,169
    
    
    76,899
    
    
    60,270Network
      service offering
    
    
    6,205
    
    
    2,165
    
    
    807
    
    
    (70
    )
    
    —
    
    
    (203
    )
    
    —
    
    
    —
    
    
    1,995
    
    
    9,107
    
    
    (203
    )Selling,
      general, administrative and other (includes provision for bad debt
      expense)
    
    
    14,732
    
    
    14,031
    
    
    14,493
    
    
    15,066
    
    
    15,214
    
    
    15,114
    
    
    14,223
    
    
    11,416
    
    
    35,277
    
    
    58,322
    
    
    55,967Depreciation
      and amortization
    
    
    1,826
    
    
    1,758
    
    
    1,993
    
    
    1,548
    
    
    1,699
    
    
    1,648
    
    
    1,515
    
    
    2,094
    
    
    4,214
    
    
    7,125
    
    
    6,956Total
      operating costs and expenses
    
    
    42,306
    
    
    37,108
    
    
    36,559
    
    
    35,480
    
    
    33,548
    
    
    32,239
    
    
    31,087
    
    
    26,116
    
    
    89,655
    
    
    151,453
    
    
    122,990Operating
      income (loss)
    
    
    (11,939
    )
    
    (1,113
    )
    
    (1,557
    )
    
    (3,079
    )
    
    1,175
    
    
    (5,820
    )
    
    (3,697
    )
    
    (2,053
    )
    
    (4,403
    )
    
    (17,688
    )
    
    (10,395
    )Other
      income (expense), net
    
    
    (721
    )
    
    (942
    )
    
    (762
    )
    
    (283
    )
    
    67
    
    
    (777
    )
    
    (502
    )
    
    (600
    )
    
    (2,941
    )
    
    (2,708
    )
    
    (1,812
    )Segment
      income (loss)
    
    $
    (12,660
    )
    $
    (2,055
    )
    $
    (2,319
    )
    $
    (3,362
    )
    $
    1,242
    
    $
    (6,597
    )
    $
    (4,199
    )
    $
    (2,653
    )
    $
    (7,344
    )
    $
    (20,396
    )
    $
    (12,207
    )





***Technologies***


**


****
    
    **2003****(unaudited)**
    
    **2004****(unaudited)**
    
    **Full
      Year****(audited)******
    
    **Q1**
    
    **Q2**
    
    **Q3**
    
    **Q4**
    
    **Q1**
    
    **Q2**
    
    **Q3**
    
    **Q4**
    
    **2002**
    
    **2003**
    
    **2004**Revenues:Technology
    
    $
    —
    
    $
    1,050
    
    $
    1,049
    
    $
    65
    
    $
    450
    
    $
    90
    
    $
    —
    
    $
    —
    
    $
    2,837
    
    $
    2,164
    
    $
    540Operating
      costs and expenses:Selling,
      general, administrative and other
    
    
    73
    
    
    575
    
    
    282
    
    
    220
    
    
    366
    
    
    465
    
    
    211
    
    
    732
    
    
    1,850
    
    
    1,150
    
    
    1,774Research
      and development
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    106
    
    
    119
    
    
    217
    
    
    —
    
    
    —
    
    
    442Depreciation
      and amortization
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    5
    
    
    5
    
    
    5
    
    
    5
    
    
    11
    
    
    —
    
    
    20Total
      operating costs and expenses
    
    
    73
    
    
    575
    
    
    282
    
    
    220
    
    
    371
    
    
    576
    
    
    335
    
    
    954
    
    
    1,861
    
    
    1,150
    
    
    2,236Operating
      income (loss)
    
    
    (73
    )
    
    475
    
    
    767
    
    
    (155
    )
    
    79
    
    
    (486
    )
    
    (335
    )
    
    (954
    )
    
    976
    
    
    1,014
    
    
    (1,696
    )Other
      income (expense), net
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (344
    )
    
    (352
    )
    
    (360
    )
    
    (368
    )
    
    —
    
    
    —
    
    
    (1,424
    )Segment
      income (loss)
    
    $
    (73
    )
    $
    475
    
    $
    767
    
    $
    (155
    )
    $
    (265
    )
    $
    (838
    )
    $
    (695
    )
    $
    (1,322
    )
    $
    976
    
    $
    1,014
    
    $
    (3,120
    )







32





***Reconciliation
of Segmented Information to Consolidated Statements of
Operations***


**


****
    
    **2003****(unaudited)**
    
    **2004****(unaudited)**
    
    **Full
      Year****(audited)******
    
    **Q1**
    
    **Q2**
    
    **Q3**
    
    **Q4**
    
    **Q1**
    
    **Q2**
    
    **Q3**
    
    **Q4**
    
    **2002**
    
    **2003**
    
    **2004**Operating
      income (loss):Telecommunications
    
    $
    (11,939
    )
    $
    (1,113
    )
    $
    (1,557
    )
    $
    (3,079
    )
    $
    1,175
    
    $
    (5,820
    )
    $
    (3,697
    )
    $
    (2,053
    )
    $
    (4,403
    )
    $
    (17,688
    )
    $
    (10,395
    )Technologies
    
    
    (73
    )
    
    475
    
    
    767
    
    
    (155
    )
    
    79
    
    
    (486
    )
    
    (335
    )
    
    (954
    )
    
    976
    
    
    1,014
    
    
    (1,696
    )Total
      segment operating income (loss)
    
    
    (12,012
    )
    
    (638
    )
    
    (790
    )
    
    (3,234
    )
    
    1,254
    
    
    (6,306
    )
    
    (4,032
    )
    
    (3,007
    )
    
    (3,427
    )
    
    (16,674
    )
    
    (12,091
    )Operating
      costs not allocated to segments
    
    
    (595
    )
    
    (1,142
    )
    
    (672
    )
    
    (821
    )
    
    (410
    )
    
    (235
    )
    
    (499
    )
    
    (774
    )
    
    (4,103
    )
    
    (3,230
    )
    
    (1,918
    )Operating
      income (loss)
    
    
    (12,607
    )
    
    (1,780
    )
    
    (1,462
    )
    
    (4,055
    )
    
    844
    
    
    (6,541
    )
    
    (4,531
    )
    
    (3,781
    )
    
    (7,530
    )
    
    (19,904
    )
    
    (14,009
    )Interest
      and other income (expense), net:Telecommunications
    
    
    (721
    )
    
    (942
    )
    
    (762
    )
    
    (283
    )
    
    67
    
    
    (777
    )
    
    (502
    )
    
    (600
    )
    
    (2,941
    )
    
    (2,708
    )
    
    (1,812
    )Technologies
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (344
    )
    
    (352
    )
    
    (360
    )
    
    (368
    )
    
    —
    
    
    —
    
    
    (1,424
    )Total
      segment interest and other income (expense), net
    
    
    (721
    )
    
    (942
    )
    
    (762
    )
    
    (283
    )
    
    (277
    )
    
    (1,129
    )
    
    (862
    )
    
    (968
    )
    
    (2,941
    )
    
    (2,708
    )
    
    (3,236
    )Interest
      and other income (expense), net, not allocated to segments
    
    
    (2,192
    )
    
    (2,451
    )
    
    (2,583
    )
    
    (2,119
    )
    
    (1,879
    )
    
    (546
    )
    
    (1,474
    )
    
    (1,743
    )
    
    (4,859
    )
    
    (9,345
    )
    
    (5,642
    )Other
      income (expense), net
    
    
    (2,913
    )
    
    (3,393
    )
    
    (3,345
    )
    
    (2,402
    )
    
    (2,156
    )
    
    (1,675
    )
    
    (2,336
    )
    
    (2,711
    )
    
    (7,800
    )
    
    (12,053
    )
    
    (8,878
    )Loss
      from continuing operations
    
    
    (15,520
    )
    
    (5,173
    )
    
    (4,807
    )
    
    (6,457
    )
    
    (1,312
    )
    
    (8,216
    )
    
    (6,867
    )
    
    (6,492
    )
    
    (15,330
    )
    
    (31,957
    )
    
    (22,887
    )Gain
      (loss) from discontinued operations
    
    
    (277
    )
    
    371
    
    
    213
    
    
    222
    
    
    104
    
    
    —
    
    
    —
    
    
    —
    
    
    (12,508
    )
    
    529
    
    
    104Net
      loss
    
    $
    (15,797
    )
    $
    (4,802
    )
    $
    (4,594
    )
    $
    (6,235
    )
    $
    (1,208
    )
    $
    (8,216
    )
    $
    (6,867
    )
    $
    (6,492
    )
    $
    (27,838
    )
    $
    (31,428
    )
    $
    (22,783
    )





33





**Supplemental
Statistical and Financial Data**





All
amounts shown are unaudited.





**(In
      millions of dollars, except where indicated)**
    
    
    
    **2003**
    
    **2004******Q1****
    
    ****Q2****
    
    **Q3**
    
    **Q4**
    
    **Q1**
    
    **Q2**
    
    **Q3**
    
    **Q4****Gross
      revenues — product mix**Local
      and long-distance bundle
    
    
    
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    0.1
    
    $
    1.0
    
    $
    2.7
    
    $
    3.1Domestic
      long-distance
    
    
    
    
    
    7.8
    
    
    7.8
    
    
    7.4
    
    
    7.5
    
    
    6.4
    
    
    5.6
    
    
    5.4
    
    
    4.8International
      long-distance
    
    
    
    
    
    12.8
    
    
    14.4
    
    
    15.3
    
    
    15.1
    
    
    13.0
    
    
    11.4
    
    
    10.5
    
    
    9.2MRC/USF(1)
    
    
    
    
    
    2.3
    
    
    2.4
    
    
    2.8
    
    
    3.0
    
    
    3.0
    
    
    2.7
    
    
    2.3
    
    
    2.3Dedicated
      voice
    
    
    
    
    
    0.4
    
    
    0.3
    
    
    0.4
    
    
    0.4
    
    
    0.3
    
    
    0.3
    
    
    0.4
    
    
    0.5Direct
      sales revenues
    
    
    
    
    
    7.1
    
    
    6.8
    
    
    5.9
    
    
    5.9
    
    
    5.4
    
    
    5.0
    
    
    5.8
    
    
    4.0Other
    
    
    
    
    
    —
    
    
    0.1
    
    
    0.2
    
    
    —
    
    
    0.1
    
    
    0.2
    
    
    0.2
    
    
    0.2**Total
      telecommunications revenue**
    
    
    
    
    $
    30.4
    
    **$******
    ******31.8**
    
    **$******
    ******32.0**
    
    **$******
    ******31.9**
    
    **$******
    ******28.3**
    
    **$******
    ******26.2**
    
    **$******
    ******27.3**
    
    **$******
    ******24.1**Network
      service offering
    
    
    
    
    
    —
    
    
    4.1
    
    
    3.1
    
    
    0.4
    
    
    6.4
    
    
    0.2
    
    
    0.1
    
    
    -Technology
      licensing and development
    
    
    
    
    
    —
    
    
    1.1
    
    
    1.0
    
    
    0.1
    
    
    0.5
    
    
    0.1
    
    
    -
    
    
    -**Total
      revenues**
    
    
    
    
    $
    30.4
    
    **$******
    ******37.0**
    
    **$******
    ******36.1**
    
    **$******
    ******32.4**
    
    **$******
    ******35.2**
    
    **$******
    ******26.5**
    
    **$******
    ******27.4**
    
    **$******
    ******24.1****Telecommunications
      revenue by customer type:**Local
      and long-distance bundle
    
    
    
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    —
    
    $
    0.1
    
    $
    1.0
    
    $
    2.7
    
    $
    3.1Dial-around
    
    
    
    
    
    14.8
    
    
    13.3
    
    
    13.7
    
    
    13.3
    
    
    10.3
    
    
    9.0
    
    
    7.2
    
    
    6.51+
    
    
    
    
    
    8.5
    
    
    11.6
    
    
    12.2
    
    
    12.7
    
    
    12.4
    
    
    11.0
    
    
    11.4
    
    
    10.3Direct
      sales
    
    
    
    
    
    7.1
    
    
    6.8
    
    
    5.9
    
    
    5.9
    
    
    5.4
    
    
    5.0
    
    
    5.8
    
    
    4.0Other
    
    
    
    
    
    —
    
    
    0.1
    
    
    0.2
    
    
    —
    
    
    0.1
    
    
    0.2
    
    
    0.2
    
    
    0.2**Total
      telecommunications revenues**
    
    
    
    
    $
    30.4
    
    **$******
    ******31.8**
    
    **$******
    ******32.0**
    
    **$******
    ******31.9**
    
    **$******
    ******28.3**
    
    **$******
    ******26.2**
    
    **$******
    ******27.3**
    
    **$******
    ******24.1****Gross
      revenue — product mix (%):**Local
      and long-distance bundle
    
    
    
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    0.4
    %
    
    3.8
    %
    
    9.8
    %
    
    12.9
    %Domestic
      long-distance
    
    
    
    
    
    25.6
    %
    
    24.6
    %
    
    23.1
    %
    
    23.5
    %
    
    22.6
    %
    
    21.4
    %
    
    19.9
    %
    
    19.9
    %International
      long-distance
    
    
    
    
    
    42.1
    %
    
    45.3
    %
    
    47.8
    %
    
    47.3
    %
    
    45.9
    %
    
    43.1
    %
    
    38.4
    %
    
    38.2
    %MRC/USF(1)
    
    
    
    
    
    7.6
    %
    
    7.5
    %
    
    8.8
    %
    
    9.4
    %
    
    10.6
    %
    
    10.3
    %
    
    8.5
    %
    
    9.5
    %Dedicated
      voice
    
    
    
    
    
    1.3
    %
    
    0.9
    %
    
    1.3
    %
    
    1.3
    %
    
    1.0
    %
    
    1.1
    %
    
    1.3
    %
    
    2.1
    %Direct
      sales revenues
    
    
    
    
    
    23.4
    %
    
    21.4
    %
    
    18.4
    %
    
    18.5
    %
    
    19.1
    %
    
    19.5
    %
    
    21.4
    %
    
    16.6
    %Other
    
    
    
    
    
    -
    
    
    0.3
    %
    
    0.6
    %
    
    0.0
    %
    
    0.4
    %
    
    0.8
    %
    
    0.8
    %
    
    0.8
    %**Total
      telecommunications revenues**
    
    
    
    
    
    100.0
    %
    
    100.0
    %
    
    100.0
    %
    
    100.0
    %
    
    100.0
    %
    
    100.0
    %
    
    100.0
    %
    
    100.0
    %**Gross
      revenues — product mix (minutes)**Domestic
      long-distance(5)
    
    135,236,248
    
    140,798,912
    
    
    134,198,098
    
    
    121,880,023
    
    
    129,293,178
    
    
    134,649,835
    
    
    176,065,320
    
    
    183,884,289International
      long-distance
    
    83,191,655
    
    93,896,850
    
    
    98,873,877
    
    
    98,978,290
    
    
    91,288,985
    
    
    83,923,345
    
    
    79,458,519
    
    
    74,180,770Dedicated
      voice
    
    
    
    
    
    9,571,155
    
    7,772,277
    
    
    9,364,583
    
    
    8,653,038
    
    
    9,653,915
    
    
    9,374,236
    
    
    14,751,696
    
    
    17,479,619**Active
      Retail Subscribers (in number of people):**Local
      and long-distance bundleBeginning
      of Period
    
    
    
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,971
    
    
    11,471
    
    
    21,332Adds
    
    
    
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    3,076
    
    
    12,288
    
    
    16,444
    
    
    9,244Churn
    
    
    
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (1,105
    )
    
    (2,788
    )
    
    (6,583
    )
    
    (8,466
    )End
      of Period
    
    
    
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,971
    
    
    11,471
    
    
    21,332
    
    
    22,110Dial-around(2)Beginning
      of Period
    
    
    
    
    
    199,375
    
    
    228,330
    
    
    215,187
    
    
    206,937
    
    
    192,678
    
    
    164,331
    
    
    138,857
    
    
    125,202Adds
    
    
    
    
    
    112,223
    
    
    85,246
    
    
    100,624
    
    
    63,349
    
    
    46,518
    
    
    40,094
    
    
    37,582
    
    
    37,745Churn
    
    
    
    
    
    (83,268
    )
    
    (98,389
    )
    
    (108,874
    )
    
    (77,608
    )
    
    (74,865
    )
    
    (65,568
    )
    
    (51,237
    )
    
    (42,146
    )End
      of Period
    
    
    
    
    
    228,330
    
    
    215,187
    
    
    206,937
    
    
    192,678
    
    
    164,331
    
    
    138,857
    
    
    125,202
    
    
    120,8011+(3)Beginning
      of Period
    
    
    
    
    
    72,008
    
    
    136,896
    
    
    174,486
    
    
    168,242
    
    
    161,570
    
    
    165,847
    
    
    172,162
    
    
    163,941Adds
    
    
    
    
    
    109,646
    
    
    81,040
    
    
    43,964
    
    
    25,356
    
    
    25,344
    
    
    27,093
    
    
    23,574
    
    
    17,741Churn
    
    
    
    
    
    (44,758
    )
    
    (43,450
    )
    
    (50,208
    )
    
    (32,028
    )
    
    (21,067
    )
    
    (20,778
    )
    
    (31,795
    )
    
    (28,662
    )End
      of Period
    
    
    
    
    
    136,896
    
    
    174,486
    
    
    168,242
    
    
    161,570
    
    
    165,847
    
    
    172,162
    
    
    163,941
    
    
    153,020**Total
      subscribers (End of Period)**
    
    
    
    
    
    **365,226**
    
    
    **389,673**
    
    
    **375,179**
    
    
    **354,248**
    
    
    **332,149**
    
    
    **322,490**
    
    
    **310,475**
    
    
    **295,931**Direct
      Sales(6)Active
      Customer Base
    
    
    
    
    
    276
    
    
    254
    
    
    236
    
    
    227
    
    
    256
    
    
    252
    
    
    238
    
    
    234Total
      top 10 billing
    
    
    
    
    $
    1,243
    
    $
    1,163
    
    $
    1,094
    
    $
    1,050
    
    $
    926
    
    $
    1,034
    
    $
    1,230
    
    $
    915**Avg
      monthly revenue per user (active subscriptions)in absolute dollars:**(4)Local
      and long-distance bundle
    
    
    
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    -
    
    $
    16.49
    
    $
    30.05
    
    $
    41.65
    
    $
    46.53Dial-around
    
    
    
    
    $
    21.61
    
    $
    20.60
    
    $
    22.07
    
    $
    23.01
    
    $
    20.89
    
    $
    21.61
    
    $
    19.15
    
    $
    17.981+
    
    
    
    
    $
    20.70
    
    $
    22.16
    
    $
    24.17
    
    $
    26.20
    
    $
    24.92
    
    $
    21.30
    
    $
    23.15
    
    $
    22.31





(1)
    MRC/USF
      represents “Monthly Recurring Charges” and “Universal Service Fund” fees
      charged to the customers.(2)
    “Dial-around”
      refers to a product which allows a customer to make a call from any phone
      by dialing a 10-10-XXX prefix.
  34
  (3)
    “1+”
      refers to a product which allows a retail customer to directly make a long
      distance call from their own phone by dialing “1” plus the destination
      number.(4)
    Average
      monthly revenues per user (“ARPU”), a generally accepted industry
      measurement, is calculated as the revenues of the quarter divided by the
      number of users at the end of the quarter divided by 3 to get the monthly
      amount. We use the term average revenue per user (“ARPU”) for the use of
      the reader in understanding of our operating results. This term is not
      prepared in accordance with, nor does it serve as an alternative to, GAAP
      measures and may be materially different from similar measures used by
      other companies. While not a substitute for information prepared in
      accordance with GAAP, ARPU provides useful information concerning the
      appeal of our rate plans and service offerings and our performance in
      attracting and retaining customers. However, ARPU should not be considered
      in isolation or as alternatives measures of performance under GAAP. This
      measure has limitations as an analytical tool, and investors should not
      consider it in isolation or as a substitute for analysis of our results
      prepared in accordance with GAAP.(5)
    Includes
      local product line bulk/package rate domestic minutes.(6)
    Represents
      number of parent customers with revenues greater than $0 in each calendar
      month.







35





**Risk
Factors**





**The
telecommunications business is in transition and we are considering strategic
alternatives.**


The
Company targets revenue growth by broadening our product offerings.  In
2004, the addition of a local and long distance bundled offering targeted at
residential customers was expected to provide revenue expansion, while the
Company continued its strategy of allowing attrition of lower average revenue
10-10-XXX customers.  The objective of this strategy was to allow the
Company to increase the average monthly revenue per customer, resulting in a
greater contribution per customer providing greater operating leverage of the
business fixed cost base.  The Company launched a local and long distance
bundled offering early in 2004 and the product soon gained acceptance in five
states:  New Jersey, New York, Pennsylvania, Massachusetts and
Florida.  By mid-year 2004, regulatory uncertainty initially created by a
court decision created a lack of clarity regarding the ongoing
profitability/existence of the Unbundled Network Element Platform
(“UNE-P”).  Some felt that everything would soon settle and that things
would continue as they existed prior to the court decision, while others felt
that a new business model would exist but that uncertainty existed surrounding
the economics of any such business model, while others felt that changes were
occurring that would change telecommunications forever in the United States in a
negative manner for companies like Acceris.  Long distance carrier AT&T
announced its decision to exit the local residential market.  In response
to these legal and regulatory developments, the Company made the decision to put
its geographic expansion plans on hold, while continuing to market to existing
states.  Of the approximately 296,000 customers that the Company has,
approximately 22,000 are affected by UNE-P. In March 2005, the Company
decided to suspend efforts to attract new local customers in Pennsylvania, New
Jersey, New York, Florida and Massachusetts, while continuing to support its
existing local customers in those states. The decision was a result of the
Federal Communications Commission’s (“FCC”) revision of its wholesale rules,
originally designed to introduce competition in local markets, which went into
effect on March 11, 2005. The reversal of local competition policy by the FCC
has permitted the Regional Bell Operating Companies (“RBOCs”) to substantially
raise wholesale rates for the services known as unbundled network elements
(“UNEs”), and required the Company to re-assess its local strategy while it
attempts to negotiate long-term agreements for UNEs on competitive terms. Should
the Company not enter into a wholesale contract for UNE services in the future,
the natural attrition cycle will result in a reduction in the number of local
customers and related revenues in 2005.  On the cost side of the business,
we continued our integration initiatives and resized the organization for our
revised revenue expectations.  At this time, in conjunction with our
strategic advisors, we are looking to merge or dispose of some or all of our
telecommunications operations given recent trends in the telecommunication
business. There is no certainty that a merger or disposal can occur on a timely
basis on favorable terms. For more information on the assets and operations of
the Telecommunications business, please refer to Note 19 of the financial
statements included in Item 15 of this Form 10-K.





**Reports
of our independent registered accountants have been qualified and make reference
to the going concern risk.**


In each
of their audit reports for the years ended December 31, 2002, 2003 and 2004, our
independent registered public accounting firm has made reference to the
substantial doubt of our ability to continue as a going concern. Before
considering making an investment or becoming a stakeholder in Acceris, you
should carefully review the aforementioned accountants’ reports and ensure that
you have read, understood and obtained relevant advice from consultation with
your financial and other advisors.





**We
are primarily dependent upon an ongoing commitment from Counsel to fund, through
long-term intercompany advances or equity contributions, all of our capital
investment, working capital or other operational cash requirements through June
30, 2005.**


Counsel
is the 91% equity holder and 82% debt holder of the Company at December 31,
2004. Counsel has committed to fund the operating cash requirements of the
Company through June 30, 2005 and since December 31, 2004 through March 15, 2005
has advanced $5,246. Acceris will be unable to meet its obligations as they come
due should Counsel be unable or unwilling to meet its commitment to provide
financial support as necessary through June 30, 2005.  See the section
entitled “Certain Relationships and Related Transactions” in Item 13 of this
report.





**We
have no commitments in place to fund operations beyond June 30,
2005**


Management’s
forecasts did not anticipate the Company achieving breakeven cash flows by June
30, 2005. Accordingly, the Company will need to obtain third party financing in
order to continue operations beyond June 30, 2005. As of the date of this
report, management has not been successful in arranging additional financing
beyond the maturity of the Counsel Keep Well, which expires on June 30, 2005,
and there is no assurance that management will be able to obtain financing on
favorable financial terms to fund the operations of the Company beyond June 30,
2005. Management, along with its advisors, is looking to merge or dispose of its
Telecommunications operations. There is no certainty that a merger or disposal
can occur on a timely basis or on favorable terms. For more information on the
assets and operations of the Telecommunications business, please refer to Note
19 of the financial statements included in Item 15 of this Form
10-K.





**The
telecommunications industry in which we operate is subject to government
regulation.**


The
telecommunications industry is subject to government regulation at federal,
state and local levels. Any change in current government regulation regarding
telecommunications pricing, system access, consumer protection or other relevant
legislation could have a material impact on our results of operations. Most of
our current operations are subject to regulation by the Federal Communications
Commission (“FCC”) under the Communications Act of 1934, as amended. In
addition, certain of our operations are subject to regulation by state public
utility or public service commissions. Changes in the regulation of, or the
enactment of changes in interpretation of, legislation affecting us
could negatively impact our operations and lower the price of our
common stock. See the section entitled “Government Regulation” in Item 1 of this
report for further discussion of the regulatory environment.





36


The 1996
Act, among other things, allows the Regional Bell Operating Companies (“RBOCs”)
and others to enter the long distance business. Entry of the RBOCs or other
entities, such as electric utilities and cable television companies, into the
long distance business may have a negative impact on our business or our
customers. We anticipate that some of these entrants will prove to be strong
competitors because they are better capitalized, already have substantial
customer bases, and enjoy cost advantages relating to local telecom lines and
access charges. This could adversely impact the results of our operations, which
could have a negative effect on the price of our common stock. In addition, the
1996 Act provides that state proceedings may in certain instances determine
access charges we are required to pay to the local exchange carriers. If these
proceedings occur, rates could increase which could lead to a loss of customers,
weaker operating results and the lowering of the price of our common
stock.





**The
telecommunications market is volatile.**


During
the last several years, the telecommunications industry has been very volatile
as a result of overcapacity, which has led to price erosion and bankruptcies. If
we cannot control subscriber and customer attrition through maintaining
competitive services and pricing, revenue could decrease significantly.
Likewise, by maintaining competitive pricing policies, the revenue per minute we
earn may decrease significantly. Both scenarios could result in us not meeting
growth and profitability targets.





**We
may need to settle the convertible notes in cash.**


Conversion
of existing convertible notes is primarily at the option of the holders. Should
the holders decide not to convert or should other conditions not be met
regarding stock price, the Company may be required to deliver cash to settle
amounts due in respect of interest, amortization payments and/or principal at
various times in the future. There can be no assurance that we will be able to
generate sufficient cash from operations or from third party financing in order
to be able to do so.





**Our
assets serve as collateral under several facilities. If we were to default on
any of these loans, the secured lenders could foreclose on our assets. In that
event, we would be unable to continue our operations as they are presently
conducted, if at all.**


Our
asset-based lender has first priority over all the assets and a pledge of shares
of the Company’s common stock owned by the controlling stockholder of the
Company. The asset-based facility provides the Company advances based on
outstanding billings, subject to certain restrictions. This facility matures in
June 2005 and will not be extended beyond its current maturity. In addition,
Laurus Master Fund, Ltd. (“Laurus”) has a $5,000 secured convertible note which
is collateralized by a blanket security interest in our assets and a pledge of
the stock of certain of our subsidiaries. This facility matures in October 2007.
At December 31, 2004, our assets also secure $34,268 of convertible and
non-convertible debt to Counsel and the shares of one of our subsidiaries secure
a further $11,024 of debt to Counsel. All Counsel debt is subordinate in favor
of our asset-based facility and our convertible note. Our aggregate total debt
to Counsel at December 31, 2004 of $52,100 may need to be restructured or
converted into equity in the event that the Company is unable to satisfy these
obligations in cash.





**Our
principal stockholder has voting control over us and certain of our executive
officers are employees and stockholders of Counsel.**


Counsel
owns approximately 91% of our outstanding common stock. As a result, Counsel
controls all matters requiring approval by the stockholders including the
election of the Board of Directors and significant corporate transactions. Our
Board of Directors establishes corporate policies and has the sole authority to
nominate and elect our officers to carry out those policies. Our Chief Executive
Officer, President, Chief Financial Officer and Corporate Secretary are all
employees of Counsel Corporation. Our Chief Executive Officer has a supplemental
employment contract with Acceris. Services of Counsel staff working at Acceris
(excluding the CEO) are paid for pursuant to a management services agreement
that exists between Counsel and Acceris. The control by Counsel could delay or
prevent a change in control of Acceris, impede a merger, consolidation, takeover
or other business combination involving us and discourage a potential acquirer
from making a tender offer or otherwise attempting to obtain control of us.
Other stockholders therefore will have limited participation in our affairs. The
eight member Board of Directors has four members independent of Counsel,
including the Chairman. The Board established a special committee of independent
directors of the Board in 2004 to consider recommendations of the Company’s
management for potential merger, acquisitions and financing activities.





**Our
Board of Directors may issue additional shares of preferred stock without
stockholder approval.**


Our
Articles of Incorporation, as amended, authorize the issuance of up to
10,000,000 shares of preferred stock, $10.00 par value per share. The Board of
Directors is authorized to determine the rights and preferences of any
additional series or class of preferred stock. The Board of Directors may,
without stockholder approval, issue shares of preferred stock with dividend,
liquidation, conversion, voting or other rights which are senior to our shares
of common stock or which could adversely affect the voting power or other rights
of the existing holders of outstanding shares of preferred stock or common
stock. The issuance of additional shares of preferred stock may also hamper or
discourage an acquisition or change in control of Acceris.





37








**We
are subject to litigation.**


We are,
from time to time, involved in various claims, legal proceedings and complaints
arising in the ordinary course of business. Details of insignificant matters
have not been disclosed in this document. Set out below are the significant
litigation matters facing us at this time:





On
April 16, 2004, certain of our stockholders (the “Plaintiffs”) filed a
putative derivative complaint in the Superior Court of the State of California
in and for the County of San Diego, (the “Complaint”) against us, WorldxChange
Corporation, Counsel Communications LLC, and Counsel Corporation as well as
certain of our present and former officers and directors, some of whom also are
or were directors and/or officers of the other corporate defendants
(collectively, the “Defendants”). The Complaint alleges, among other things,
that the Defendants, in their respective roles as our controlling stockholder
and directors and officers, committed breaches of the fiduciary duties of care,
loyalty and good faith and were unjustly enriched, and that the individual
Defendants committed waste of corporate assets, abuse of control and gross
mismanagement. The Plaintiffs seek compensatory damages, restitution,
disgorgement of allegedly unlawful profits, benefits and other compensation,
attorneys’ fees and expenses in connection with the Complaint. The Company
believes that these claims are without merit and intends to continue to
vigorously defend this action. There is no assurance that this matter will be
resolved in the Company’s favor and an unfavorable outcome of this matter could
have a material adverse impact on its business, results of operations, financial
position or liquidity.





Acceris
and several of Acceris' current and former executives and board members were
named in a securities action filed in the Superior Court of the State of
California in and for the County of San Diego on April 16, 2004, in which the
plaintiffs made claims nearly identical to those set forth in the Complaint in
the derivative suit described above. We believe that these claims are without
merit and intend to vigorously defend this action. There is no assurance that
this matter will be resolved in our favor and an unfavorable outcome of this
matter could have a material adverse impact on our business, results of
operations, financial position or liquidity.





In
connection with the Company’s efforts to enforce its patent rights, Acceris
Communications Technologies Inc., our wholly owned subsidiary, filed a patent
infringement lawsuit against ITXC Corp. (“ITXC”) in the United States District
Court of the District of New Jersey on April 14, 2004. The complaint
alleges that ITXC’s VoIP services and systems infringe the Company’s U.S. Patent
No. 6,243,373, entitled *“Method
and Apparatus for Implementing a Computer Network/Internet Telephone
System”* . On
May 7, 2004, ITXC filed a lawsuit against Acceris Communications
Technologies Inc., and the Company, in the United States District Court for the
District of New Jersey for infringement of five ITXC patents relating to VoIP
technology, directed generally to the transmission of telephone calls over the
Internet and the completion of telephone calls by switching them off the
Internet and onto a public switched telephone network. The Company believes that
the allegations contained in ITXC’s complaint are without merit and the Company
intends to continue to provide a vigorous defense to ITXC’s claims. There is no
assurance that this matter will be resolved in the Company’s favor and an
unfavorable outcome of this matter could have a material adverse impact on its
business, results of operations, financial position or liquidity.





The
Company is involved in various other legal matters arising out of its operations
in the normal course of business, none of which are expected, individually or in
the aggregate, to have a material adverse effect on the Company.





**We
may be required to make cash payments to dissenting
stockholders.**


At our
Adjourned Meeting of Stockholders held on December 30, 2003, our
stockholders, among other things, approved an amendment to our Articles of
Incorporation, deleting Article VI thereof (regarding liquidations,
reorganizations, mergers and the like). Stockholders who were entitled to vote
at the meeting and advised us in writing, prior to the vote on the amendment,
that they dissented and intended to demand payment for their shares if the
amendment was effectuated, were entitled to exercise their appraisal rights and
obtain payment in cash for their shares under Sections 607.1301 - 607.1333
of the Florida Business Corporation Act (the “Florida Act”), provided their
shares were not voted in favor of the amendment. In January 2004, we sent
appraisal notices in compliance with Florida corporate statutes to all
stockholders who had advised us of their intention to exercise their appraisal
rights. The appraisal notices included our estimate of fair value of our shares,
at $4.00 per share on a post-split basis. These stockholders had until
February 29, 2004 to return their completed appraisal notices along with
certificates for the shares for which they were exercising their appraisal
rights. Approximately 33 stockholders holding approximately 74,000 shares of our
stock returned completed appraisal notices by February 29, 2004. A
stockholder of 20 shares notified us of his acceptance of our offer of $4.00 per
share, while the stockholders of the remaining shares did not accept our offer.
Subject to the qualification that, in accordance with the Florida Act, we may
not make any payment to a stockholder seeking appraisal rights if, at the time
of payment, our total assets are less than our total liabilities, stockholders
who accepted our offer to purchase their shares at the estimated fair value will
be paid for their shares within 90 days of our receipt of a duly executed
appraisal notice. If we should be required to make any payments to dissenting
stockholders, Counsel will fund any such amounts through the purchase of shares
of our common stock. Stockholders who did not accept our offer were required to
indicate their own estimate of fair value, and if we do not agree with such
estimates, the parties are required to go to court for an appraisal proceeding
on an individual basis, in order to establish fair value. Because we did not
agree with the estimates submitted by most of the dissenting stockholders, we
have sought a judicial determination of the fair value of the common stock held
by the dissenting stockholders. On June 24, 2004, we filed suit against the
dissenting stockholders seeking a declaratory judgment, appraisal and other
relief in the Circuit Court for the 17 th Judicial
District in Broward County, Florida. On February 4, 2005, the declaratory
judgment action was stayed pending the resolution of the direct and derivative
lawsuits filed in California. This decision was made by the judge in the Florida
declaratory judgment action due to the similar nature of certain allegations
brought by the defendants in the declaratory judgment matter and the California
lawsuits described in Item 3 above. When the declaratory judgment matter
resumes, there is no assurance that this matter will be resolved in our favor
and an unfavorable outcome of this matter could have a material adverse impact
on our business, results of operations, financial position or
liquidity.





38


**We
have not declared any dividends on our common stock to date and have no
intention of doing so in the foreseeable future.**


The
payment of cash dividends on our common stock rests within the discretion of our
Board of Directors and will depend, among other things, upon our earnings,
unencumbered cash, capital requirements and our financial condition, as well as
other relevant factors. Payments of dividends on our outstanding shares of
preferred stock must be paid prior to the payment of dividends on our common
stock. To date, we have not paid dividends on our common stock nor do we
anticipate that we will pay dividends in the foreseeable future. As of December
31, 2004, we do not have any preferred stock outstanding which has any
preferential dividends. The Loan and Security Agreements with our lenders
restrict the ability of one of our subsidiaries to make distributions or declare
or pay any dividends to us. So long as 25% of principal amount of the Note held
by Laurus described below remains outstanding, we agreed not to pay any
dividends on our common stock. Additionally, under the Florida Act, we cannot
pay dividends while we have negative stockholders’ equity.





**We
may conduct future offerings of our common stock and preferred stock and pay
debt obligations with our common and preferred stock which may diminish our
investors’ pro rata ownership and depress our stock price.**


We
reserve the right to make future offers and sales, either public or private, of
our securities including shares of our preferred stock, common stock or
securities convertible into common stock at prices differing from the price of
the common stock previously issued.





We have
$16,714 of convertible debt owing to Counsel as of December 31, 2004,
convertible into over 3,300,000 shares of our common stock (subject to the
effects of anti-dilution, including the effect of the Laurus convertible note
and credit facility discussed below). We also have $35,386 of non-convertible
debt owed to Counsel at December 31, 2004 which may need to be restructured into
convertible debt or converted into equity in the event that the Company is
unable to satisfy these obligations in cash.





In
addition the Company has issued a $5,000 secured convertible note to Laurus
convertible into approximately 5,700,000 shares of common stock. Laurus also
holds Warrants to acquire 1,000,000 shares of common stock of the Company. The
Laurus debt is guaranteed by Counsel.





There can
be no assurance that we will be able to successfully complete any such future
offerings. In the event that any such future sales of securities are effected or
we use our common or preferred stock to pay principal or interest on our first
debt obligations, an investor’s pro rata ownership interest in us may be reduced
to the extent of any such issuances and, to the extent that any such sales are
effected at consideration which is less than that paid by the investor, the
investor may experience dilution and a diminution in the market price of the
common stock.





**Our
future performance relies on attracting and retaining key
employees.**


We have
certain employees that we consider to be key. Many of these employees are
involved in executing the strategy that will impact our planned results. If
these key employees cease to be employed with us, planned results could be
delayed or might not materialize. We mitigate this risk through the use of
employment contracts, the formalization of our strategy and business plans and
by ensuring the existence of timely knowledge exchange and
collaboration.





**We
must continue to have up to date technology and be attentive to general economic
trends to compete in the communications services industry.**


The
market for telecommunications services is extremely competitive. To be
competitive and meet changing customer requirements, we must be attentive to
rapidly changing technology, evolving industry standards, emerging competition
and frequent new software and service introductions.





We
believe that our ability to compete successfully will depend upon a number of
factors including, but not limited to:





· the
pricing policies of our competitors and suppliers;


· the
capacity, reliability, availability and security of our real-time
network;


· the
public’s recognition of our name and products;


· the
timing of our introductions of new products and services;


· our ease
of access to and navigation of the Internet or other types of data communication
networks;


· our
ability in the future to support existing and emerging industry standards;


· our
ability to balance network demand with the fixed expenses associated with
network capacity; and


· our
ability to deal with trends toward increasing wireless and decreasing wire line
usage.





39


Many
companies offer business communications services and compete with us at some
level. These range from large telecommunications carriers such as AT&T,
MCI/WorldCom and Sprint, to smaller, regional resellers of telephone line
access. These companies, as well as others, including manufacturers of hardware
and software used in the business communications industry, could in the future
develop products and services that may directly compete with ours. These
entities are far better capitalized than us and enjoy a significant market share
in their industry segments. These entities also enjoy certain competitive
advantages such as extensive nationwide networks, name recognition, operating
histories and substantial advertising resources.





Our
technology-related service revenues are derived from the licensing of our
proprietary technology. New technologies may emerge that would make our product
offering obsolete. This would require the pursuit of technological advances,
which may require substantial time and expense and may not succeed in adapting
our technology offering to new or alternate technologies. In addition, there may
be other companies attempting to introduce products similar to those we offer or
plan to offer for the transmission of information over the Internet. We might
not be able to successfully compete with these market participants.





**We
may fail to adequately protect our proprietary technology and processes, which
would allow competitors to take advantage of our development
efforts.**


Included
in the Company’s VoIP Patent Portfolio are United States Patents No. 6,243,373
and No. 6,438,124. The value of these patents has yet to be determined. If we
fail to obtain or maintain adequate protections, we may not be able to prevent
third parties from using our proprietary rights. Any currently pending or future
patent applications may not result in issued patents. In addition, any issued
patents may not have priority over any patent applications of others or may not
contain claims sufficiently broad to protect us against third parties with
similar technologies, products or processes. We also rely upon trade secrets,
proprietary know-how and continuing technological innovation to remain
competitive. We protect this information with reasonable security measures,
including the use of confidentiality agreements with our employees, consultants
and corporate collaborators. It is possible that these individuals will breach
these agreements and that any remedies for a breach will be insufficient to
allow us to recover our costs. Furthermore, our trade secrets, know-how and
other technology may otherwise become known or be independently discovered by
our competitors.





**Our
operations are dependent on leased telecommunications
lines.**


We use
other companies to provide data communications capacity via leased
telecommunications lines and services to and from geographic areas that are not
covered by our own network. MCI, Verizon, AT&T, Global Crossing, Qwest, Bell
South, and other regional and international companies provide significant
portions of the leased telecommunications lines and services that we use. If any
of these suppliers were unable or unwilling to provide or expand their current
levels of service to us in the future, the services we offer our subscribers
would be affected. Although leased telecommunications lines are available from
several alternative suppliers, we might not be able to obtain substitute
services from other providers at reasonable or comparable prices or in a timely
fashion. Significant interruptions of our telecommunications services might
occur in the future, and we might not be able to provide the level of service we
currently offer. Changes in tariffs, regulations, or policies by any of our
telecommunications providers might limit or eliminate our ability to continue to
offer long distance or local dial tone service on commercially reasonable or
profitable terms.





**We
are dependent upon the services of others for billing, collection and network
services.**


We
utilize the services of certain competitive local exchange carriers (“CLECs”) to
bill and collect from customers for a significant portion of our revenues. If
the CLECs were unwilling or unable to provide such services in the future, we
would be required to significantly enhance our billing and collection
capabilities in a short amount of time and our collection experience could be
adversely affected during this transition period. If the CLECs were unable to
remit payments received from their customers relating to our billings, our
operations and cash position could be adversely affected. Management believes we
have strong business relationships with the CLECs.





We depend
on certain large telecommunications carriers to provide network services for
significant portions of our telecommunications traffic. If these carriers were
unwilling or unable to provide such services in the future, our ability to
provide services to customers would be adversely affected and we might not be
able to obtain similar services from alternative carriers on a timely basis.
Management believes we have strong business relationships with our
telecommunications carriers.





**We
must attract new subscribers and minimize the rate of customer attrition in an
industry with larger and better capitalized competitors.**


We are a
business that faces several challenges, especially when compared to larger
companies in the same industry, including:




·  a small
management team


·  limited
capital and financial resources


·  our small
size


·  a small
market share





All these
factors might make us unable to compete with larger, older, better capitalized
businesses.





40


In order
to increase our subscribers, we must be able to replace terminating subscribers
and attract new subscribers. However, the sales and marketing expenses and other
subscriber costs associated with attracting new subscribers are substantial. Our
ability to improve or maintain operating margins will depend on our ability to
retain and attract new subscribers. While we continue to invest resources in the
telecommunications infrastructure, customer support resources, sales and
marketing expenses and subscriber acquisition costs, our future efforts might
not improve subscriber retention or acquisition.





**Acquisition
of companies, products or technologies may result in disruptions in business and
diversion of management attention, adversely impacting our business, results of
operations and financial condition, and making period to period comparisons
difficult.**


Acquisitions
of complementary companies, products or technologies which we have recently
made, or which we may make in the future, will require the assimilation of the
operations, products and personnel of the acquired businesses and the training
and motivation of these individuals. Acquisitions may therefore cause
disruptions in operations and divert management’s attention from day to day
operations, which could impair our relationships with current employees,
customers and strategic partners. Although we currently have no understandings,
commitments or agreements with respect to any additional acquisitions, any such
acquisitions may be accompanied by the risks commonly encountered in such
transactions. We may also have to, or choose to, incur debt or issue equity
securities to pay for any future acquisitions. The issuance of equity securities
for an acquisition could be substantially dilutive to our stockholders’
holdings. In addition, our profitability may suffer because of
acquisition-related costs or amortization costs for tangible and intangible
assets. Our inability to address such risks or to fulfill expectations regarding
revenues from acquired businesses, products and technologies could have a
material adverse effect on our business, operating results and financial
condition. We have completed several acquisitions over the past three years and
may complete acquisitions in the future, which makes it difficult to compare our
financial results on a period to period basis.





**We
face risks inherent in new product and service offerings as well as new
markets.**


From time
to time we introduce new products and services or expand our previous product
and service offerings to our existing and target markets. Our prospects must
therefore be considered in light of the risks, expenses, problems and delays
inherent in establishing new lines of business in a rapidly changing industry.
Although we believe we can successfully differentiate our product and service
offerings from others in the marketplace, we must be able to compete against
other companies who may already be established in the marketplace and have
greater resources. There can be no assurance we will be successful in adding
products or services or expanding into new markets or that our administrative,
operational, infrastructure and financial resources and systems will be adequate
to accommodate such offerings or expansion. In 2004, the Company commenced
offering local services in five states and realized revenue of $6,900, finishing
the year with approximately 22,000 local subscribers. In March 2005, the Company
decided to suspend efforts to attract new local customers in Pennsylvania, New
Jersey, New York, Florida and Massachusetts, while continuing to support its
existing local customers in those states. The decision was a result of the FCC’s
revision of its wholesale rules, originally designed to introduce competition in
local markets, which went into effect on March 11, 2005. The reversal of local
competition policy by the FCC has permitted the RBOCs to substantially raise
wholesale rates for the services known as UNE, and required the Company to
re-assess its local strategy while it attempts to negotiate long-term agreements
for UNEs on competitive terms. Should the Company not enter into a wholesale
contract for UNE services in the future, the natural attrition cycle will result
in a reduction in the number of local customers and related revenues in
2005.





**We
are dependent upon the services of independent agents.**


Our
market penetration primarily reflects the marketing, sales and customer service
activities of our independent agents, who market our products and services on a
commission basis. The use of these agents exposes us to significant risks,
including the fact that we depend on the continued viability, loyalty and
financial stability of our agents. Our future success depends in large part on
our ability to recruit, maintain and motivate our agents. We are subject to
competition in the recruiting of agents from other organizations that use agents
to market their products and services, including those that market
telecommunications services. Because of the number of factors that affect the
recruiting, performance and viability of our agents and our relationship with
our agents, we cannot predict when or to what extent we will be able to continue
to recruit, maintain and motivate agents effectively, nor can we predict the
difficulties or costs associated with terminating any of our agency
relationships.





**We
are reliant on our billing solution.**


We rely
on three billing solutions to bill customers. If those technologies fail to
operate as expected, there is a risk that revenue could be lost or that
customers could be billed incorrectly. Our billing systems are dependent on data
feeds from switch sites across the United States. Should those switches fail to
capture or retain such data there is a risk that revenue could be lost or that
customers could be billed incorrectly.





**We
may not be able to utilize income tax loss carry forwards.**


Restrictions
in our ability to utilize income tax loss carry forwards have occurred in the
past due to the application of certain changes in ownership tax rules in the
United States. There is no certainty that the application of these rules may not
reoccur or that future merger, acquisition and/or disposition transactions may
cause further restrictions on our income tax loss carry forwards existing at a
particular time. Any such additional limitations could require us to pay income
taxes in the future and record an income tax expense to the extent of such
liability. We could be liable for income taxes on an overall basis while having
unutilized tax loss carry forwards since these losses may be applicable to one
jurisdiction and/or particular line of business while earnings may be applicable
to a different jurisdiction and/or line of business. Additionally, income tax
loss carry forwards may expire before we have the ability to utilize such losses
in a particular jurisdiction and there is no certainty that current income tax
rates will remain in effect at the time when we have the opportunity to utilize
reported tax loss carry forwards.





41


**We
may be unable to maintain adequate insurance coverage.**


We
participate under the Counsel Corporation director and officer insurance policy
and maintain insurance that includes liability coverage to protect us from
claims made against us. Recent events have made liability insurance more
expensive while at the same time reducing the scope of coverage. Our ability to
maintain adequate insurance coverage at a reasonable cost may be impacted by
market conditions beyond our control.





**Our
internal disclosure controls may not reduce to a relatively low level the risk
that a material error in our financial statements may go
undetected.**


Our Chief
Executive Officer and Chief Financial Officer (the “Certifying Officers”) are
responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for Acceris.
Accordingly, the Certifying Officers designed such disclosure controls and
procedures, or caused such disclosure controls and procedures to be designed
under their supervision, to ensure that material information relating to
Acceris, including our consolidated subsidiaries, is made known to the
Certifying Officers by others within those entities. We regularly evaluate the
effectiveness of disclosure controls and procedures and report our conclusions
about the effectiveness of the disclosure controls quarterly on our Form 10-Q
and annually on our Form 10-K. In completing such reporting we disclose, as
appropriate, any significant change in our internal control over financial
reporting that occurred during our most recent fiscal period that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. This disclosure, based on our most recent evaluation
of our disclosure controls and procedures, is made to our independent
accountants and the audit committee of our Board of Directors (or persons
performing the equivalent functions). All significant deficiencies and material
weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect our ability to record,
process, summarize and report financial information on a timely basis are
reported in our public filings. Additionally, any fraud, whether or not
material, that involves management or other employees who have a significant
role in our internal control over financial reporting, is reported on such
filings as applicable.





Over the
last two years, the Certifying Officers have reported four separate events of
control deficiencies, constituting material weaknesses. Control deficiencies
were last reported in the second quarter of 2004. Since that time, the
Certifying Officers have reported that the disclosure controls and procedures
are effective. We have undertaken specific measures to cure or mitigate the
ineffective controls and procedures identified in our prior filings. Such
measures include making significant systems, process and control changes and we
have implemented new technologies to achieve an effective system of controls and
procedures as of the quarter ended September 30, 2004 and through the date of
this Report on Form 10-K. The details of the four control deficiencies are
detailed in the following filings:





·
    Form
      10-Q for the quarter ended September 30, 2002, as
  amended;


·
    Form
      10-K for the year ended December 31, 2002, as
amended;


·
    Form
      10-Q for the quarter ended September 30, 2003, as
  amended;


·
    Form
      10-K for the year ended December 31, 2003, as amended;
  and


·
    Form
      10-Q for the quarter ended June 30, 2004.





While
management is responsible for ensuring an effective control environment and has
taken steps to ensure that the internal control environment remains free of
significant deficiencies and/or material weaknesses, the inherent nature of our
business and rapidly changing environment may affect management’s ability to be
successful with this initiative.





**Terrorist
attacks or acts of war may seriously harm our business.**


Terrorist
attacks or acts of war may cause damage or disruption to our operations,
employees, facilities and our customers, which could significantly impact our
revenues, costs and expenses, and financial condition. The terrorist attacks
that took place in the United States on September 11, 2001 were unprecedented
events that have created many economic and political uncertainties, some of
which may have a material adverse effect on our business, results of operations,
and financial condition. The potential for future terrorist attacks, the
national and international responses to terrorist attacks and other acts of war
or hostility have created many economic and political uncertainties, which could
also have a material adverse effect on our business, results of operations and
financial condition in ways that management currently cannot
predict.





**Natural
disasters or massive failure of public and private services may seriously harm
our business.**


Natural
disasters and/or the massive failure of public and private services may cause
damage or disruption to our operations, employees, facilities and our customers,
which could significantly impact our revenues, costs and expenses, and financial
condition. The tsunami in Asia and the blackout of power in the eastern United
States are recent examples that have created displacement. These types of events
may have a material adverse effect on our business, results of operations, and
financial condition in ways that management currently cannot
predict.





42


**There
is a limited public trading market for our common stock; the market price of our
common stock has been volatile and could experience substantial fluctuations.**


Our
common stock is currently quoted on the OTC-BB and there is a limited public
trading market for the common stock. Without an active trading market, there can
be no assurance of any liquidity or resale value of the common stock. In
addition, the market price of our common stock has been, and may continue to be,
volatile. Such price fluctuations may be affected by general market price
movements or by reasons unrelated to our operating performance or prospects such
as, among other things, announcements concerning us or our competitors,
technological innovations, government regulations, and litigation concerning
proprietary rights or other matters. In addition, in recent years, the stock
market in general, and the market for telecommunications companies in
particular, have experienced significant price and volume fluctuations. This
volatility has affected the market prices of securities issued by many companies
and it may adversely affect the price of our common stock.





**Provisions
in our Articles of Incorporation, as amended, could prevent or delay
stockholders' attempts to replace or remove current
management.**


Our
Articles of Incorporation, as amended, provide for staggered terms for the
members of our Board of Directors. The Board of Directors is divided into three
staggered classes, and each director serves a term of three years. At each
annual stockholders’ meeting only those directors comprising one of the three
classes will have completed their term and stand for re-election or
replacement.





The use
of a staggered Board of Directors and the ability to issue "blank check"
preferred stock are traditional anti-takeover measures. These provisions may be
beneficial to our management and the Board of Directors in a hostile tender
offer, and may have an adverse impact on stockholders who may want to
participate in such a tender offer, or who may want to replace some or all of
the members of the Board of Directors.





**We
are subject to reporting requirements that are currently evolving and, once
established, could substantially increase our operating expenses and divert our
management's attention from the operation of our business.**


We are
subject to a variety of rules and regulations of federal and state governmental
and other entities charged with the protection of investors and the oversight of
companies whose securities are publicly traded. These entities have recently
issued new requirements and regulations and are currently developing additional
regulations and requirements in response to recent laws enacted by Congress,
most notably the Sarbanes-Oxley Act of 2002. Our compliance with current rules
is likely to require the commitment of significant financial and managerial
resources. As a result, management's attention might be diverted from other
business concerns, which could negatively affect our business.





**Recent
Accounting Pronouncements**





See Note
3 to the Consolidated Financial Statements for a discussion of recent accounting
pronouncements and their impact on our financial statements.





**Critical
Accounting Policies**





The
section entitled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations”, included in this Item 7 of this report, discusses
our consolidated financial statements, which have been prepared in accordance
with accounting principals generally accepted in the United States (“GAAP”). The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, management evaluates
its estimates and judgments, including those related to intangible assets,
contingencies, collectibility of receivables and litigation. Management bases
its estimates and judgments on historical experience and various other factors
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.





**Revenue
recognition**





Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the Company’s price to the customer is
fixed and determinable, and collection of the resulting receivable is reasonably
assured. Revenue is derived from telecommunications usage based on minutes of
use and monthly recurring fees. Revenue derived from usage is recognized as
services are provided, based on agreed upon usage rates, while revenue from
monthly recurring fees is based on the passage of time. Revenue is recorded net
of estimated customer credits and billing errors, which are recorded at the same
time the corresponding revenue is recognized. Revenues from billings for
services rendered where collectibility is not assured are recognized when the
final cash collections to be retained by the Company are finalized.





43


Revenues
for the Company’s network service offering, which it began to sell in November
2002 and subsequently ceased selling in July 2003, are accounted for using the
unencumbered cash method. The Company determined that collectibility of the
amounts billed to customers was not reasonably assured at the time of billing.
Under its agreements with the Local Exchange Carriers (“LECs”), cash collections
remitted to the Company are subject to adjustment, generally over several
months. Accordingly, the Company recognizes revenue when the actual cash
collections to be retained by the Company are finalized and unencumbered. There
is no further billing of customers for the network service offering subsequent
to the program’s termination.





Revenue
from the sale of software licenses is recognized when a non-cancelable agreement
is in force, the license fee is fixed or determinable, acceptance has occurred,
and collectibility is reasonably assured. Maintenance and support revenues are
recognized ratably over the term of the related agreements. When a license of
Acceris technology requires continued support or involvement of Acceris,
contract revenues are spread over the period of the required support or
involvement. In the event that collectibility is in question, revenue (deferred
or recognized) is recorded only to the extent of cash receipts.





**Use
of estimates**





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





Significant
estimates include revenue recognition, accruals for telecommunications network
cost, the allowance for doubtful accounts, purchase accounting (including the
ultimate recoverability of intangibles and other long-lived assets), valuation
of deferred tax assets and contingencies surrounding litigation. These policies
have the potential to have a more significant impact on our financial
statements, either because of the significance of the financial statement item
to which they relate, or because they require judgment and estimation due to the
uncertainty involved in measuring, at a specific point in time, events which are
continuous in nature.





Costs
associated with carrying telecommunications traffic over our network and over
the Company’s leased lines are expensed when incurred, based on invoices
received from the service providers. If invoices are not available in a timely
fashion, estimates are utilized to accrue for these telecommunications network
costs. These estimates are based on the understanding of variable and fixed
costs in the Company’s service agreements with these vendors in conjunction with
the traffic volumes that have passed over the network and circuits provisioned
at the contracted rates. Traffic volumes for a period are calculated from
information received through the Company’s network switches. From time to time,
the Company has disputes with its vendors relating to telecommunications network
services. In the event of such disputes, the Company records an expense based on
its understanding of the agreement with that particular vendor, traffic
information received from its network switches and other factors.





Allowances
for doubtful accounts are maintained for estimated losses resulting from the
failure of customers to make required payments on their accounts. The Company
evaluates its provision for doubtful accounts at least quarterly based on
various factors, including the financial condition and payment history of major
customers and an overall review of collections experience on other accounts and
economic factors or events expected to affect its future collections experience.
Due to the large number of customers that the Company serves, it is impractical
to review the creditworthiness of each of its customers. The Company considers a
number of factors in determining the proper level of the allowance, including
historical collection experience, current economic trends, the aging of the
accounts receivable portfolio and changes in the creditworthiness of its
customers.





The
Company accounts for intangible assets in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 141, *Business
Combinations* (“SFAS
141”) and SFAS No. 142, *Goodwill
and Other Intangible Assets* (“SFAS
142”). All business combinations are accounted for using the purchase method and
goodwill and intangible assets with indefinite useful lives are not amortized,
but are tested for impairment at least annually. Intangible assets are initially
recorded based on estimates of fair value at the time of the
acquisition.





The
Company assesses the fair value of its segments for goodwill impairment based
upon a discounted cash flow methodology. If the carrying amount of the segment
assets exceeds the estimated fair value determined through the discounted cash
flow analysis, goodwill impairment may be present. The Company would measure the
goodwill impairment loss based upon the fair value of the underlying assets and
liabilities of the segment, including any unrecognized intangible assets and
estimate the implied fair value of goodwill. An impairment loss would be
recognized to the extent that a reporting unit’s recorded goodwill exceeded the
implied fair value of goodwill.





The
Company performed its annual goodwill impairment test in the fourth quarters of
2004 and 2003. No impairment was present upon the performance of these tests in
2004 and 2003. We cannot predict the occurrence of future events that might
adversely affect the reported value of goodwill. Such events may include, but
are not limited to, strategic decisions made in response to economic and
competitive conditions, the impact of the telecommunications regulatory
environment, the economic environment of its customer base, statutory judgments
on the validity of the Company’s VoIP Patent Portfolio or a material negative
change in its relationships with significant customers.





44


Regularly,
the Company evaluates whether events or circumstances have occurred that
indicate the carrying value of its other amortizable intangible assets may not
be recoverable. When factors indicate the asset may not be recoverable, the
Company compares the related future net cash flows to the carrying value of the
asset to determine if impairment exists. If the expected future net cash flows
are less than carrying value, impairment is recognized to the extent that the
carrying value exceeds the fair value of the asset





The
Company performs a valuation on its deferred tax asset, which has been generated
by a history of net operating loss carryforwards, at least annually, and
determines the necessity for a valuation allowance. The Company evaluates which
portion, if any, will more likely than not be realized by offsetting future
taxable income. The determination of that allowance includes a projection of its
future taxable income, as well as consideration of any limitations that may
exist on its use of its net operating loss or credit carryforwards.





The
Company is involved from time to time in various legal matters arising out of
its operations in the normal course of business. On a case by case basis, the
Company evaluates the likelihood of possible outcomes for this litigation. Based
on this evaluation, the Company determines whether a liability is appropriate.
If the likelihood of a negative outcome is probable, and the amount can be
estimated, the Company accounts for the liability in the current period. A
change in the circumstances surrounding any current litigation could have a
material impact on the financial statements.





**Provision
for doubtful accounts**





The
Company evaluates the collectibility of its receivables at least quarterly,
based upon various factors including the financial condition and payment history
of major customers, and overall review of collections experience on other
accounts and economic factors or events expected to affect the Company’s future
collections experience. Due to the large number of customers that the Company
serves, it is impractical to review the credit worthiness of each of its
customers. The Company considers a number of factors in determining the proper
level of the allowance, including historical collection experience, current
economic trends, the aging of the accounts receivable portfolio and changes in
the credit worthiness of its customers.





**Investments**





Dividends
and realized gains and losses on equity securities are included in other income
in the consolidated statements of operations.





Investments
are accounted for under the cost method, as the equity securities or the
underlying common stock are not readily marketable and the Company’s ownership
interests do not allow it to exercise significant influence over these entities.
The Company monitors these investments for impairment by considering current
factors including economic environment, market conditions and operational
performance and other specific factors relating to the business underlying the
investment, and will record impairments in carrying values when necessary. The
fair values of the securities are estimated using the best available information
as of the evaluation date, including the quoted market prices of comparable
public companies, market price of the common stock underlying the preferred
stock, recent financing rounds of the investee and other investee specific
information.





**Intangible
assets**





Effective
January 1, 2002, the Company accounts for intangible assets in accordance with
SFAS No. 141, *Business
Combinations* (“SFAS
141”) and SFAS No. 142, *Goodwill
and Other Intangible Assets* (“SFAS
142”). The adoption of SFAS 141 and 142 did not materially impact the results of
operations or financial condition of the Company. All business combinations are
accounted for using the purchase method and goodwill and intangible assets with
indefinite useful lives are not amortized, but are tested for impairment at
least annually.





The
Company regularly evaluates whether events or circumstances have occurred that
indicate the carrying value of its intangible assets may not be recoverable.
When factors indicate the asset may not be recoverable, the Company compares the
related future net cash flows to the carrying value of the asset to determine if
impairment exists. If the expected future net cash flows are less than carrying
value, impairment is recognized to the extent that the carrying value exceeds
the fair value of the asset. Amortization of intangible assets is calculated
using the straight-line method over the following periods:





Enterprise
      customer contracts and relationships
    60
      monthsRetail
      customer contracts and relationships
    12
      monthsAgent
      relationships
    30
      monthsAcquired
      patents
    60
      monthsAgent
      contracts
    12
      months





45


In the
fourth quarter of 2004, management assessed the future cash flows expected to be
derived from the Commercial Agent Channel based on both the continued margin
compression and the high commission levels paid to third party agents. Based on
this assessment, management made the decision to write down the unamortized
intangible asset described as Agent Relationships to $360. The writedown
resulted in an increase of $637 in the depreciation and amortization expense for
2004. In conjunction with this impairment assessment the Company has also
reduced the amortization life of the intangible from 36 months to 30 months. The
monthly amortization in 2005 will be $30 per month.





**Income
taxes**





The
Company records deferred taxes in accordance with SFAS No. 109, *Accounting
for Income Taxes* (“SFAS
109”). The statement requires recognition of deferred tax assets and liabilities
for temporary differences between the tax bases of assets and liabilities and
the amounts at which they are carried in the financial statements, based upon
the enacted tax rates in effect for the year in which the differences are
expected to reverse. The Company establishes a valuation allowance when
necessary to reduce deferred tax assets to the amount expected to be realized.
The determination of that allowance includes a projection of the Company’s
future taxable income, as well as consideration of any limitations that may
exist on the Company’s use of its net operating loss or credit
carryforwards.








This
discussion and analysis should be read in conjunction with our Consolidated
Financial Statements and Notes thereto included in Item 8 of this report. These
policies have the potential to have a more significant impact on our financial
statements, either because of the significance of the financial statement item
to which they relate, or because they require judgment and estimation due to the
uncertainty involved in measuring, at a specific point in time, events which are
continuous in nature.





**Item
7A. Quantitative and Qualitative Disclosures about Market
Risk.**





Our
exposure to market risk is limited to interest rate sensitivity, which is
affected by changes in the general level of United States interest rates. Our
cash equivalents are invested with high quality issuers and we limit the amount
of credit exposure to any one issuer. Due to the short-term nature of the cash
equivalents, we believe that we are not subject to any material interest rate
risk as it relates to interest income. As to interest expense, we have two debt
instruments that have variable interest rates. Our asset-based lending facility
is based on the prime rate of interest + 1.75%, with an interest floor of 6%.
Our variable interest rate convertible note provides that the principal amount
outstanding bears interest at the prime rate as published in the Wall St.
Journal (“WSJ interest rate”, 5.25% at December 31, 2004) plus 3% (but not less
than 7.0%), decreasing by 2% (but not less than 0%) for every 25% increase in
the Market Price (as defined therein) above the fixed conversion price of $0.88
following the effective date (January 18, 2005) of the registration statement
covering the Common Stock issuable upon conversion. Assuming the debt amount on
the asset-based facility at December 31, 2004 was constant during the next
twelve-month period, the impact of a one percent increase in the respective
interest rates would be an increase in interest expense of
approximately  $73  for that
twelve-month period, and an increase in interest expense of approximately $50
for that twelve-month period on our convertible note. Because the asset-based
facility is subject to an interest rate floor of 6.0%, a one percent decrease in
the prime interest rate would have no impact on interest expense during the next
twelve-month period. In respect of the variable interest rate convertible note,
should the price of the common stock of Acceris increase and maintain a price
equal to 125% of $0.88 for a twelve month period, the Company would benefit from
a reduced interest rate of 2%, resulting in lower interest costs of up to
approximately $100 for that twelve-month period. We do not believe that we are
subject to material market risk on our fixed rate debt with Counsel in the near
term.





We did
not have any foreign currency hedges or other derivative financial instruments
as of December 31, 2004. We do not enter into financial instruments for trading
or speculative purposes and do not currently utilize derivative financial
instruments. Our operations are conducted primarily in the United States and as
such are not subject to material foreign currency exchange rate risk.





**Item
8. Financial Statements and Supplementary Data.**





See
Consolidated Financial Statements and supplementary data beginning on pages F-1
and S-1.





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





None.





**Item
9A. Controls and Procedures.**





As of the
end of the period covered by this annual report, the Chief Executive Officer and
Chief Financial Officer of the Company (the “Certifying Officers”) conducted
evaluations of the Company’s disclosure controls and procedures. As defined
under Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), the term “disclosure controls and procedures”
means controls and other procedures of an issuer that are designed to ensure
that information required to be disclosed by the issuer in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Commission’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by an
issuer in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the issuer’s management, including the
Certifying Officers, to allow timely decisions regarding required disclosure.
Based on this evaluation, the Certifying Officers have concluded that the
Company’s disclosure controls and procedures are effective to ensure that
material information is recorded, processed, summarized and reported by
management of the Company on a timely basis in order to comply with the
Company’s disclosure obligations under the Exchange Act, and the rules and
regulations promulgated thereunder.





46


Further,
there were no changes in the Company’s internal control over financial reporting
during the fourth fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.





**Item
9B. Other Information.**





None.





47








**PART
III**





**Item
10. Directors and Executive Officers of the Registrant.**





Acceris’
Articles of Incorporation, as amended, provide that the Board of Directors shall
be divided into three classes, and that the total number of directors shall not
be less than five and not more than nine. Each
director shall serve a term of three years. As of the date hereof, the Board of
Directors consists of eight members: two Class I directors (Messrs. Shimer and
Tanki), three Class II directors (Messrs. Toh, Heaton, and Silber) and three
Class III directors (Messrs. Lomicka and Meenan, and Ms. Murumets). The
following table sets forth the names, ages and positions with Acceris of the
persons who currently serve as our directors and executive officers. There are
no family relationships between any present executive officers and
directors.





**Name**
    
    **Age
      (1)**
    
    **Title**James
      J. Meenan
    
    61
    
    Chairman
      of the BoardAllan
      C. Silber
    
    56
    
    Director
      and Chief Executive OfficerKelly
      D. Murumets
    
    41
    
    Director
      and PresidentFrank
      J. Tanki
    
    64
    
    DirectorHal
      B. Heaton
    
    54
    
    DirectorHenry
      Y.L. Toh
    
    47
    
    DirectorSamuel
      L. Shimer
    
    41
    
    DirectorWilliam
      H. Lomicka
    
    67
    
    DirectorStephen
      A. Weintraub
    
    57
    
    Senior
      Vice President and SecretaryGary
      M. Clifford
    
    35
    
    Vice
      President of Finance and Chief Financial OfficerJames
      G. Ducay
    
    45
    
    Executive
      Vice President and Chief Operating OfficerKenneth
      L. Hilton
    
    52
    
    Executive
      Vice President, Sales and MarketingDavid
      B. Silverman
    
    40
    
    Senior
      Vice President and General CounselEric
      S. Lipscomb
    
    36
    
    Vice
      President of Accounting, Controller and Chief Accounting
      Officer


_______________


(1)
    
    As
      of December 31, 2004.




Set forth
below are descriptions of the backgrounds of the executive officers and
directors of the Company and their principal occupations for the past five
years:





**James
J. Meenan** ,
Chairman of the Board since October 2004. Mr. Meenan was appointed by the Board
of Directors as a Class III Director on May 11, 2004. Mr. Meenan has over 35
years of telecommunications expertise, having joined AT&T in 1966 and rising
in the organization to hold various executive financial and operational roles.
He became President and Chief Executive Officer of AT&T Canada in 1995, and
over the next 6 years, he helped shape the Canadian telecommunications industry
through devising strategic alliances, partnerships and mergers and acquisitions
for AT&T Canada. In 2001, AT&T Canada completed a reorganization under
the Company Creditors Arrangement Act (“CCAA”). Since retiring from AT&T
Canada in 2002, Mr. Meenan has worked as an advisor to entrepreneurial companies
and currently serves as a director for several boards in both the United States
and Canada, including Custom Direct Income Fund, an income trust in the check
printing business traded on the Toronto Stock Exchange and Datawire
Communications, a software development company specializing in secure financial
transactions over the internet from point of sale terminals. Mr. Meenan earned a
Masters in Management Science from the Stevens Institute of Technology in New
Jersey.





**Allan
C. Silber** ,
Director and Chief Executive Officer. Mr. Silber was elected to the Board of
Directors as a Class II director in September 2001 and appointed as Chairman of
the Board in November 2001, a position he held until October, 2004. Mr. Silber
is the Chairman and CEO of Counsel Corporation, which he founded in 1979. Mr.
Silber attended McMaster University and received a Bachelor of Science degree
from the University of Toronto.





**Kelly
D. Murumets** ,
Director and President. Ms. Murumets became a Class III director in February
2003. Ms. Murumets joined Counsel Corporation as Executive Vice President in
February 2002 and was appointed President of Acceris in November 2003. Prior to
joining Counsel and Acceris, Ms. Murumets was a Vice President with Managerial
Design where she was a valued advisor to clients throughout North America giving
leaders the insight and guidance required to implement change, achieve results
and improve profitability. Ms. Murumets received her BA from Bishop’s
University, her MBA from the University of Western Ontario’s Ivey School of
Business and her MSW from Wilfrid Laurier University, where she was the
recipient of the Gold Medal and Governor General’s Award.





**Frank
J. Tanki** ,
Director. Mr. Tanki was appointed by the Board of Directors as a Class I
Director on June 15, 2004. Mr. Tanki has over 35 years of public accounting
experience, having joined Coopers & Lybrand LLP (now PricewaterhouseCoopers
LLP) in 1962, where he became a partner in 1972 and retired in 1998. During his
career, Mr. Tanki has served major multinational companies in industries
including telecommunications products and services, technology, consumer goods,
engineering and construction, and real estate development. Mr. Tanki earned a
Bachelor of Business Administration degree from the City College of the City
University of New York.





48


**Hal
B. Heaton** ,
Director. Dr. Heaton was appointed by the Board of Directors as a Class II
director on June 14, 2000 to fill a board vacancy. From 1982 to present he has
been a professor of Finance at Brigham Young University and between 1988 and
1990 was a visiting professor of Finance at Harvard University. Dr. Heaton is a
director of MITY Enterprises, Inc., a publicly traded manufacturer of furniture
in Orem, Utah. Dr. Heaton holds a Bachelor’s degree in Computer
Science/Mathematics and a Master’s in Business Administration from Brigham Young
University, as well as a Master’s degree in Economics and a Ph.D. in Finance
from Stanford University.





**Henry
Y.L. Toh** ,
Director. The Board of Directors elected Mr. Toh as a Class II director and as
Vice Chairman of the Board of Directors in April 1992. Mr. Toh became President
of Acceris in May 1993, Acting Chief Financial Officer in September 1995 and
Chairman of the Board in May 1996, and served as such through September 1996.
Mr. Toh serves as a director of: National Auto Credit, Inc. (previously an
originator of sub-prime automobile financing that is transitioning into new
lines of business) since December 1998; Teletouch Communications, Inc., a retail
provider of Internet, cellular and paging services, beginning in November 2001;
Isolagen, Inc., a biotechnology company, since 2003; Crown Financial Group,
Inc., a publicly traded registered broker-dealer, since March 2004; and Vaso
Active Pharmaceuticals Inc., a development stage company formed for the purpose
of marketing and distributing over the counter pharmaceuticals, since August
2004. He has also served as a director and Chief Executive Officer of Four M
International Inc., a private investment firm, and as a director and Chief
Executive Officer of Amerique Investments since 1992. He is a graduate of Rice
University.





**Samuel
L. Shimer** ,
Director. Mr. Shimer was appointed by the Board of Directors as a Class I
director on April 15, 2001 to fill a board vacancy and was appointed Senior Vice
President, Mergers & Acquisitions and Business Development on February 12,
2003. From 1997 to February 2003 he was employed by Counsel Corporation, serving
as a Managing Director since 1998. From 1991 to 1997, Mr. Shimer worked at two
merchant banking funds affiliated with Lazard Frères & Co., Center Partners
and Corporate Partners, ultimately serving as a Principal. Mr. Shimer earned a
Bachelor of Science in Economics degree from The Wharton School of the
University of Pennsylvania, and a Master’s of Business Administration degree
from Harvard Business School. Mr. Shimer terminated his employment with the
Company on February 27, 2004 to join Whitney & Co., an asset management
company. He remains a member of the Board.





**William
H. Lomicka** ,
Director. Mr. Lomicka was appointed by the Board of Directors as a Class III
director on March 23, 2004 to fill a board vacancy left by the resignation of
Mr. Albert Reichmann. Mr. Lomicka is Chairman of Coulter Ridge Capital, Inc. a
private investment firm, a position he has held since 1999. Between 1989 and
1999 he was President of Mayfair Capital, Inc., a private investment firm. Mr.
Lomicka is a director of Pomeroy IT Solutions and is also on the board of
advisors of Valley Ventures, an Arizona venture capital fund. Mr. Lomicka is a
graduate of the College of Wooster in Wooster, Ohio, and has a Master’s of
Business Administration degree from the Wharton School of the University of
Pennsylvania. Mr. Lomicka has served as a director of Counsel Corporation, the
parent company of Acceris, since June 26, 2002.





**Stephen
A. Weintraub** , Senior
Vice President and Secretary. Mr. Weintraub was elected as a Class I director on
November 26, 2003, and served as a director until June 15, 2004. Mr. Weintraub
joined Counsel in June 1983 as Vice President, Finance and Chief Financial
Officer. He has been and is an officer and director of various Counsel
subsidiaries. He has been Secretary of Counsel since 1987 and Senior Vice
President since 1989. From 1980 to 1983 he was Secretary-Treasurer of Pinetree
Development Co. Limited, a private real estate developer and investor. From 1975
to 1980 he was Treasurer and CFO of Unicorp Financial Corporation, a public
financial management and holding company. Mr. Weintraub received a Bachelor’s
degree in Commerce from the University of Toronto in 1969, qualified as a
Chartered Accountant with Clarkson, Gordon (now Ernst & Young LLP) in 1972
and received his law degree (LL.B.) from Osgoode Hall Law School, York
University in 1975. Mr. Weintraub is a director of Counsel Corporation, the
parent company of Acceris.





**Gary
M. Clifford** , Vice
President of Finance and Chief Financial Officer. Mr. Clifford joined Counsel
Corporation in November 2002 as its Chief Financial Officer. From June 1998 to
October 2002, Mr. Clifford has held various senior roles at Leitch Technology
Corporation in Finance, Operations and Corporate Development. From February 1996
to June 1998, Mr. Clifford worked for NetStar Communications Inc. Mr. Clifford
is a Chartered Accountant, who articled with Coopers & Lybrand (now
PricewaterhouseCoopers). Mr. Clifford serves as a board member of QuStream
Corporation, a Canadian private company in the high technology sector. A
graduate of the University of Toronto, with a Bachelor’s degree in Management,
he has also lectured at Ryerson Polytechnic University in Toronto, Canada. Mr.
Clifford was appointed as Vice President of Finance of Acceris on December 6,
2002 and Chief Financial Officer on February 12, 2003.





**James
G. Ducay** ,
Executive Vice President and Chief Operating Officer. Mr. Ducay was named
Executive Vice President and Chief Operating Officer of Acceris in October 2003.
From December 2002 until October 2003, Mr. Ducay served as President of the
Company’s Enterprise business. Previously, from April 2000 to December 2002, Mr.
Ducay was Executive Vice President and Chief Operating Officer of RSL.COM USA
(“RSL.COM”) with responsibility for Marketing, Sales and Account Services,
Engineering and Operations and Information Technology. RSL.COM filed for
bankruptcy protection under Chapter 11 in March 2001. Before joining RSL.COM,
Mr. Ducay was Vice President of Marketing and Sales for Ameritech Interactive
Media Services from February 1998 to April 2000 where he was responsible for
managing Ameritech’s Internet products and related sales channels. He also
served as Managing Director and Vice President for Bell Atlantic/NYNEX. Mr.
Ducay has a Master’s Degree in Engineering from the University of Illinois and a
Master’s Degree in Business Administration from the University of
Chicago.





49


**Kenneth
L. Hilton** ,
Executive Vice President, Sales and Marketing. Mr. Hilton was named Executive
Vice President, Sales and Marketing of Acceris in October 2003. Previously, he
was appointed Chief Executive Officer of WorldxChange Corporation in May 2002.
From June 1999 to December 2001, Mr. Hilton served as the Chief Executive
Officer of Handtech.com, an Internet-based start-up company in Austin, TX that
provided customized E-commerce storefronts, supply chain management and back
office services to value-added resellers. Prior to Handtech.com, from October
1995 to May 1999, he was the Executive Vice President of North American Consumer
Sales for Excel Communications, where he also served as the Chairman of the
Board for Excel Canada. Prior to his 5 years at Excel, he ran North America
operations for PageMart Wireless where he launched the Canadian business and
also served as the Chairman of the Canadian Board. Prior to PageMart, Mr. Hilton
held numerous sales and management positions with IBM. His 14-year career with
IBM included sales, sales management, branch management and regional management
positions.





**David
B. Silverman** , Senior
Vice President and General Counsel. Mr. Silverman was named Senior Vice
President and General Counsel of Acceris in April 2004. From April 2000 to April
2004, Mr. Silverman served as Corporate Counsel, Director of Legal Affairs of XO
Communications, Inc., a telecommunications company in Reston, VA providing
communications services for small and growing businesses, larger enterprises and
carriers. Prior to XO Communications, Inc., from September 1997 to April 2000,
he was an associate attorney at the law firm of Wiley Rein and Fielding, located
in Washington, DC. Mr. Silverman received his B.S. in Journalism from the
University of Kansas and his J.D. from Northwestern University School of
Law.





**Eric
S. Lipscomb** , Vice
President of Accounting, Controller and Chief Accounting Officer. Mr. Lipscomb
was appointed Vice President of Accounting and Controller in December 2003.
Prior to his employment with Acceris, Mr. Lipscomb was an independent consultant
from February 2001 to December 2003. From July 1995 to February 2001, he held
various senior roles at Viacom Inc. in accounting and finance. Mr. Lipscomb is a
Certified Public Accountant (CPA), as well as a Certified Management Accountant
(CMA) and a Certified Financial Manager (CFM). Mr. Lipscomb earned a Bachelor of
Science degree in Accounting from Pennsylvania State University and a Master of
Business Administration degree from the University of Pittsburgh. Mr. Lipscomb
was appointed Chief Accounting Officer on March 9, 2005.





Each
officer of Acceris is appointed by the Board of Directors and holds his/her
office at the pleasure and direction of the Board of Directors or until such
time of his/her resignation or death.





Acceris
and several of Acceris’ current and former executives and board members were
named in derivative and securities actions filed in the Superior Court
of the State of California in and for the County of San Diego on April 16,
2004, which are described above in Item 3. The Company believes that
these claims are without merit and intends to vigorously defend these actions.
There is no assurance that these matters will be resolved in the Company’s favor
and an unfavorable outcome of these matters could have a material adverse impact
on its business, results of operations, financial position or liquidity. See
“Item 3 - Legal Proceedings.”





**Section
16(a) Beneficial Ownership Reporting Compliance**





Section
16(a) of the Exchange Act requires our officers and directors, and persons who
own more than ten percent of a registered class of our equity securities, to
file reports of ownership and changes in ownership of equity securities of
Acceris with the SEC. Officers, directors, and greater than ten percent
stockholders are required by the SEC regulation to furnish us with copies of all
Section 16(a) forms that they file.





Based
solely upon a review of Forms 3 and Forms 4 furnished to us pursuant to Rule
16a-3 under the Exchange Act during our most recent fiscal year, and Forms 5
with respect to our most recent fiscal year, we believe that all such forms
required to be filed pursuant to Section 16(a) were timely filed as necessary,
by the executive officers, directors and security holders required to file same
during the fiscal year ended December 31, 2004, except that William Lomicka,
David Silverman, James Meenan and Samuel Shimer each failed to file a timely
Form 3 and Hal Heaton, Albert Reichmann, and Henry Toh each had one transaction
which was not timely reported on Form 4, and Counsel Corporation had 4
transactions which were not timely reported on Form 4. As of the date of this
Annual Report, the foregoing reporting persons are in compliance with Section
16(a) reporting requirements.








50








**The
Board of Directors**





The Board
of Directors oversees the business affairs of the Company and monitors the
performance of management. The Board of Directors held 15 meetings during the
fiscal year ended December 31, 2004. The Board of Directors has designated three
standing committees: the Audit Committee, the Compensation Committee, and the
Special Committee of Independent Directors. We do not have a nominating or a
corporate governance committee or any committees serving similar functions.
However, corporate governance functions are included in the Audit Committee
Charter.





**Committees
of the Board of Directors**





Audit
Committee. The Audit Committee is responsible for making recommendations to the
Board of Directors concerning the selection and engagement of independent
accountants and for reviewing the scope of the annual audit, audit fees, results
of the audit and independent registered public accounting firm’s independence.
The Audit Committee also reviews and discusses with management and the Board of
Directors such matters as accounting policies, internal accounting controls and
procedures for preparation of financial statements. Its membership is currently
comprised of Mr. Tanki (chairman) and Messrs. Heaton and Toh. The Audit
Committee held six meetings during the last fiscal year. On June 9, 2000, the
Board of Directors approved Acceris’ Audit Committee Charter, which was
subsequently revised and amended on July 10, 2001 and again on February 12, 2003
in order to incorporate certain updates in light of the most recent regulatory
developments, including the Sarbanes-Oxley Act of 2002. A copy of the current
Audit Committee Charter was attached to the Company’s Definitive Proxy Statement
sent to stockholders in October 2003 in connection with the 2003 Annual Meeting
of Stockholders. The Audit Committee Charter is reviewed annually and was last
reviewed by the Board of Directors on March 23, 2004, at which time no
amendments were proposed.





Compensation
Committee. The Compensation Committee reviews and approves the compensation for
executive employees. Its membership is currently comprised of Messrs. Heaton,
Toh and Meenan. The Compensation Committee held one meeting during the last
fiscal year. Mr. Meenan joined the committee on September 21, 2004.





Special
Committee of Independent Directors. The Special Committee of Independent
Directors reviews and makes recommendations to the Board of Directors on
potential merger and acquisition activities of the business and potential
financings. The Committee was formed on December 7, 2004 and is comprised of
Messrs. Toh, Tanki and Meenan.





**Audit
Committee Financial Expert**





The Board
of Directors has determined that Mr. Henry Y.L. Toh and Mr. Frank J. Tanki,
members of the Audit Committee, are each an audit committee financial expert as
defined by Item 401(h) of Regulation S-K under the Securities Act and are
independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A under the
Exchange Act.





**Code
of Ethics**





Acceris
has adopted a code of ethics that applies to its principal executive, financial
and accounting officers. The Acceris Code of Conduct (the “Code”) can be found
on the Company’s website at *http://www.acceris.com* (follow
Corporate Governance link to Governance Documents tab). The Company intends to
satisfy the disclosure requirements under Item 10 (now Item 5.05) of Form 8-K
regarding any amendments to, or waivers from, a provision of the Code that
applies to its principal executive, financial and accounting officers by posting
such information on its website at the website address set forth above. The Code
of Conduct is modified from time to time and is signed annually by all employees
of the Company in conjunction with annual performance reviews.











51








**Item
11. Executive Compensation.**





The
following table sets forth the aggregate cash compensation paid for services
rendered during the last three years by each person serving as our Chief
Executive Officer during the last year and the four
most highly compensated executive officers during the year ended December 31,
2004 whose compensation was in excess of $100,000 (“Named
Officers”).


**Long-Term
      Compensation****Annual
      Compensation**
      **(in
      absolute dollars)**
    
    
    **Awards**
    
    
    **Payouts****Name
      and****Principal
      Position(5)**
    
    
    **Year**
    
    
    **Salary($)**
    
    
    **Bonus($)**
    
    
    **Other**
      **Annual**
      **Compensation
      ($)**
    
    
    **Restricted**
      **Stock**
      **Awards
      ($)**
    
    
    **Securities**
      **Underlying**
      **Options
      (#)**
    
    
    **LTIP**
      **Payouts
      ($)**
    
    
    **All
      Other**
      **Compensation($)**Allan
      Silber(1)
    
    
    2004
    
    $
    275,000
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Director
      and Chief Executive Officer
    
    
    2003
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —2002
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Kenneth
      L. Hilton (2)
    
    
    2004
    
    $
    275,000
    
    $
    —
    
    $
    2,010
    
    
    —
    
    
    —
    
    
    —
    
    
    —Executive
      Vice President,
    
    
    2003
    
    
    275,000
    
    
    55,000
    
    
    —
    
    
    —
    
    
    150,000
    
    
    —
    
    
    —Sales
      and Marketing
    
    
    2002
    
    
    183,333
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —James
      G. Ducay (3)
    
    
    2004
    
    $
    275,000
    
    $
    100,000
    
    $
    450
    
    
    —
    
    
    —
    
    
    —
    
    
    —Executive
      Vice President,
    
    
    2003
    
    
    275,000
    
    
    —
    
    
    —
    
    
    —
    
    
    150,000
    
    
    —
    
    
    —Chief
      Operating Officer
    
    
    2002
    
    
    12,500
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —David
      B. Silverman(4)
    
    
    2004
    
    $
    133,864
    
    $
    60,000
    
    $
    200
    
    
    —
    
    
    75,000
    
    
    —
    
    
    —Senior
      Vice President and
    
    
    2003
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —General
      Counsel
    
    
    2002
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —


(1)
    
    Mr.
      Silber was appointed interim Chief Executive Officer and President of
      Acceris as of December 19, 2002. Mr. Silber is entitled to an annual
      salary of $275,000 and a discretionary bonus equal to 100% of his base
      salary. For 2004 and 2003, no bonus was awarded. In 2003, Mr. Silber
      elected to assign his salary payable at December 31, 2003 of $275,000 to
      Counsel. On November 26, 2003, Kelly D. Murumets was appointed President,
      succeeding Mr. Silber in his capacity as President.(2)
    
    Mr.
      Hilton became the Executive Vice President, Sales and Marketing, of
      Acceris on January 1, 2003.(3)
    
    Mr.
      Ducay became the President of the Enterprise customer base of Acceris on
      December 10, 2002. In October 2003, Mr. Ducay became the Executive
      Vice-President and Chief Operating Officer for Acceris.(4)
    
    Mr.
      Silverman became Senior Vice President and General Counsel of Acceris in
      April 2004.(5)
    
    Ms.
      Kelly Murumets (Director and President), Mr. Gary Clifford (Vice President
      of Finance and Chief Financial Officer), and Mr. Stephen Weintraub (Senior
      Vice President and Corporate Secretary) did not receive any direct
      compensation from Acceris in 2003 or 2004. On December 31, 2004, Acceris
      Communications Inc. (the “Company”) entered into a management services
      agreement (the “Agreement”) with Counsel Corporation, the Company’s
      majority stockholder, and its wholly-owned subsidiaries (collectively,
      “Counsel”). Under the terms of the Agreement, the Company agreed to make
      payment to Counsel for the past and future services to be provided by
      Counsel personnel (excluding Allan C. Silber, Counsel’s Chairman,
      President and Chief Executive Officer and the Company’s Director and Chief
      Executive Officer) to the Company for the calendar years of 2004 and 2005.
      The basis for such services charged will be an allocation, on a cost
      basis, based on time incurred, of the base compensation paid by Counsel to
      those employees providing services to the Company. The cost of such
      services is $280,000 for the year ended December 31, 2004. Services for
      2005 will be determined on the same basis. For each fiscal quarter,
      Counsel will provide the details of the charge for services by individual,
      including respective compensation and their time allocated to the
      Company.In
      accordance with the Foothill and Laurus agreements, amounts owing to
      Counsel cannot be repaid while amounts remain owing to Foothill and
      Laurus.The foregoing fees for 2004 and 2005 are due and payable within 30 days
      following the respective year ends, subject to applicable restrictions.
      Any unpaid fee amounts will bear interest at 10% per annum commencing on
      the day after such year end.In
      the event of a change of control, merger or similar event of the Company,
      all amounts owing, including fees incurred up to the date of the event,
      will become due and payable immediately upon the occurrence of such event.
      The Agreement does not guarantee the personal services of any specific
      individual at the Company throughout the term of the agreement and the
      Company will have to enter into a separate personal services arrangement
      with such individual should their specific services be required. The
      Company’s Board of Directors approved the Agreement on December 23, 2004.





52


**Option
Grants in Last Fiscal Year (2004)**





The
following table shows information about stock option grants to the Named
Officers during fiscal 2004. These options are included in the Summary
Compensation Table above. These gains are calculated assuming annual compound
stock price appreciation of 5% and 10% from the date the option was originally
granted to the end of the option term. The 5% and 10% assumed annual compound
rates of stock price appreciation are required by Securities and Exchange
Commission rules, and are not the Company’s estimate or projection of future
stock prices.


**Individual
      Grants****Number
      of**
      **Securities**
      **Underlying**
      **Options**
    
    
    **Percent
      of Total**
      **Options**
      **Granted
      to**
      **Employees
      in**
    
    
    **Exercise
      Of**
      **Base
      Price**
    
    
    
    
    
    **Potential
      Realizable**
      **Value
      at Assumed**
      **Annual
      Rates Of Stock**
      **Price**
      **Appreciation
      For Option**
      **Term****Name**
    
    
    **Granted
      (#)**
    
    
    **Fiscal
      Year**
    
    
    **($/Sh)**
    
    
    **Expiration
      Date**
    
    
    **5%
      ($)**
    
    
    **10%
      ($)**Allan
      C. Silber
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Kenneth
      L. Hilton
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —James
      G. Ducay
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —David
      B. Silverman
    
    
    75,000
    
    
    20.9
    %
    $
    1.39
    
    
    July
      19, 2011
    
    $
    42,440
    
    $
    98,904





**Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year-End
Option**  **Values:**





The
following table shows information about the value realized on option exercises
for each of the Named Officers during fiscal 2004, and the value of their
unexercised options at the end of fiscal 2004. Value realized, or gain, is
measured as the difference between the exercise price and market value or the
price at which the shares were sold on the date of exercise.


**Name**
    
    
    **Shares
      Acquired On**
      **Exercise
      (#)**
    
    
    **Value
      Realized ($)**
    
    
    **Number
      of Securities**
      **Underlying
      Unexercised**
      **Options
      At Fiscal Year-**
      **End
      (#)**
      **Exercisable/Unexercisable**
    
    
    **Value
      of Unexercised In-**
      **The-Money
      Options At**
      **Fiscal
      Year-End ($)**
      **Exercisable/Unexercisable**
      **(1)**Allan
      C. Silber
    
    
    —
    
    
    —
    
    
    —
    
    
    /
    
    
    —
    
    
    —
    
    
    /
    
    
    —Kenneth
      L. Hilton
    
    
    —
    
    
    —
    
    
    37,500
    
    
    /
    
    
    112,500
    
    
    —
    
    
    /
    
    
    —James
      G. Ducay
    
    
    —
    
    
    —
    
    
    37,500
    
    
    /
    
    
    112,500
    
    
    —
    
    
    /
    
    
    —David
      B. Silverman
    
    
    —
    
    
    —
    
    
    —
    
    
    /
    
    
    75,000
    
    
    —
    
    
    /
    
    
    —


(1) None
of the unexercised options above are in the money, based on the closing price of
the Company’s common stock on December 31, 2004, which was $0.65 per
share.





**Director
Compensation**





Commencing
in June 2004, Board members who are not employed by Counsel or Acceris receive a
$20,000 per year cash retainer, $1,000 per meeting attended in person or by
telephone, and a grant of stock options to purchase 10,000 shares of common
stock each year. In addition, the Chairman of the Audit Committee receives a
cash retainer of $10,000 per year, Audit Committee members who are not the chair
receive a cash retainer of $5,000 per year, and other committee chairpersons
receive an annual cash retainer of $2,000 per annum. Prior to June 2004, all
directors then serving who were not employed by Acceris or Counsel other than in
their capacity as directors received an option to purchase 1,000 shares of
common stock and for each committee on which the director served, an option to
purchase 250 shares of common stock. In addition, each independent director was
compensated $1,000 for each in-person board meeting attended and $500 for each
telephonic board meeting attended. The directors were also eligible to receive
options under our stock option plans at the discretion of the Board of
Directors. No discretionary stock options were awarded to directors during 2004.
In 2004, Mr. Meenan received approximately $8,000 pursuant to a management
consulting services agreement.





**Employment
Contracts and Termination of Employment and
Change-in-Control**  **Arrangements**





*Kenneth
L. Hilton Employment Contract.* Acceris
and Kenneth L. Hilton entered into an employment agreement pursuant to which Mr.
Hilton became the Executive Vice President, Sales and Marketing, of Acceris,
effective January 1, 2003. Mr. Hilton’s annual salary is $275,000, and he is
eligible for a discretionary bonus of up to 100% of his annual salary in an
amount to be determined pursuant to a performance management system, based on
performance criteria established at the beginning of each fiscal year.
Additionally, in June 2002, the Company made a relocation loan of $100,000 to
Mr. Hilton. The loan is due on the earlier of August 1, 2005 or upon sale of Mr.
Hilton’s former residence. Commencing October 1, 2004, monthly payments of the
accrued interest, as calculated beginning September 1, 2004, were required.
Additionally, no amount in respect of Mr. Hilton’s bonus, or any termination or
severance payment, shall be paid to him while any of the loan remains
outstanding.





53


*James
G. Ducay Employment Contract.* Acceris
and James G. Ducay entered into an employment agreement, which became effective
on January 1, 2004. Mr. Ducay’s annual salary is $275,000, and he is eligible
for a discretionary bonus of up to 100% of his annual salary in an amount to be
determined pursuant to a performance management system, based on performance
criteria established at the beginning of each fiscal year. For 2004, Mr. Ducay
received a bonus of $100,000.





*David
B. Silverman Employment Contract.* Acceris
and David B. Silverman entered into an employment agreement, effective
April 4, 2004, pursuant to which Mr. Silverman became
the Senior Vice President and General Counsel of Acceris.
Mr. Silverman’s annual salary is $190,000, and he is eligible for a
discretionary bonus of up to 60% of his annual salary in an amount to be
determined pursuant to a performance management system, based on performance
criteria established at the beginning of each fiscal year. For 2004, Mr.
Silverman received a bonus of $60,000.





*Eric
S. Lipscomb Employment Contract.* Acceris
and Eric S. Lipscomb entered into an employment agreement, effective March
9, 2005, pursuant to which Mr. Lipscomb became the Vice President of
Accounting, Controller and Chief Accounting Officer of Acceris.
Mr. Lipscomb’s annual salary is $150,000, and he is eligible for a
discretionary bonus of up to 25% of his annual salary in an amount to be
determined pursuant to a performance management system, based on performance
criteria established at the beginning of each fiscal year. Mr. Lipscomb’s
discretionary bonus is not linked to the financial performance of the Company.
Prior to this contract Mr. Lipscomb was the Vice President of Accounting and
Controller.





**Stock
Option Plans**





At
December 31, 2004, the Company has several stock-based employee compensation
plans. All share amounts disclosed below reflect the effect of the 1-for-20
reverse stock split which was approved by the stockholders on November 26,
2003.





Director
Stock Option Plan





The
Company’s Director Stock Option Plan authorizes the grant of stock options to
directors of the Company. Options granted under the Director Stock Option Plan
are non-qualified stock options exercisable at a price equal to the fair market
value per share of common stock on the date of any such grant. Options granted
under the Director Stock Option Plan are exercisable not less than six months or
more than ten years after the date of grant.





As of
December 31, 2004, options for the purchase of 117 (2003 - 233 shares) shares of
common stock at a price of $17.50 (2003 - $17.50 to $77.50) per share were
outstanding, all of which are exercisable. In connection with the adoption of
the 1995 Director Plan, the Board of Directors authorized the termination of
future grants of options under the Director Stock Option Plan; however,
outstanding options will continue to be governed by the terms thereof until
exercise or expiration of such options. In 2004, 116 options
expired.





1995
Director Stock Option and Appreciation Rights Plan





The 1995
Director Stock Option and Appreciation Rights Plan (the “1995 Director Plan”)
provides for the issuance of incentive stock options, non-qualified stock
options and stock appreciation rights (“SARs”) to directors of the Company up to
12,500 shares of common stock (subject to adjustment in the event of stock
dividends, stock splits, and other similar events).





The 1995
Director Plan also provides for the grant of non-qualified options on a
discretionary basis to each member of the Board of Directors then serving to
purchase 500 shares of common stock at an exercise price equal to the fair
market value per share of the common stock on that date. Each option is
immediately exercisable for a period of ten years from the date of grant. The
Company has 9,500 shares of common stock reserved for issuance under the 1995
Director Plan. As of December 31, 2004, options to purchase 8,500 shares of
common stock at prices ranging from $20.00 to $25.00 per share are outstanding
and exercisable. No options were granted or exercised under this plan in 2004
and 2003.





1995
Employee Stock Option and Appreciation Rights Plan





The 1995
Employee Stock Option and Appreciation Rights Plan (the “1995 Employee Plan”)
provides for the issuance of incentive stock options, non-qualified stock
options, and SARs. Directors of the Company are not eligible to participate in
the 1995 Employee Plan. The 1995 Employee Plan provides for the grant of stock
options which qualify as incentive stock options under Section 422 of the
Internal Revenue Code, to be issued to officers who are employees and other
employees, as well as non-qualified options to be issued to officers, employees
and consultants. In addition, SARs may be granted in conjunction with the grant
of incentive and non-qualified options.





54


The 1995
Employee Plan provides for the grant of incentive options, non-qualified options
and SARs of up to 20,000 shares of common stock (subject to adjustment in the
event of stock dividends, stock splits, and other similar events). To the extent
that an incentive option or non-qualified option is not exercised within the
period of exercisability specified therein, it will expire as to the then
unexercisable portion. If any incentive option, non-qualified option or SAR
terminates prior to exercise thereof and during the duration of the 1995
Employee Plan, the shares of common stock as to which such option or right was
not exercised will become available under the 1995 Employee Plan for the grant
of additional options or rights to any eligible employee. The shares of common
stock subject to the 1995 Employee Plan may be made available from either
authorized but unissued shares, treasury shares or both. The Company has 20,000
shares of common stock reserved for issuance under the 1995 Employee Plan. As of
December 31, 2003, there were no options outstanding under the 1995 Employee
Plan. During 2003, options to purchase 6,763 shares of common stock were
forfeited or expired. No options were granted or exercised in 2004 under the
1995 Employee Plan.





1997
Recruitment Stock Option Plan





In
October 2000, the stockholders of the Company approved an amendment of the 1997
Recruitment Stock Option Plan (the “1997 Plan”) which provides for the issuance
of incentive stock options, non-qualified stock options and SARs up to an
aggregate of 370,000 shares of common stock (subject to adjustment in the event
of stock dividends, stock splits, and other similar events). The price at which
shares of common stock covered by the option can be purchased is determined by
the Company’s Board of Directors; however, in all instances the exercise price
is never less than the fair market value of the Company’s common stock on the
date the option is granted.





As of
December 31, 2004, there were options to purchase 56,736 shares of the Company’s
common stock outstanding under the 1997 Plan. The outstanding options vest over
three years at exercise prices of $1.40 to $127.50 per share. Options issued
under the 1997 Plan must be exercised within ten years of grant and can only be
exercised while the option holder is an employee of the Company. The Company has
not awarded any SARs under the 1997 Plan. During 2004 and 2003, options to
purchase 3,744 and 45,067 shares of common stock, respectively, were forfeited
or expired. There were no options granted or exercised during 2004.





2000
Employee Stock Purchase Plan





During
2000, the Company obtained approval from its stockholders to establish the 2000
Employee Stock Purchase Plan. The Stock Purchase Plan provides for the purchase
of common stock, in the aggregate, up to 125,000 shares. This plan allows all
eligible employees of the Company to have payroll withholding of 1 to 15 percent
of their wages. The amounts withheld during a calendar quarter are then used to
purchase common stock at a 15 percent discount off the lower of the closing sale
price of the Company’s stock on the first or last day of each quarter. This plan
was approved by the Board of Directors, subject to stockholder approval, and was
effective beginning the third quarter of 2000. The Company issued 1,726 shares
to employees based upon payroll withholdings during 2001. There were no
issuances in 2004, 2003 or 2002.





The
purpose of the Stock Purchase Plan is to incent all eligible employees of
Acceris (or any of its subsidiaries) who have been employees for at least three
months to encourage stock ownership of Acceris by acquiring or increasing their
proprietary interest in Acceris. The Stock Purchase Plan is designed to
encourage employees to remain in the employ of Acceris. It is the intention of
Acceris to have the Stock Purchase Plan qualify as an “employee stock purchase
plan” within the meaning of Section 423 of the Internal Revenue Code, as amended
to issue shares of common stock to all eligible employees of Acceris (or any of
Acceris’ subsidiaries) who have been employees for at least three
months.




2003
Stock Option and Appreciation Rights Plan





In
November 2003, the stockholders of the Company approved the 2003 Stock Option
and Appreciation Rights Plan (the “2003 Plan”) which provides for the issuance
of incentive stock options, non-qualified stock options and stock appreciation
rights (“SARs”) up to an aggregate of 2,000,000 shares of common stock (subject
to adjustment in the event of stock dividends, stock splits, and other similar
events). The price at which shares of common stock covered by the option can be
purchased is determined by the Company’s Board of Directors or its committee;
however, in the case of incentive stock options the exercise price shall not be
less than the fair market value of the Company’s common stock on the date the
option is granted. As of December 31, 2004, there were options to purchase
1,359,625 shares of the Company’s common stock outstanding under the 2003 Plan.
The outstanding options vest over four years at exercise prices ranging from
$0.60 to $4.60 per share. During 2004, options to purchase 433,726 shares of
common stock were forfeited or expired. There were no options granted or
exercised during 2004, and no SARs have been issued under the 2003
Plan.





**Compensation
Committee Interlocks and Insider Participation**





Mr. Toh
was formerly an officer of the Company, as described above. No Compensation
Committee members or other directors served as a member of the compensation
committee of another entity, whose executive officers served as a director of
Acceris.





55


**Item
12. Security Ownership of Certain Beneficial Owners and Management
and**  **Related
Stockholder Matters.**





The
following table sets forth information regarding the ownership of our common
stock as of March 1, 2005 by: (i) each director; (ii) each of the
Named Officers in the Summary Compensation Table; (iii) all executive
officers and directors of the Company as a group; and (iv) all those known
by us to be beneficial owners of more than five percent of our common stock. As
of March 1, 2005, there are 19,237,135 shares of common stock and 618 shares of
Series N Preferred stock issued and outstanding. Each share of Series N
Preferred Stock is entitled to 40 votes.





**Name
      and Address of**
      **Beneficial
      Owner (1)**
    
    **Number
      of Shares**
      **Beneficially
      Owned**
    
    **Percentage**
      **of
      Common Stock**
      **Beneficially
      Owned(2)**James
      J. Meenan
    
    0
    
    
    *
    %Allan
      C. Silber
    
    0
    (3)
    
    *
    %Kelly
      D. Murumets
    
    0
    (4)
    
    *
    %Frank
      J. Tanki
    
    0
    
    
    *
    %Hal
      B. Heaton
    
    7,948
    (5)
    
    *
    %Henry
      Y.L. Toh
    
    18,471
    (6)
    
    *
    %William
      H. Lomicka
    
    0
    (7)
    
    *
    %Stephen
      A. Weintraub
    
    0
    (8)
    
    *
    %Samuel
      L. Shimer
    
    0
    (9)
    
    *
    %Gary
      M. Clifford
    
    0
    (10)
    
    *
    %James
      G. Ducay
    
    37,500
    (5)
    
    *
    %Kenneth
      L. Hilton
    
    38,500
    (5)
    
    *
    %David
      B. Silverman
    
    0
    
    
    *
    %Eric
      S. Lipscomb
    
    0
    
    
    *
    %Counsel
      Corporation and subsidiaries
      40
      King Street West
      Scotia
      Plaza, Suite 3200
      Toronto,
      Ontario M5H3Y2
    
    20,846,877
    (11)
    
    91
    %All
      Executive Officers and Directors as a Group (14 people)
    
    102,419
    
    
    *
    %





*
    
    Indicates
      less than one percent(1)
    
    Unless
      otherwise noted, all listed shares of common stock are owned of record by
      each person or entity named as beneficial owner and that person or entity
      has sole voting and dispositive power with respect to the shares of common
      stock owned by each of them. All addresses are c/o Acceris Communications
      Inc. unless otherwise indicated.(2)
    
    As
      to each person or entity named as beneficial owners, that person’s or
      entity’s percentage of ownership is determined based on the assumption
      that any options or convertible securities held by such person or entity
      which are exercisable or convertible within 60 days have been exercised or
      converted, as the case may be.(3)
    
    Mr.
      Silber is Chairman, Chief Executive Officer and President of Counsel, and
      a beneficial owner of approximately 4,710,376 shares or 9.9% of the
      outstanding stock of Counsel. In September 2001, Mr. Silber became a
      Director of Acceris. Mr. Silber was appointed Chairman in November 2001.
      Mr. Silber was appointed Chief Executive Officer and Interim President of
      Acceris in December 2002 and served as such until November 2003 when the
      Board appointed Ms. Murumets to succeed Mr. Silber as President. Mr.
      Silber was succeeded as Chairman of the Board by Mr. James Meenan in
      October 2004. Mr. Silber remains a director and Chief Executive Officer of
      Acceris. Mr. Silber disclaims beneficial ownership of the shares of
      Acceris’ common stock beneficially owned by Counsel.(4)
    
    Ms.
      Murumets is Executive Vice President of Counsel and a beneficial owner of
      274,000 shares in Counsel, which represents less than 1% beneficial
      ownership of Counsel. At the December 6, 2002 meeting of the Board of
      Directors of Acceris, Ms. Murumets was appointed to the office of
      Executive Vice President of Acceris. At the February 12, 2003 meeting of
      the Board of Directors of Acceris, Ms. Murumets was appointed a director
      of Acceris. At the November 26, 2003 meeting of the Board of Directors of
      Acceris, Ms. Murumets was appointed President of Acceris. Ms. Murumets
      disclaims beneficial ownership of the shares of Acceris’ common stock
      beneficially owned by Counsel.
  56
  (5)
    
    Represents
      shares of common stock issuable within 60 days of the date hereof pursuant
      to options.(6)
    
    Represents
      shares of common stock issuable within 60 days of the date hereof pursuant
      to options. Does not include shares held of record by Four M
      International, Ltd., of which Mr. Toh is a director. Mr. Toh disclaims any
      beneficial ownership of such shares.(7)
    
    Mr.
      Lomicka is a director of Counsel and a beneficial owner of approximately
      70,000 shares in Counsel, which represents less than 1% beneficial
      ownership of Counsel. Mr. Lomicka disclaims beneficial ownership of the
      shares of Acceris’ common stock beneficially owned by
    Counsel.(8)
    
    Mr.
      Weintraub is Senior Vice President and Secretary of Counsel and a
      beneficial owner of approximately 306,102 shares in Counsel, which
      represents less than 1% beneficial ownership of Counsel. At the December
      6, 2002 meeting of the Board of Directors of Acceris, Mr. Weintraub was
      appointed to the office of Senior Vice President and Secretary of Acceris.
      Mr. Weintraub disclaims beneficial ownership of the shares of Acceris’
      common stock beneficially owned by Counsel.(9)
    
    Mr.
      Shimer is not an employee of Acceris; however he is a member of the Board
      of Directors. He was previously a managing director of Counsel. He is a
      beneficial owner of approximately 819,011 shares in Counsel, which
      represents 1.7% beneficial ownership of Counsel.(10)
    
    Mr.
      Clifford is the Chief Financial Officer of Counsel and a beneficial owner
      of approximately 100,000 shares in Counsel, which represents less than 1%
      beneficial ownership of Counsel. At the December 6, 2002 meeting of the
      Board of Directors of Acceris, Mr. Clifford was appointed Vice President
      of Finance of Acceris. At the February 16, 2003 meeting of the Board of
      Directors of Acceris, Mr. Clifford was appointed Chief Financial Officer
      of Acceris. Mr. Clifford disclaims beneficial ownership of the shares of
      Acceris’ common stock beneficially owned by Counsel.(11)
    
    Includes
      3,098,303 shares of Acceris’ common stock issued upon conversion of Series
      M and N redeemable preferred stock in March 2001 which were obtained from
      Winter Harbor LLC (“Winter Harbor”) on March 1, 2001, based on information
      included in a Schedule 13D filed by Counsel on March 13, 2001 and amended
      by Counsel and filed with the Securities and Exchange Commission on May 2,
      2001. Also includes 3,329,482 shares of common stock issuable upon
      conversion of a convertible promissory note in the principal amount (and
      including accrued interest) of approximately $16,714 as of December 31,
      2004, at the conversion price of $5.02 per share, under the terms of the
      Senior Convertible Loan and Security Agreement, dated March 1, 2001, as
      amended on May 8, 2001 (Loan Agreement). Also includes 871,724 shares
      issued on April 17, 2001 to Counsel under the terms of the Agreement and
      Plan of Merger, dated April 17, 2001. Also includes 8,681,096 shares of
      common stock issued in connection with the Amended Debt Restructuring
      conversion of a certain convertible promissory note on November 30, 2003.
      Also includes 4,747,522 shares of common stock issued in connection with
      the conversion of a certain convertible promissory note on November 30,
      2003. Also includes 118,750 shares received from Winter Harbor which were
      previously held in escrow in accordance with the terms and provisions of a
      certain Securities Purchase Agreement by and between Counsel and Winter
      Harbor dated March 1, 2001, and released to Counsel in accordance with the
      terms and provisions of certain release agreement between Counsel and
      Winter Harbor dated August 29, 2003. In accordance with the Wells Fargo
      Foothill, Inc. (“Foothill”) and Laurus Master Fund, Ltd. (“Laurus”)
      agreements, amounts owing to Counsel cannot be repaid while amounts remain
      owing to Foothill and Laurus. All of such shares have been pledged as
      security for the Laurus and Foothill indebtedness.








57








**Securities
Authorized for Issuance Under Equity Compensation Plans**





The
following table sets forth, as of December 31, 2004, information with respect to
equity compensation plans (including individual compensation arrangements) under
which the Company’s securities are authorized for issuance.




**Plan
      Category**
    
    **Number
      of Securities to beissued upon exercise ofoutstanding
      options,warrants and rights**
    
    **Weighted-averageexercise
      price ofoutstandingoptions, warrantsand
      rights**
    
    **Number
      of securitiesremaining available forfuture issuance
      underequity compensation plans(excluding securitiesreflected
      in column (a))****(a)**
    
    **(b)**
    
    **(c)****Equity
      compensation plans approved by security holders:**2003
      Stock Option and Appreciation Rights Plan
    
    
    1,359,625
    
    $
    2.68
    
    
    640,3751997
      Recruitment Stock Option Plan
    
    
    56,736
    
    
    44.94
    
    
    292,6861995
      Directors Stock Option and Appreciation Rights Plan
    
    
    8,500
    
    
    22.50
    
    
    1,0001995
      Employee Stock Option and Appreciation Rights Plan
    
    
    —
    
    
    —
    
    
    14,037Director
      Stock Option Plan
    
    
    117
    
    
    17.50
    
    
    —**Equity
      compensation plans not approved by security
    holders:**Issuance
      of non-qualified options to employees and outside consultants
      (1)
    
    
    366,665
    
    
    70.99
    
    
    —Sub-total
    
    
    1,791,643
    
    $
    18.08
    
    
    948,098Warrants
      available under Agent Warrant Program (2)
    
    
    650,000Warrants
      available under terms of convertible debenture (3)
    
    
    1,000,000Total
    
    
    3,441,643





(1)
    For
      a description of the material terms of these options, see Note 18 in the
      Company’s audited financial statements included in Item 15 of this Report
      on Form 10-K.(2)
    The
      Acceris Communications Inc. Platinum Agent Program (the “Agent Warrant
      Program”) awards warrants to certain of the Company’s agents based on
      performance criteria. This program did not commence until 2004, and as of
      the date of this filing, warrants to purchase approximately 650,000 shares
      of common stock have been issued under the Agent Warrant Program, none of
      which have vested.(3)
    For
      a description of the material terms of these warrants, see Note 10 in the
      Company’s audited financial statements included in Item 15 of this Report
      on Form 10-K.




**Item
13. Certain Relationships and Related Transactions**





**Transactions
with Management and Others**





See Item
11 hereof for descriptions of the terms of employment, consulting and other
agreements between the Company and certain officers, directors and other related
parties.





**Transactions
with Counsel**





*Initial
Acquisition of Acceris and Senior Convertible Loan*





On March
1, 2001, Acceris entered into a Senior Convertible Loan and Security Agreement,
(the “Senior Loan Agreement”) with Counsel. Pursuant to the terms and provisions
of the Senior Loan Agreement, Counsel agreed to make periodic loans to Acceris
in the aggregate principal amount not to exceed $10,000, which was subsequently
increased to $12,000 through amendment on May 8, 2001. Advances against the
Senior Loan Agreement were structured as a 3-year convertible note with interest
at 9% per annum, compounded quarterly. Counsel initially could convert the loan
into shares of common stock of Acceris at a conversion price of $11.20 per
common share. The terms of the Senior Loan Agreement also provide that at any
time after September 1, 2002, the outstanding debt including accrued interest
will automatically be converted into common stock using the then current
conversion rate, on the first date that is the twentieth consecutive trading day
that the common stock has closed at a price per share that is equal to or
greater than $20.00 per share. The Senior Loan Agreement also provides that the
conversion price is in certain cases subject to adjustment and includes
traditional anti-dilution protection for the lender and is subject to certain
events of default, which may accelerate the repayment of principal plus accrued
interest. Total proceeds available to the Company were $12,000, less debt
issuance costs of $600, amortized over three years. The Senior Loan Agreement
has been amended several times and the maturity date of the loan plus accrued
interest has been extended to January 31, 2006. As a result of the application
of the anti-dilution provisions of the Senior Loan Agreement, the conversion
price has been adjusted to $5.02 per common share. As of December 31, 2004, the
total outstanding debt under the Note (including principal and accrued interest)
was $16,714 which is convertible into approximately 3,329,482 shares of common
stock *.*





58


In
connection with the above Senior Loan Agreement, Acceris granted Counsel a
security interest in all of Acceris’ assets owned at the time of execution of
the Senior Loan Agreement or subsequently acquired, including but not limited to
Acceris’ accounts receivable, intangibles, inventory, equipment, books and
records, and negotiable instruments held by the Company (collectively, the
“Collateral”).





In
addition to the foregoing agreements, Acceris and Counsel executed a Securities
Support Agreement, dated March 1, 2001 (the “Support Agreement”) for the purpose
of providing certain representations and commitments by Acceris to Counsel,
including demand registration rights for common stock issuable upon conversion
of the related loan. Counsel relied on these representations and commitments in
its decision to enter a separate agreement (the “Securities Purchase Agreement”)
with Winter Harbor and First Media L.P., a limited partnership and the parent
company of Winter Harbor (collectively the “Winter Harbor Parties”), Counsel
agreed to purchase from the Winter Harbor Parties all of their equity securities
in Acceris, including shares of Class M and Class N preferred stock of Acceris,
beneficially owned by the Winter Harbor Parties for aggregate consideration of
$5,000 in cash.





On March
1, 2001, as part of the agreements discussed above, Counsel converted all of the
Class M and N convertible preferred stock it obtained from Winter Harbor into
3,098,303 shares of Acceris’ common stock. The Class N shares were converted at
$25.00 per common share and Class M at $11.20 per common share, in accordance
with their respective conversion rights. Pursuant to the Securities Purchase
Agreement, certain shares of common stock owned by the Winter Harbor Parties
were held in escrow pending resolution of certain events.





Under the
Support Agreement of March 1, 2001, Acceris also agreed to engage appropriate
advisors and proceed to take all steps necessary to merge Nexbell
Communications, Inc. (a subsidiary of Counsel) into Acceris. The merger was
completed on April 17, 2001 and Counsel received 871,724 shares of common stock
in Acceris as consideration.





In
October 2004, Counsel agreed to subordinate its loan and security interest to
that of Wells Fargo Foothill, Inc., (“Foothill”), the Company’s asset-based
lender, and Laurus Master Fund, Ltd. (“Laurus”), a third party financier, in
connection with the Senior Convertible Loan.





*Assignment
of Winter Harbor Common Stock and Debt Interests*





Pursuant
to the terms of a settlement between Counsel and the Winter Harbor Parties
effective August 29, 2003, the Winter Harbor Parties relinquished their right to
118,750 shares of the common stock of Acceris to Counsel. These shares were
released from escrow and delivered to Counsel.





The
Winter Harbor Parties further assigned to Counsel all of their rights with
respect to a note payable by Acceris of $1,999 drawn down pursuant to a Letter
of Credit issued November 3, 1998 to secure certain obligations of Acceris
together with any accrued interest thereon. The
assigned amount together with accrued interest amounted to $2,577 on August 29,
2003. As a result of the settlement and assignment, Acceris entered into a new
loan agreement with Counsel the terms of which provide that from August 29, 2003
the loan balance of $2,577 shall bear interest at 10% per annum compounded
quarterly with the aggregate balance of principal and accrued interest payable
on maturity of the loan on January 31, 2006. This loan agreement was
subsequently amended and restated to increase the principal of the loan by a
further $100 for funding provided by Counsel to enable Acceris to acquire a
Voice over Internet Protocol patent in December 2003 and to allow for the making
of further periodic advances thereunder at Counsel’s discretion. The loan
increased due to operating advances in 2004 of $1,918. . There are no conversion
features associated with this loan. The terms of the loan agreement provide that
certain events of default, may accelerate the repayment of principal plus
accrued interest. As of December 31, 2004, the total outstanding debt under
the loan (including principal and accrued interest) was $6,808. In October
of 2004, Counsel agreed to subordinate its loan repayment rights to the Foothill
and Laurus debts.





59








*Loan
and Security Agreement and Amended Debt Restructuring*





On June
6, 2001, Acceris and Counsel entered into a Loan and Security Agreement (the
“Loan Agreement”). Any funds advanced to Acceris between June 6, 2001 and April
15, 2002, (not to exceed $10,000) were governed by the Loan Agreement and due on
June 6, 2002. The loan was secured by all of the assets of Acceris. As of
December 31, 2001, advances under this loan agreement totaled $10,000. On June
27, 2002 the Loan Agreement was amended to an amount of $24,307, which included
additional capital advances from Counsel to Acceris made from December 31, 2001
through June 6, 2002. The amended agreement also further provided for additional
advances as needed to Acceris, which advances totaled $2,087 through December
31, 2002 and $650 through November 30, 2003.





On July
25, 2002 Acceris and Counsel entered into a Debt Restructuring Agreement (“Debt
Restructuring Agreement”) which was amended on October 15, 2002 pursuant to an
Amended and Restated Debt Restructuring Agreement (“Amended Agreement”). The
Amended Agreement included the following terms:





1)
    Principal
      ($24,307) and associated accrued interest ($2,284), as of October 15,
      2002, under the Loan Agreement, as amended, would be exchanged for common
      stock of Acceris at $3.77 per share (representing the average closing
      price of Acceris’ common stock during May 2002).2)
    Funding
      provided by Counsel pursuant to the Loan Agreement, as amended, ($2,087)
      and associated accrued interest ($1,996) from October 15, 2002 to December
      31, 2002, would be exchanged for common stock of Acceris at $3.77 per
      share (representing the average closing price of Acceris’ common stock
      during May 2002).3)
    Counsel
      would advance to Acceris all amounts paid or payable by Acceris to its
      stockholders that exercised their dissenters’ rights in connection with
      the transactions subject to the debt restructuring transactions and
      advance the amount of the annual premium to renew the existing directors
      and officers’ insurance coverage through November 2003.4)
    Counsel
      would reimburse Acceris for all costs, fees and expenses, in connection
      with the Debt Restructuring Agreement and the Amended Agreement and
      transactions contemplated thereby including all expenses incurred and yet
      to be incurred, including the Special Committee’s costs to negotiate these
      agreements and costs related to obtaining stockholder approval. During
      2003 and 2002, Counsel reimbursed Acceris $132 and $499, respectively, for
      certain reimbursable expenses, which have been recorded as additional
      paid-in capital.5)
    The
      issuance of common stock by Acceris pursuant to this Agreement would
      result in a weighted average conversion price adjustment pursuant to the
      provisions of the March 1, 2001 Loan Agreement. Whereas the conversion
      price for the March 1, 2001 Loan Agreement had initially been $11.20, the
      new conversion price would be adjusted as a result of the anti-dilution
      provisions of the Senior Loan Agreement. At December 31, 2004, the
      conversion price was $5.02 per common
share.




Effective
November 30, 2003, 8,681,096 shares of common stock were issued to Counsel in
settlement of the underlying debt and accrued interest totaling $32,721 on the
date of the conversion.





*Convertible
Promissory Note to Fund RSL COM USA, Inc. (“RSL”) Acquisition*





In
connection with the acquisition of certain assets of RSL in December 2002,
Acceris issued a $7,500 convertible note payable (the “Convertible Note”) to
Counsel, bearing interest at 10% per annum compounded quarterly which, as
amended, matured on June 30, 2005. The Convertible Note was convertible into
common stock of Acceris at a conversion rate of $1.68 per share. Effective
November 30, 2003 Counsel exercised its right to convert the Convertible Note
plus accrued interest to that date totaling $7,952 into common stock of Acceris.
This resulted in the issuance of 4,747,522 shares of Acceris common
stock.





*Collateralized
Promissory Note and Loan Agreement*





During
the fourth quarter of 2003, Counsel advanced the sum of $5,600 to Acceris
evidenced by a promissory note effective October 1, 2003. In January 2004
Acceris and Counsel entered into a loan agreement and an amended and restated
promissory note pursuant to which an additional $2,000 was loaned to Acceris and
pursuant to which additional periodic loans may be made from time to time
(collectively and as amended, the “Promissory Note”). The Promissory Note
matures on January 31, 2006 and accrues interest at 10% per annum compounded
quarterly from the date funds are advanced. The Promissory Note was
collateralized by certain shares of Series B Convertible Preferred Stock (the
“Preferred Stock”) of Buyers United, Inc. (a third party), which were held by
Acceris. In the event of the sale of the Preferred Stock (or the common stock to
which the Preferred Stock was convertible) by Acceris or an equity investment or
investments in Acceris by a third party through the capital markets and subject
to certain limitations, the terms of the Promissory Note stated that the
maturity date of the Promissory Note would accelerate to the date 10 calendar
days following either such event. The preferred stock was sold during the first
six months of 2004, and, with respect to the sale, Counsel waived its right to
accelerate the maturity date. The Promissory Note is further secured by the
assets of the Company and is subject to certain events of default which may
accelerate the repayment of principal plus accrued interest. In October of 2004,
Counsel agreed to subordinate its loan and security interest in connection with
the issuance of the Promissory Note to that of Foothill and Laurus. There are no
conversion features associated with the Promissory Note. The loan increased
primarily due to operating advances in 2004 of $10,662. The outstanding balance
at December 31, 2004 (including principal and accrued interest) was
$17,554.





60





*Secured
Loan to Acceris*





To fund
the acquisition of the WorldxChange Communications, Inc. assets purchased and
liabilities assumed by Acceris, on June 4, 2001 Counsel provided a loan (the
“Initial Loan”) to Acceris in the aggregate amount of $15,000. The loan was
subordinated to a revolving credit facility with Foothill, was collateralized by
all the assets of the Company and, as amended, had a maturity date of June 30,
2005. On October 1, 2003 Counsel assigned the balance owed in connection with
the Initial Loan of $9,743 including accrued interest (“the Assigned Loan”) to
Acceris in exchange for a new loan bearing interest at 10% per annum compounded
quarterly maturing on January 31, 2006 (“the New Loan”). Consistent with the
terms of the Initial Loan, subject to certain conditions, the New Loan provides
for certain mandatory prepayments upon written notice from Counsel including an
event resulting in the issuance of new shares by Acceris to a party unrelated to
Counsel where the funds are not used for an approved expanded business plan, the
purchase of the Company’s accounts receivable by a third party or where Acceris
has sold material assets in excess of cash proceeds of $1,000 and certain other
events. The New Loan is subject to certain events of default which may
accelerate the repayment of principal plus accrued interest. Pursuant to a Stock
Pledge Agreement as amended, the New Loan is secured by the common stock held
directly by Acceris in its operating subsidiary. Effective October 2004,
Counsel’s loan and security interest have been subordinated in favor of Foothill
and Laurus. There are no conversion features associated with the New Loan. As of
December 31, 2004, the total outstanding debt under the New Loan (including
principal and accrued interest) was $11,024.





*Counsel
Keep Well*





Counsel
has committed to fund, through long-term intercompany advances or equity
contribution, all capital investment, working capital or other operational cash
requirements of Acceris through June 30, 2005 (the “Keep Well”). Counsel is not
expected to extend the Keep Well beyond its current maturity.





*Counsel
Guarantee, Subordination and Stock Pledge*





Counsel
has guaranteed the debt that the Company owes to Foothill and Laurus. Counsel
has also agreed to subordinate all of its debt owed by the Company, and to
subrogate all of its related security interests in favor of its asset-based
lender, Foothill, and Laurus. Counsel further agreed to pledge all of its shares
owned in Acceris as security for the related debts. Counsel has also guaranteed
various other debts of the Company, including its debt obligations in respect of
its lease of telecommunications equipment as well as its obligations owed to a
network carrier. In accordance with the Foothill and Laurus agreements, amounts
owing to Counsel cannot be repaid while amounts remain owing to Foothill and
Laurus.





*Counsel
Management Services*




In
December 2004, Acceris entered into a management services agreement (the
“Agreement”) with Counsel. Under the terms of the Agreement, Acceris agreed to
make payment to Counsel for the past and future services to be provided by
certain Counsel personnel to Acceris for each of 2004 and 2005. The basis for
such services charged will be an allocation, based on time incurred, of the cost
of the base compensation paid by Counsel to those employees providing services
to Acceris, primarily Messrs. Clifford and Weintraub and Ms. Murumets. For the
year ended December 31, 2004, the cost of such services was $280. The foregoing
fees for 2004 and 2005 are due and payable within 30 days following the
respective year ends, subject to any subordination restrictions then in effect.
Any unpaid fee amounts will bear interest at 10% per annum commencing on the day
after such year-end. In the event of a change of control, merger or similar
event of the Company, all amounts owing, including fees incurred up to the date
of the event, will become due and payable immediately upon the occurrence of
such event, subject to any subordination restrictions then in effect. In
accordance with the Foothill and Laurus agreements, amounts owing to Counsel
cannot be repaid while amounts remain owing to Foothill and Laurus.




Counsel
provided management services to Acceris in 2003, for which no amounts were
charged to Acceris, resulting in the conferral of a benefit of
$130.





61





**Item
14. Principal Accountant Fees and Services.**





In May
2004 the Company’s Audit Committee engaged BDO Seidman, LLP as the independent
registered public accounting firm of the Company for the fiscal year ended
December 31, 2004. Previously, the Company’s independent registered public
accounting firm was PricewaterhouseCoopers LLP.





Fees paid
to PricewaterhouseCoopers LLP, our independent registered public accountant for
all of 2003 and for the period January 1 - May 4, 2004 are set forth below. All
fees paid to our independent registered public accountant were pre-approved by
the Audit Committee.





****
    
    **Year
      Ended December 31,****(in
      thousands)******
    
    **2003**
    
    **2004**Audit
      fees
    
    $
    767
    
    $
    834Audit-related
      fees
    
    
    176
    
    
    —Tax
      fees
    
    
    182
    
    
    203All
      other fees
    
    
    —
    
    
    —Total
    
    $
    1,125
    
    $
    1,037





Fees paid
to BDO Seidman, LLP, our independent registered public accounting firm for the
period May 19 - December 31, 2004 are set forth below. All fees paid to our
independent registered public accounting firm were pre-approved by the Audit
Committee.





****
    
    **Year
      Ended December 31,****(in
      thousands)******
    
    **2004**Audit
      fees
    
    $
    676Audit-related
      fees
    
    
    61Tax
      fees
    
    
    106All
      other fees
    
    
    —Total
    
    $
    843




***Audit
Fees***





Audit
fees were for professional services rendered for the audit of our annual
financial statements for the years ended December 31, 2003 and 2004, the reviews
of the financial statements included in our quarterly reports on Form 10-Q for
the years ended December 31, 2003 and 2004 and services in connection with our
statutory and regulatory filings for the years ended December 31, 2003 and 2004
and amounted to $767 and $1,510, respectively.





***Audit-Related
Fees***





Audit
related fees were for assurance and related services rendered that are
reasonably related to the audit and reviews of our financial statements for the
years ended December 31, 2003 and 2004, exclusive of the fees disclosed as Audit
Fees above. These fees include benefit plan audits, accounting consultations and
audits in connection with acquisitions, which amounted to $176 and
$61.





***Tax
Fees***





Tax fees
were for services related to tax compliance, consulting and planning services
rendered during the years ended December 31, 2003 and 2004 and included
preparation of tax returns, review of restrictions on net operating loss
carryforwards and other general tax services. Tax fees paid amounted to $182 and
$129.





***All
Other Fees***





We did
not incur fees for any services, other than the fees disclosed above relating to
audit, audit-related and tax services, rendered during the years ended December
31, 2003 and 2004.





**Audit
and Non-Audit Service Pre-Approval Policy**





In
accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the rules
and regulations promulgated thereunder, the Audit Committee has adopted an
informal approval policy that it believes will result in an effective and
efficient procedure to pre-approve services performed by the independent
registered public accounting firm.





62


**Audit
Services.** Audit
services include the annual financial statement audit (including quarterly
reviews) and other procedures required to be performed by the independent
registered public accounting firm to be able to form an opinion on our financial
statements. The Audit Committee may pre-approve specified annual audit services
engagement terms and fees and other specified audit fees. All other audit
services must be specifically pre-approved by the Audit Committee. The Audit
Committee monitors the audit services engagement and may approve, if necessary,
any changes in terms, conditions and fees resulting from changes in audit scope
or other items.





**Audit-Related
Services.** Audit-related
services are assurance and related services that are reasonably related to the
performance of the audit or review of our financial statements which
historically have been provided to us by the independent registered public
accounting firm and are consistent with the SEC’s rules on auditor independence.
The Audit Committee may pre-approve specified audit-related services within
pre-approved fee levels. All other audit-related services must be pre-approved
by the Audit Committee.





**Tax
Services.** The Audit
Committee may pre-approve specified tax services that the Audit Committee
believes would not impair the independence of the independent registered public
accounting firm and that are consistent with SEC rules and guidance. All other
tax services must be specifically approved by the Audit Committee.





**All
Other Services.** Other
services are services provided by the independent registered public accounting
firm that do not fall within the established audit, audit-related and tax
services categories. The Audit Committee may pre-approve specified other
services that do not fall within any of the specified prohibited categories of
services.





**Procedures** . All
requests for services to be provided by the independent registered public
accounting firm which must include a detailed description of the services to be
rendered and the amount of corresponding fees, are submitted to the Chief
Financial Officer. The Chief Financial Officer authorizes services that have
been pre-approved by the Audit Committee. If there is any question as to whether
a proposed service fits within a pre-approved service, the Audit Committee chair
is consulted for a determination. The Chief Financial Officer submits requests
or applications to provide services that have not been pre-approved by the Audit
Committee, which must include an affirmation by the Chief Financial Officer and
the independent registered public accounting firm that the request or
application is consistent with the SEC’s rules on auditor independence, to the
Audit Committee (or its Chair or any of its other members pursuant to delegated
authority) for approval.








63





**PART
IV**





**Item
15. Exhibits and Financial Statement Schedules**





(a)
    The
      following financial statements and those financial statement schedules
      required by Item 8 hereof are filed as part of this
  report:1.
    Financial
      Statements:Reports
      of Independent Registered Public Accounting FirmsConsolidated
      Balance Sheets as of December 31, 2004 and 2003Consolidated
      Statements of Operations for the years ended December 31, 2004, 2003 and
      2002Consolidated
      Statement of Changes in Stockholders’ Deficit for the years ended December
      31, 2004, 2003 and 2002Consolidated
      Statements of Cash Flows for the years ended December 31, 2004, 2003 and
      2002Notes
      to Consolidated Financial Statements2.
    Financial
      Statement Schedule:Schedule
      II - Valuation and Qualifying AccountsAll
      other schedules are omitted because of the absence of conditions under
      which they are required or because the required information is presented
      in the Financial Statements or Notes thereto.(b)
    The
      following exhibits are filed as part of this Annual Report:





**Exhibit
      Number**
    
    **Title
      of Exhibit**3.1(i)
    
    Amended
      and Restated Articles of Incorporation. (1)3.2
    
    Bylaws
      as amended (2)4.2
    
    Securities
      Purchase Agreement by and between Acceris and Winter Harbor, LLC dated as
      of September 30, 1997. (3)4.3
    
    Amended
      and Restated Registration Rights Agreement by and between Acceris and
      Winter Harbor, LLC dated as of January 15, 1999, amending Registration
      Rights Agreement dated October 10, 1997. (4)4.4
    
    Form
      of Stockholders Agreement by and among Acceris, Winter Harbor, LLC and
      certain holders of Acceris’ securities (Exhibit D to the Purchase
      Agreement). (3)4.5
    
    Form
      of Warrant Agreement by and between MedCross, Inc. and Winter Harbor, LLC
      (Exhibit F to the Purchase Agreement). (3)4.6
    
    Senior
      Convertible Loan and Security Agreement by and between Acceris and Counsel
      Communications LLC, dated March 1, 2001. (5)4.7
    
    Loan
      Note by and between Counsel Communications LLC and Acceris dated as of
      March 1, 2001. (5)4.8
    
    Security
      Agreement by and between Acceris, MiBridge Inc and Counsel Communications
      LLC, dated March 1, 2001. (5)10.1*
    
    1997
      Recruitment Stock Option Plan. (6)10.2*
    
    2001
      Stock Option and Appreciation Rights Plan. (7)
  64
  **Exhibit
      Number**
    
    **Title
      of Exhibit**
 10.2.1*
    
    2003
      Stock Option and Appreciation Rights Plan. (8)10.3
    
    Agreement
      by and between Acceris and Winter Harbor, LLC, dated April 14, 1998. (9)10.4
    
    Pledge
      Agreement by and between Acceris and Winter Harbor, LLC, dated April 14,
      1998. (9)10.5
    
    Security
      Agreement by and among certain of Acceris’ subsidiaries and Winter Harbor,
      LLC, dated April 14, 1998. (9)10.6
    
    Form
      of Promissory Notes issued to Winter Harbor, LLC. (9)10.7
    
    Warrant
      to purchase 250,000 shares of Acceris’ common stock issued to JNC, dated
      June 30, 1998. (9)10.8
    
    Warrant
      to purchase 100,000 shares of Acceris’ common stock issued to JNC, dated
      July 28, 1998. (9)10.9
    
    Loan
      Agreement by and between Acceris and Winter Harbor, LLC, dated as of
      January 15, 1999. (4)10.10
    
    First
      Amendment to Loan Agreement by and between Acceris and Winter Harbor, LLC,
      dated March 4, 1999. (4)10.11
    
    Promissory
      Note in principal amount of $8,000,000 executed by Acceris in favor of
      Winter Harbor, LLC, dated November 10, 1998. (4)10.12
    
    Series
      K Warrant Agreement by and between Acceris and Winter Harbor, LLC and form
      of Series K Warrant, dated as of January 15, 1999. (4)10.13
    
    Agreement
      by and between Acceris and Winter Harbor, LLC, dated as of January 15,
      1999. (4)10.14
    
    First
      Amendment to Security Agreement dated as of January 15, 1999, by and among
      Acceris, five of its wholly-owned subsidiaries and Winter Harbor, LLC,
      amending Security Agreement dated April 14, 1997. (4)10.15
    
    First
      Amendment to Pledge Agreement dated as of January 15, 1999, by and among
      Acceris and Winter Harbor, LLC, amending Pledge Agreement dated April 14,
      1997. (4)10.16
    
    Series
      D, E, F, G, H, I and J Warrant Agreement dated as of January 15, 1999 by
      and between Acceris and Winter Harbor, LLC, and related forms of warrant
      certificates. (4)10.17
    
    Amended
      and Restated Employment Agreement with Helen Seltzer, dated January 3,
      2002. (10)10.18
    
    Form
      of Wholesale Service Provider and Distribution Agreement between Acceris
      and Big Planet, Inc., dated February 1, 2000. (11)10.19
    
    Form
      of Cooperation and Framework Agreement between Acceris and CyberOffice
      International AG, dated May 8, 2000. (12)10.20
    
    Form
      of Revenue Sharing Agreement between Acceris and Red Cube International AG
      (formerly known as CyberOffice International AG.) dated June 30, 2000.
      (12)10.21
    
    Form
      of Letter dated June 30, 2000, clarifying a Cooperation and Framework
      Agreement issue. (12)
  65
  **Exhibit
      Number**
    
    **Title
      of Exhibit**
 10.22
    
    Loan
      and Security Agreement by and among WorldxChange Corp. and Foothill
      Capital Corporation, dated December 10, 2001. (13)10.23*
    
    Employment
      agreement with James Ducay, dated January 1, 2004. (14)10.24*
    
    Employment
      agreement with Kenneth Hilton, dated May 1, 2002. (15)10.25
    
    Form
      of Asset Purchase Agreement by and between Counsel Springwell
      Communications LLC and RSL.COM U.S.A. Inc. (16)10.26
    
    Form
      of Amendment No. 1 to Asset Purchase Agreement between Counsel Springwell
      Communications LLC and RSL.COM U.S.A., Inc. (16)10.27
    
    Amended
      and Restated Debt Restructuring Agreement, dated October 15, 2002.
      (15)10.28
    
    Form
      of Asset Purchase Agreement between Buyers United Inc., I-Link
      Communications Inc., and Acceris, dated December 6, 2002. (15)10.29
    
    Acceris
      Convertible Promissory Note for $7,500,000 between Acceris and Counsel
      Corporation (U.S.) dated December 10, 2002. (15)10.30
    
    Warrant
      Exchange Agreement by and between Winter Harbor, LLC and Acceris dated as
      of March 1, 2001. (5)10.31
    
    Securities
      Support Agreement by and between Counsel Communications, LLC and Acceris
      dated as of March 1, 2001. (5)10.32
    
    Promissory
      note dated as of August 29, 2003, for $2,577,070 issued to Counsel
      Corporation. (14)10.33
    
    Promissory
      note dated March 10, 2004 for $1,546,532 issued to Counsel Corporation
      (U.S.). (14)10.34
    
    Loan
      Agreement dated as of January 26, 2004 between Acceris and Counsel
      Corporation. (14)10.35
    
    Loan
      Agreement dated as of October 1, 2003, between Acceris and Counsel
      Corporation (U.S.). (14)10.36
    
    Amended
      and Restated Stock Pledge Agreement dated as of January 30, 2004 between
      Acceris and Counsel Corporation (U.S.). (14)10.37
    
    Amended
      and Restated Secured Promissory Note dated as of October 1, 2003, for
      $9,743,479 issued to Counsel Corporation (U.S.). (14)10.38
    
    Amended
      and Restated Promissory Note dated January 26, 2004 for $7,600,000 issued
      to Counsel Corporation. (14)10.39
    
    Amended
      and Restated Loan Agreement dated as of January 30, 2004 between Acceris
      and Counsel Corporation (U.S.). (14)10.40
    
    Third
      Amendment to Senior Convertible Loan and Security Agreement dated as of
      November 1, 2003 between Acceris and Counsel Corporation. (14)10.41
    
    Amended
      and Restated Stock Pledge Agreement dated January 26, 2004 between Acceris
      and Counsel. (17)10.42
    
    Promissory
      Note for $917,095 dated March 31, 2004 between Acceris and Counsel
      Corporation (U.S.). (17)
  66
  **Exhibit
      Number**
    
    **Title
      of Exhibit**
 10.43
    
    Promissory
      Note for $2,050,000 dated March 12, 2004 between Acceris and Counsel
      Corporation. (17)10.44
    
    $1
      million Note dated May 26, 2004. (18)10.45
    
    $248,020
      Promissory Note dated June 30, 2004. (18)10.46
    
    $3.2
      million Promissory Note dated June 30, 2004. (18)10.47
    
    First
      Amendment to Loan Agreement dated October 1, 2003. (18)10.48
    
    Fourth
      Amendment to Senior Convertible Loan and security Agreement dated March 1,
      2001. (19)10.49
    
    First
      Amendment to Amended and Restated Loan Agreement dated January 30, 2004.
      (18)10.50
    
    First
      Amendment to Loan Agreement dated January 26, 2004.
(18)10.51
    
    Amended
      and Restated Promissory Note ($2.05 million). (18)10.52
    
    Amended
      and Restated Promissory Note ($7.6 million). (18)10.53
    
    Securities
      Purchase Agreement dated as of October 14, 2004. (19)10.54
    
    Secured
      Convertible Term Note dated October 14, 2004. (19)10.55
    
    Master
      Security Agreement dated October 14, 2004 by the Company, Acceris
      Communications Technologies, Inc. and Acceris Communications Corp.
      (19)10.56
    
    Registration
      Rights Agreement dated as of October 14, 2004. (19)10.57
    
    Common
      Stock Purchase Warrant issued October 14, 2004. (19)10.58
    
    Stock
      Pledge Agreement dated as of October 14, 2004. (19)10.59
    
    Guaranty
      dated as of October 14, 2004. (19)10.60*
    
    Employment
      Agreement with David Silverman (21)10.61*
    
    Employment
      Agreement with Kenneth Hilton, as amended (21)10.62*
    
    Counsel
      Management Agreement. (20)10.63*
    
    Employment
      Agreement with Eric Lipscomb (22)10.64
    
    $300,000
      Promissory Note dated December 31, 2004 (included
  herewith)
  67
  **Exhibit
      Number**
    
    **Title
      of Exhibit**
 10.65
    
    $577,992.45
      Promissory Note dated December 31, 2004 (included
  herewith)14
    
    Acceris
      Communications Inc. Code of Conduct. (14)21
    
    List
      of subsidiaries. (14)23.1
    
    Consent
      of BDO SEIDMAN LLP (included herewith)23.2
    
    Consent
      of PricewaterhouseCoopers, LLP (included herewith)31.1
    
    Certification
      of the CEO pursuant to Rule 13a-14(a) or Rule 14(d)-14(a) included
      herewith31.2
    
    Certification
      of the CFO pursuant to Rule 13a-14(a) or Rule 14(d)-14(a) included
      herewith32.1
    
    Certification
      pursuant to 18 U.S.C 1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (included herewith)32.2
    
    Certification
      pursuant to 18 U.S. C. 1350 as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (included
herewith)




*
Indicates a management contract or compensatory plan required to be filed as an
exhibit.





(1)
    Incorporated
      by reference to our Annual Report on Form 10-K for the year ended December
      31, 1998, file number 0-17973.(2)
    Incorporated
      by reference to our Quarterly Report on Form 10-Q for the period ended
      September 30, 1998, file number 0-17973.(3)
    Incorporated
      by reference to our Current Report on Form 8-K, dated September 30, 1997,
      file number 0-17973.(4)
    Incorporated
      by reference to our Current Report on Form 8-K filed on March 23, 1999,
      file number 0-17973.(5)
    Incorporated
      by reference to our Current Report on Form 8-K filed on March 16, 2001,
      file number 0-17973.(6)
    Incorporated
      by reference to our Annual Report on Form 10-KSB for the year ended
      December 31, 1996, file number 0-17973.(7)
    Incorporated
      by reference to our Quarterly Report on Form 10-Q for the period ended
      September 30, 2001, file number 0-17973.(8)
    Incorporated
      by reference to our Definitive Proxy Statement for the November 26, 2003
      annual stockholder meeting.(9)
    Incorporated
      by reference to our Quarterly Report on Form 10-Q for the period ended
      June 30, 1998, file number 0-17973.(10)
    Incorporated
      by reference to our Quarterly Report on Form 10-Q for the period ended
      March 31, 2002, file number 0-17973.(11)
    Incorporated
      by reference to our Quarterly Report on Form 10-Q for the period ended
      March 31, 2000, file number 0-17973.(12)
    Incorporated
      by reference to our Quarterly Report on Form 10-Q for the period ended
      June 30, 2000, file number 0-17973.
  68
  (13)
    Incorporated
      by reference to our Annual Report on Form 10-K for the year ended December
      31, 2001, file number 0-17973.(14)
    Incorporated
      by reference to our Annual Report on Form 10-K/A#1 for the year ended
      December 31, 2003.(15)
    Incorporated
      by reference to our Annual Report on Form 10-K/A#3 for the year ended
      December 31, 2002, file number 0-17973.(16)
    Incorporated
      by reference to our Current Report on Form 8-K filed on December 26, 2002,
      file number 0-17973.(17)
    Incorporated
      by reference to our Quarterly Report on Form 10-Q for the period ended
      March 31, 2004.(18)
    Incorporated
      by reference to our Current Report on Form 8-K filed on July 19,
      2004.(19)
    Incorporated
      by reference to our Current Report on Form 8-K filed on October 20,
      2004.(20)
    Incorporated
      by reference to our Current Report on Form 8-K filed on January 6,
      2005(21)
    Incorporated
      by reference to our registration statement on Form S-1, as amended (No.
      333-120512).(22)
    Incorporated
      by reference to our Current Report on Form 8-K filed on March 11,
      2005










69




**SIGNATURES**





In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on our behalf by the
undersigned, hereunto duly authorized.




**ACCERIS
      COMMUNICATIONS INC.**Date: March 28,
2005
    By:
    /s/ Allan C.
  SilberAllan C. SilberChief Executive
  Officer




In
accordance with Section 13 of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





**Signature**
    
    **Title**
    
    **Date**/s/
      James J. Meenan
    
    Chairman
      of the Board of Directors
    
    March
      28, 2005James
      J. Meenan/s/
      Allan C. Silber
    
    Chief
      Executive Officer
    
    March
      28, 2005Allan
      C. Silber/s/Gary
      M. Clifford
    
    Chief
      Financial Officer and VP of Finance
    
    March
      28, 2005Gary
      M. Clifford/s/
      Eric S. Lipscomb
    
    Vice
      President of Accounting, Controller
    
    March
      28, 2005Eric
      S. Lipscomb
    
    and Chief Accounting
    Officer/s/
      Hal B. Heaton
    
    Director
    
    March
      28, 2005Hal
      B. Heaton/s/
      William H. Lomicka
    
    Director
    
    March
      28, 2005William
      H. Lomicka/s/
      Kelly D. Murumets
    
    Director
      and President
    
    March
      28, 2005Kelly
      D. Murumets/s/
      Samuel L. Shimer
    
    Director
    
    March
      28, 2005Samuel
      L. Shimer/s/
      Frank J. Tanki
    
    Director
    
    March
      28, 2005Frank
      J. Tanki/s/
      Henry Y. L. Toh
    
    Director
    
    March
      28, 2005Henry
      Y.L. Toh








70





(c)
Financial Statement Schedules





The
following Schedules are included in our Financial Statements:





Schedule
of Valuation and Qualifying Accounts








71








**INDEX
OF FINANCIAL STATEMENTS & SUPPLEMENTAL SCHEDULE**





**Title
of Document**





**Page**Reports
      of Independent Registered Public Accounting Firms
    F-1Consolidated
      Balance Sheets as of December 31, 2004 and 2003
    F-3Consolidated
      Statements of Operations for the years ended December 31, 2004, 2003 and
      2002
    F-4Consolidated
      Statement of Changes in Stockholders’ Deficit for the years ended December
      31, 2004, 2003 and 2002
    F-5Consolidated
      Statements of Cash Flows for the years ended December 31, 2004, 2003 and
      2002
    F-6Notes
      to Consolidated Financial Statements
    F-8Schedule
      of Valuation and Qualifying Accounts
    S-1








72







**Report
of Independent Registered Public Accounting Firm**
 
 To the
Board of Directors and Stockholders of
 Acceris
Communications Inc.
 Pittsburgh,
PA
 
 We have
audited the accompanying consolidated balance sheet of Acceris Communications
Inc. (the Company) as of December 31, 2004 and the related consolidated
statements of operations, changes in stockholders’ deficit, and cash flows for
the year then ended.  We have
also audited the schedule listed in the accompanying index for the year ended
December 31, 2004. These consolidated financial statements and schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audit.
  We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit
also includes examining, on a test  basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements and the schedule. We believe that our audit provides a
reasonable basis for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Acceris Communications Inc.
at December 31, 2004, and the results of its operations and its cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States of America. Also, in
our opinion, the schedule listed in the accompanying index presents fairly, in
all material respects, the information set forth therein for the year ended
December 31, 2004. The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 2 to the financial statements, the Company has suffered
recurring losses from operations and at December 31, 2004 has a net capital
deficiency that raise substantial doubt about its ability to continue as a going
concern. Management’s plans in regard to these matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
 
 
 BDO
Seidman, LLP
 Houston,
Texas
 
 March 11,
2005


F-1






**Report
of Independent Registered Public Accounting Firm**
 
 To the
Board of Directors and Stockholders of
 Acceris
Communications Inc.
 Pittsburgh,
PA
 
  In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects the financial position of Acceris
Communications Inc. and its subsidiaries at December 31, 2003, and the results
of its operations and its cash flows for each of the two years in the period
ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our
opinion **,** the
financial statement schedule for the years ended December 31, 2003 and 2002
listed in the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test  basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall presentation of the financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
 
 The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, which
appears in the financial statements included in the Company’s Form 10-K
Amendment No. 1 for the year then ended December 31, 2003 and is not presented
herein, the
Company has suffered recurring losses from operations and has a net capital
deficiency. These matters raise substantial doubt about its ability to continue
as a going concern. Management’s plans in regard to these matters were also
described in Note 2, which
appears in the consolidated financial statements included in the Company’s Form
10-K Amendment No. 1 for the year then ended December 31, 2003 and is not
presented herein . The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
 
 
 /s/ PricewaterhouseCoopers,
    LLPPricewaterhouseCoopers, LLPSan Diego, CaliforniaApril 14, 2004, except for Note 3, which
      appears in theconsolidated financial statements included in
      the Company’sForm 10-K Amendment No. 1 for the year ended
      December 31,2003 and is not presented herein, as to which
      the date isSeptember 28, 2004


F-2





**ACCERIS
COMMUNICATIONS INC. AND SUBSIDIARIES**


**CONSOLIDATED
BALANCE SHEETS**


**as
of December 31, 2004 and 2003**


**(In
thousands of dollars, except share and per share amounts)**





****
    
    **2004**
    
    **2003**ASSETSCurrent
      assets:Cash
      and cash equivalents
    
    $
    458
    
    $
    2,033Accounts
      receivable, less allowance for doubtful accounts of $2,163 and $1,764 as
      of December 31, 2004 and 2003, respectively
    
    
    13,079
    
    
    18,018Investments
      in convertible preferred and common stock
    
    
    —
    
    
    2,058Other
      current assets
    
    
    1,473
    
    
    2,111Net
      assets of discontinued operations
    
    
    —
    
    
    91Total
      current assets
    
    
    15,010
    
    
    24,311Furniture,
      fixtures, equipment and software, net
    
    
    4,152
    
    
    8,483Other
      assets:Intangible
      assets, net
    
    
    1,404
    
    
    3,297Goodwill
    
    
    1,120
    
    
    1,120Investments
    
    
    1,100
    
    
    1,100Other
      assets
    
    
    1,223
    
    
    743Total
      assets
    
    $
    24,009
    
    $
    39,054LIABILITIES
      AND STOCKHOLDERS’ DEFICITCurrent
      liabilities:Revolving
      credit facility
    
    $
    4,725
    
    $
    12,127Accounts
      payable and accrued liabilities
    
    
    27,309
    
    
    28,272Unearned
      revenue
    
    
    959
    
    
    5,678Current
      portion of notes payable
    
    
    1,928
    
    
    1,254Current
      portion of obligations under capital leases
    
    
    1,441
    
    
    2,715Net
      liabilities of discontinued operations
    
    
    —
    
    
    841Total
      current liabilities
    
    
    36,362
    
    
    50,887Notes
      payable, less current portion
    
    
    3,597
    
    
    772Obligations
      under capital leases, less current portion
    
    
    —
    
    
    1,631Notes
      payable to a related party, net of unamortized discount
    
    
    46,015
    
    
    28,717Total
      liabilities
    
    
    85,974
    
    
    82,007Commitments
      and contingenciesStockholders’
      deficit:Preferred
      stock, $10.00 par value, authorized 10,000,000 shares, issued and
      outstanding 618 and 619 Class N shares as of December 31, 2004 and 2003,
      respectively; liquidation preference of $618 and $619 at December 31, 2004
      and 2003, respectively
    
    
    6
    
    
    6Common
      stock, $0.01 par value, authorized 300,000,000 shares, issued and
      outstanding 19,237,135 and 19,262,095 at December 31, 2004 and 2003,
      respectively
    
    
    192
    
    
    192Additional
      paid-in capital
    
    
    186,650
    
    
    182,879Accumulated
      deficit
    
    
    (248,813
    )
    
    (226,030
    )Total
      stockholders’ deficit
    
    
    (61,965
    )
    
    (42,953
    )Total
      liabilities and stockholders’ deficit
    
    $
    24,009
    
    $
    39,054





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










F-3








**ACCERIS
COMMUNICATIONS INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENTS OF OPERATIONS**


**for
the years ended December 31, 2004, 2003 and 2002**


**(In
thousands of dollars, except per share amounts)**





****
    
    **2004**
    
    **2003**
    
    **2002**Revenues:Telecommunications
      services
    $
    112,595
    
    $
    133,765
    
    $
    85,252Technology
      licensing and development
    
    540
    
    
    2,164
    
    
    2,837Total
      revenues
    
    113,135
    
    
    135,929
    
    
    88,089Operating
      costs and expenses:Telecommunications
      network expense (exclusive of depreciation and amortization shown
      below)
    
    60,067
    
    
    86,006
    
    
    50,936Selling,
      general and administrative
    
    54,430
    
    
    57,264
    
    
    33,015Provision
      for doubtful accounts
    
    5,229
    
    
    5,438
    
    
    5,999Research
      and development
    
    442
    
    
    —
    
    
    1,399Depreciation
      and amortization
    
    6,976
    
    
    7,125
    
    
    4,270Total
      operating costs and expenses
    
    127,144
    
    
    155,833
    
    
    95,619Operating
      loss
    
    (14,009
    )
    
    (19,904
    )
    
    (7,530
    )Other
      income (expense):Interest
      expense - related party
    
    (8,488
    )
    
    (10,878
    )
    
    (4,515
    )Interest
      expense - third party
    
    (2,861
    )
    
    (2,391
    )
    
    (3,680
    )Other
      income
    
    2,471
    
    
    1,216
    
    
    395Total
      other expense
    
    (8,878
    )
    
    (12,053
    )
    
    (7,800
    )Loss
      from continuing operations
    
    (22,887
    )
    
    (31,957
    )
    
    (15,330
    )Gain
      (loss) from discontinued operations
    
    104
    
    
    529
    
    
    (12,508
    )Net
      loss
    $
    (22,783
    )
    $
    (31,428
    )
    $
    (27,838
    )
  Basic
      and diluted weighted average shares outstanding
    
    
    19,256
    
    
    7,011
    
    
    5,828Net
      loss per common share - basic and diluted:Loss
      from continuing operations
    
    $
    (1.19
    )
    $
    (4.56
    )
    $
    (2.63
    )Gain
      (loss) from discontinued operations
    
    
    0.01
    
    
    0.08
    
    
    (2.15
    )Net
      loss per common share
    
    $
    (1.18
    )
    $
    (4.48
    )
    $
    (4.78
    )





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







F-4




**ACCERIS
COMMUNICATIONS INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT**


**for
the years ended December 31, 2004, 2003 and 2002**


**(In
thousands of dollars, except share amounts)(1)**




**Preferred
      stock**
    
    
    **Common
      stock**
    
    
    **Additional
paid-**
    
    
    **Accumulated****Shares**
    
    
    **Amount**
    
    
    **Shares**
    
    
    **Amount**
    
    
    **in
      capital**
    
    
    **Deficit****Balance
      at December 31, 2001**
    
    
    769
    
    $
    7
    
    
    5,827,477
    
    $
    58
    
    
    129,700
    
    $
    (166,764
    )Beneficial
      conversion feature on certain convertible notes payable to related
      party
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    6,522
    
    
    —Acceris
      costs paid by majority stockholder
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    499
    
    
    —Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (27,838
    )**Balance
      at December 31, 2002**
    
    
    769
    
    
    7
    
    
    5,827,477
    
    
    58
    
    
    136,721
    
    
    (194,602
    )Conversion
      of related party debt to common stock
    
    
    —
    
    
    —
    
    
    13,428,618
    
    
    134
    
    
    40,539
    
    
    —Conversion
      of Class N preferred stock to common stock
    
    
    (150
    )
    
    (1
    )
    
    6,000
    
    
    —
    
    
    1
    
    
    —Beneficial
      conversion feature on certain convertible notes payable to related
      party
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    5,354
    
    
    —Acceris
      costs paid by majority stockholder
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    132
    
    
    —Management
      expense from majority stockholder
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    130
    
    
    —Issuance
      of options to purchase common stock to non-employee
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    2
    
    
    —Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (31,428
    )**Balance
      at December 31, 2003**
    
    
    619
    
    
    6
    
    
    19,262,095
    
    
    192
    
    
    182,879
    
    
    (226,030
    )Conversion
      of Class N preferred stock to common stock
    
    
    (1
    )
    
    —
    
    
    40
    
    
    —Cancellation
      of common stock (2)
    
    
    —
    
    
    —
    
    
    (25,000
    )
    
    —
    
    
    (21
    )Beneficial
      conversion feature on certain convertible notes payable to related
      party
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    3,771
    
    
    —Acceris
      costs paid by majority stockholder
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    16
    
    
    —Issuance
      of options to purchase common stock to non-employee
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    5
    
    
    —Net
      loss
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (22,783
    )**Balance
      at December 31, 2004**
    
    
    618
    
    $
    6
    
    
    19,237,135
    
    $
    192
    
    $
    186,650
    
    $
    (248,813
    )





(1) All
amounts shown as if the reverse stock split described more fully in Note 4 had
occurred on December 31, 2001.


(2)The Company received and
cancelled 25,000 common shares of the Company pursuant to the partial settlement
of a prior claim over a third party.





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







F-5





**ACCERIS
COMMUNICATIONS INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENTS OF CASH FLOWS**


**for
the years ended December 31, 2004, 2003 and 2002**


**(In
thousands of dollars)**




****
    
    **2004**
    
    **2003**
    
    **2002**Cash
      flows from operating activities:Net
      loss
    
    $
    (22,783
    )
    $
    (31,428
    )
    $
    (27,838
    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
    
    
    6,339
    
    
    7,125
    
    
    8,135Provision
      for doubtful accounts
    
    
    5,229
    
    
    5,438
    
    
    6,110Amortization
      of discount and debt issuance costs on notes payable
    
    
    4,237
    
    
    6,052
    
    
    1,765Accrued
      interest added to loan principal of related party debt
    
    
    4,304
    
    
    5,667
    
    
    3,651Mark
      to market adjustment to warrants
    
    
    (108
    )
    
    —
    
    
    —Impairment
      of long-lived assets
    
    
    637
    
    
    —
    
    
    3,609Other
      income
    
    
    (148
    )
    
    (169
    )
    
    —Stock
      received on sale of technology license
    
    
    —
    
    
    (1,100
    )
    
    —Expense
      associated with stock options issued to non-employee for
      services
    
    
    5
    
    
    2
    
    
    —Loss
      on disposal of assets
    
    
    4
    
    
    —
    
    
    266Discharge
      of obligation
    
    
    (972
    )
    
    —
    
    
    —Gain
      on sale of investments
    
    
    (1,376
    )
    
    —
    
    
    —Gain
      on settlement of note payable
    
    
    —
    
    
    (1,141
    )
    
    —Cancellation
      of common shares
    
    
    (21
    )Management
      expense imputed to controlling stockholder
    
    
    —
    
    
    130
    
    
    —(4,653
    )
    
    (9,424
    )
    
    (4,302
    )Increase
      (decrease) from changes in operating assets and liabilities, net of
      effects of acquisitions:Accounts
      receivable
    
    
    (576
    )
    
    (5,944
    )
    
    (1,269
    )Other
      assets
    
    
    719
    
    
    (1,003
    )
    
    (1,164
    )Net
      assets and liabilities of discontinued operations
    
    
    —
    
    
    750
    
    
    —Accounts
      payable, accrued liabilities and interest payable
    
    
    (1,023
    )
    
    2,586
    
    
    3,507Unearned
      revenue
    
    
    (4,719
    )
    
    4,720
    
    
    (1,643
    )Net
      cash used in operating activities
    
    
    (10,252
    )
    
    (8,315
    )
    
    (4,871
    )Cash
      flows from investing activities:Purchases
      of furniture, fixtures, equipment and software
    
    
    (731
    )
    
    (2,036
    )
    
    (1,649
    )Purchase
      of patent rights
    
    
    —
    
    
    (100
    )
    
    —Business
      acquisitions, net of acquisition costs and cash acquired
    
    
    —
    
    
    149
    
    
    (8,276
    )Cash
      received from sale of investments in common stock and other
      assets
    
    
    3,581
    
    
    160
    
    
    692Net
      cash provided by (used in) investing activities
    
    
    2,850
    
    
    (1,827
    )
    
    (9,233
    )Cash
      flows from financing activities:Proceeds
      from issuance of notes payable to a related party
    
    
    12,584
    
    
    7,896
    
    
    16,823Proceeds
      from issuance of convertible debenture
    
    
    4,773
    
    
    —
    
    
    —Finance
      costs on convertible debenture
    
    
    (211
    )
    
    —
    
    
    —Payment
      of notes payable to related party
    
    
    —
    
    
    —
    
    
    (3,000
    )Proceeds
      from (repayment of) revolving credit facility, net
    
    
    (7,402
    )
    
    3,041
    
    
    2,089Payment
      of capital lease obligations
    
    
    (2,714
    )
    
    (2,514
    )
    
    (2,544
    )Payment
      of debt obligations
    
    
    (1,219
    )
    
    —
    
    
    (805
    )Acceris
      costs paid by majority stockholder
    
    
    16
    
    
    132
    
    
    498Net
      cash provided by financing activities
    
    
    5,827
    
    
    8,555
    
    
    13,061Decrease
      in cash and cash equivalents
    
    
    (1,575
    )
    
    (1,587
    )
    
    (1,043
    )Cash
      and cash equivalents at beginning of year
    
    
    2,033
    
    
    3,620
    
    
    4,663Cash
      and cash equivalents at end of year
    
    $
    458
    
    $
    2,033
    
    $
    3,620





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










F-6





**ACCERIS
COMMUNICATIONS INC. AND SUBSIDIARIES**


**CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)**


**for
the years ended December 31, 2004, 2003 and 2002**


**(In
thousands of dollars)**





****
    
    **2004**
    
    **2003**
    
    **2002****Supplemental
      schedule of non-cash investing and financing
      activities:**RSL
      acquisition costs financed through note payable to seller
    
    
    —
    
    
    —
    
    $
    875Warrants
      issued in connection with convertible notes payable
    
    $
    430
    
    
    —
    
    
    —Fees
      to the lender in connection with convertible note payable
    
    
    226
    
    
    —
    
    
    —Discount
      in connection with convertible notes payable to related
      parties
    
    
    3,771
    
    $
    5,354
    
    
    6,522Conversion
      of notes payable to a related party and associated accrued interest to
      common stock
    
    
    —
    
    
    40,673
    
    
    —Preferred
      stock received in exchange for assets of discontinued
      operations
    
    
    —
    
    
    1,691
    
    
    —Assets
      included in the purchase price of Transpoint acquisition,
    net
    
    
    —
    
    
    2,882
    
    
    —Stock
      options issued for services
    
    
    —
    
    
    142
    
    
    —Notes
      payable incurred for the purchase of software and software
      licenses
    
    
    —
    
    
    921
    
    
    —**Supplemental
      cash flow information:**Taxes
      paid
    
    
    52
    
    
    —
    
    
    —Interest
      paid
    
    
    2,903
    
    
    2,194
    
    
    2,164





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










F-7




**ACCERIS
COMMUNICATIONS INC.**


**NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**


(amounts
in thousands, except where specifically indicated, and share
amounts)





**Note
1 - Description of Business and Principles of Consolidation**





The
consolidated financial statements include the accounts of Acceris Communications
Inc. (formerly I-Link Incorporated) and its wholly-owned subsidiaries Acceris
Communications Corp. (“ACC,” formerly WorldxChange Corp.); I-Link Communications
Inc., (“ILC”), which is substantially included in discontinued operations;
Transpoint Holdings Corporation, which includes the purchased assets of
Transpoint Communications, LLC and the purchased membership interest in Local
Telcom Holdings, LLC (collectively, “Transpoint”), which the Company purchased
in July 2003; and Acceris Communications Technologies, Inc. These entities, on a
combined basis, are referred to as “Acceris” or the “Company” in these
consolidated financial statements.





Our
Technologies segment offers a proven network convergence solution for voice and
data in VoIP communications technology and includes a portfolio of communication
patents. Included in this portfolio are two foundational patents in the VoIP
space, U.S. Patent Nos. 6,243,373 and 6,438,124 (together the “VoIP Patent
Portfolio”). This segment of our business is primarily focused on licensing our
technology, supported by our patents, to carriers and equipment manufacturers
and suppliers in the internet protocol (“IP”) telephony market.





Our
Telecommunications business, which generated substantially all of our revenue in
2004, is a broad-based communications segment servicing residential, small and
medium-sized businesses, and corporate accounts in the United States. We provide
a range of products, including local dial tone, domestic and international long
distance voice services and fully managed, integrated data and enhanced
services, to residential and commercial customers through a network of
independent agents, telemarketing and our direct sales force. We are a U.S.
facilities-based carrier with points of presence in 30 major U.S. cities. Our
voice capabilities include nationwide Feature Group D (“FGD”) access. Our data
network consists of 17 Nortel Passports that have recently been upgraded to
support multi-protocol label switching (“MPLS”). Additionally, we have
relationships with multiple tier I and tier II providers in the U.S. and abroad
which afford Acceris the opportunity for least cost routing on telecommunication
services to our clients.





All
significant intercompany accounts and transactions have been eliminated upon
consolidation.





**Note
2 - Liquidity and Capital Resources**





**Liquidity
and Capital Resources:**





As a
result of our substantial operating losses and negative cash flows from
operations, we had a stockholders’ deficit of $61,965 (2003 - $42,953) and
negative working capital of $21,352 (2003 - $26,576) at December 31, 2004. 
Operations in 2004 were financed through a combination of related party debt,
third party financing and the sale of securities in BUI.  The Company had
third party debt of $10,855 at December 31, 2004, a reduction from the $14,171
owed at December 31, 2003.  Scheduled debt payments in 2005 are expected to
be $8,094 compared to $3,933 in 2004.  Related party debt owing to our 91%
common stock owner, Counsel, at December 31, 2004 is $52,100 compared to $35,220
at December 31, 2003.  During 2004, Counsel extended the maturity of its
debt from 2005 to January 2006.  Interest on the related party debt is
rolled into the principal amounts outstanding.  This debt is supplemented
by Counsel’s Keep Well, which requires Counsel to fund, through long-term
intercompany advances or equity contributions, all capital investment, working
capital or other operational cash requirements.  The Keep Well obligates
Counsel to continue its financial support of Acceris until June 30, 2005. 
The Keep Well is not expected to be extended beyond its current maturity.
 The related party debt is subordinated to the Wells Fargo Foothill, Inc.
(“Foothill”) credit facility and to the Laurus Master Fund, Ltd. of New York
(“Laurus”) convertible debenture. Additionally, both of these financial
instruments are guaranteed by Counsel through their respective maturities of
June 2005 and October 2007, respectively.  The
current debt arrangements with Laurus prohibit the repayment of Counsel debt
prior to the repayment or conversion of the Laurus debt.  The Laurus debt,
to the extent that it is not converted, is due in October 2007.  The
current asset-based facility with Foothill matures in June 2005 and is not
expected to be extended beyond its current maturity.  No additional
borrowings are available under this facility at December 31, 2004. Payments
cannot be made to Counsel while the Foothill facility remains
outstanding.





Organically,
we do not expect to see telecommunications revenue grow in 2005.  We expect
to continue our ongoing product migration from 10-10-XXX and 1+ products to a
broader product portfolio that includes long distance and enhanced services for
our residential customers while we continue to expand the breadth of our data
and managed services offerings for our enterprise customers.  This
migration is expected to significantly improve revenue and contribution per
continuing customer.  In 2004, the Company commenced offering local
services in five states and realized revenue of $6,900; and the Company finished
2004 with approximately 22,000 local subscribers.  In March 2005, the
Company made the decision to suspend competing for new local customers in
Pennsylvania, New Jersey, New York, Florida and Massachusetts, while continuing
to support its existing local customers in those states.  The decision was
a result of the FCC‘s revision of its wholesale rules, originally designed to
introduce competition in local markets, that went into effect on March 11,
2005.  The reversal of local competition policy by the FCC has permitted
the RBOCs to substantially raise wholesale rates for the services known as
unbundled network elements (UNEs), and required the Company to re-assess its
local strategy while it attempts to negotiate long-term agreements for UNEs on
competitive terms Additionally, we remain concerned about the continuing
increases in the contribution rates of the Universal Service Fund (“USF”),
coupled with the exclusion from USF contributions of communications companies
whose product offerings provide the same service as traditional
telecommunications companies.





F-8


There is
significant doubt about the Company’s ability to obtain additional financing
beyond June 30, 2005 to support its Telecommunications operations once the Keep
Well from Counsel expires. Additionally, the Company does not at this time have
an ability to obtain additional financing for its Telecommunications business to
pursue expansion through acquisition. Due to these financial constraints, and
with the belief that the Company does not have sufficient scale to create
positive cash flow, management and its strategic advisors are looking to merge
or dispose of the Telecommunications business. There is no certainty that a
merger or disposal can occur on a timely basis on favorable terms. These matters
raise substantial doubt about the Company’s ability to continue as a going
concern. For more information on the assets and operations of the
Telecommunications business, please refer to Note 19 of the financial statements
included in Item 15 of this Form 10-K.





Ownership
Structure and Capital Resources:





·
    The
      Company is approximately 91% owned by Counsel. The remaining 9% is owned
      by public stockholders.





·
    The
      Company has total gross debt of $62,955 at December 31, 2004. 83% or
      $52,100 of this debt is owed to Counsel and an additional 16% or $10,050
      is guaranteed by Counsel, leaving 1% or $805 of the Company’s debt
      outstanding to third parties.





·
    Since
      becoming controlling stockholder in 2001, Counsel has invested over
      $90,000 in Acceris to fund the completion of Acceris’ technology and to
      fund the building of Acceris’ telecommunications business. In 2004,
      Counsel invested approximately $12,584 in Acceris and continues to have a
      commitment to provide the necessary funding to ensure the continued
      operations of the Company through June 30, 2005. In addition, Counsel has
      subordinated its debt, and guaranteed our obligations, to Laurus and
      Foothill.





·
    In
      2004, the Company successfully completed a $5,000 financing with Laurus
      Master Fund Ltd. of New York, an unrelated third party. Proceeds were used
      to fund operations.









F-9




**Note
3 - Summary of Significant Accounting Policies**





**Revenue
recognition**





Revenue
is recognized when persuasive evidence of an arrangement exists, delivery has
occurred or services have been rendered, the Company’s price to the customer is
fixed and determinable, and collection of the resulting receivable is reasonably
assured. Revenue is derived from telecommunications usage based on minutes of
use and monthly recurring fees. Revenue derived from usage is recognized as
services are provided, based on agreed upon usage rates, while revenue from
monthly recurring fees is based on the passage of time. Revenue is recorded net
of estimated customer credits and billing errors, which are recorded at the same
time the corresponding revenue is recognized. Revenues from billings for
services rendered where collectibility is not assured are recognized when the
final cash collections to be retained by the Company are finalized.





Revenues
for the Company’s network service offering, which it began to sell in November
2002 and subsequently ceased selling in July 2003, are accounted for using the
unencumbered cash method. The Company determined that collectibility of the
amounts billed to customers was not reasonably assured at the time of billing.
Under its agreements with the Local Exchange Carriers (“LECs”), cash collections
remitted to the Company are subject to adjustment, generally over several
months. Accordingly, the Company recognizes revenue when the actual cash
collections to be retained by the Company are finalized and unencumbered. There
is no further billing of customers for the network service offering subsequent
to the program’s termination.





Revenue
from the sale of software licenses is recognized when a non-cancelable agreement
is in force, the license fee is fixed or determinable, acceptance has occurred,
and collectibility is reasonably assured. Maintenance and support revenues are
recognized ratably over the term of the related agreements. When a license of
Acceris technology requires continued support or involvement of Acceris,
contract revenues are spread over the period of the required support or
involvement. In the event that collectibility is in question, revenue (deferred
or recognized) is recorded only to the extent of cash receipts.





**Use
of estimates**





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





Significant
estimates include revenue recognition, accruals for telecommunications network
cost, the allowance for doubtful accounts, purchase accounting (including the
ultimate recoverability of intangibles and other long-lived assets), valuation
of deferred tax assets and contingencies surrounding litigation. These policies
have the potential to have a more significant impact on our financial
statements, either because of the significance of the financial statement item
to which they relate, or because they require judgment and estimation due to the
uncertainty involved in measuring, at a specific point in time, events which are
continuous in nature.





Costs
associated with carrying telecommunications traffic over our network and over
the Company’s leased lines are expensed when incurred, based on invoices
received from the service providers. If invoices are not available in a timely
fashion, estimates are utilized to accrue for these telecommunications network
costs. These estimates are based on the understanding of variable and fixed
costs in the Company’s service agreements with these vendors in conjunction with
the traffic volumes that have passed over the network and circuits provisioned
at the contracted rates. Traffic volumes for a period are calculated from
information received through the Company’s network switches. From time to time,
the Company has disputes with its vendors relating to telecommunications network
services. In the event of such disputes, the Company records an expense based on
its understanding of the agreement with that particular vendor, traffic
information received from its network switches and other factors.





Allowances
for doubtful accounts are maintained for estimated losses resulting from the
failure of customers to make required payments on their accounts. The Company
evaluates its provision for doubtful accounts at least quarterly based on
various factors, including the financial condition and payment history of major
customers and an overall review of collections experience on other accounts and
economic factors or events expected to affect its future collections experience.
Due to the large number of customers that the Company serves, it is impractical
to review the creditworthiness of each of its customers. The Company considers a
number of factors in determining the proper level of the allowance, including
historical collection experience, current economic trends, the aging of the
accounts receivable portfolio and changes in the creditworthiness of its
customers.





F-10







The
Company accounts for intangible assets in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 141, *Business
Combinations* (“SFAS
141”) and SFAS No. 142, *Goodwill
and Other Intangible Assets* (“SFAS
142”). All business combinations are accounted for using the purchase method and
goodwill and intangible assets with indefinite useful lives are not amortized,
but are tested for impairment at least annually. Intangible assets are initially
recorded based on estimates of fair value at the time of the
acquisition.





The
Company assesses the fair value of its segments for goodwill impairment based
upon a discounted cash flow methodology. If the carrying amount of the segment
assets exceeds the estimated fair value determined through the discounted cash
flow analysis, goodwill impairment may be present. The Company would measure the
goodwill impairment loss based upon the fair value of the underlying assets and
liabilities of the segment, including any unrecognized intangible assets and
estimate the implied fair value of goodwill. An impairment loss would be
recognized to the extent that a reporting unit’s recorded goodwill exceeded the
implied fair value of goodwill.





The
Company performed its annual goodwill impairment test in the fourth quarters of
2004 and 2003. No impairment was present upon the performance of these tests in
2004 and 2003. We cannot predict the occurrence of future events that might
adversely affect the reported value of goodwill. Such events may include, but
are not limited to, strategic decisions made in response to economic and
competitive conditions, the impact of the telecommunications regulatory
environment, the economic environment of its customer base, statutory judgments
on the validity of the Company’s VoIP Patent Portfolio or a material negative
change in its relationships with significant customers.





Regularly,
the Company evaluates whether events or circumstances have occurred that
indicate the carrying value of its other amortizable intangible assets may not
be recoverable. When factors indicate the asset may not be recoverable, the
Company compares the related future net cash flows to the carrying value of the
asset to determine if impairment exists. If the expected future net cash flows
are less than carrying value, impairment is recognized to the extent that the
carrying value exceeds the fair value of the asset





The
Company performs a valuation on its deferred tax asset, which has been generated
by a history of net operating loss carryforwards, at least annually, and
determines the necessity for a valuation allowance. The Company evaluates which
portion, if any, will more likely than not be realized by offsetting future
taxable income. The determination of that allowance includes a projection of its
future taxable income, as well as consideration of any limitations that may
exist on its use of its net operating loss or credit carryforwards.





The
Company is involved from time to time in various legal matters arising out of
its operations in the normal course of business. On a case by case basis, the
Company evaluates the likelihood of possible outcomes for this litigation. Based
on this evaluation, the Company determines whether a liability is appropriate.
If the likelihood of a negative outcome is probable, and the amount is
estimable, the Company accounts for the liability in the current period. A
change in the circumstances surrounding any current litigation could have a
material impact on the financial statements.





**Cash
and cash equivalents**





The
Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. The Company maintains its cash and
cash equivalents primarily with financial institutions in California and
Pennsylvania. These accounts may from time to time exceed federally insured
limits. The Company has not experienced any losses on such
accounts.





**Provision
for doubtful accounts**





The
Company evaluates the collectibility of its receivables monthly, based upon
various factors including the financial condition and payment history of major
customers, and overall review of collections experience on other accounts and
economic factors or events expected to affect the Company’s future collections
experience. Due to the large number of customers that the Company serves, it is
impractical to review the credit worthiness of each of its customers. The
Company considers a number of factors in determining the proper level of the
allowance, including historical collection experience, current economic trends,
the aging of the accounts receivable portfolio and changes in the credit
worthiness of its customers.







F-11




**Furniture,
fixtures, equipment and software**





Furniture,
fixtures, equipment and software are stated at cost. Depreciation is calculated
using the straight-line method over the following estimated useful
lives:





Telecommunications
      network equipment
    3-5
      yearsFurniture,
      fixtures and office equipment
    3-10
      yearsSoftware
      and information systems
    3
      yearsLeasehold
      improvements
    Shorter
      of estimated life or lease term





Long-lived
assets that are to be disposed of by sale are carried at the lower of book value
or estimated net realizable value less costs to sell. Betterments and renewals
that extend the life of the assets are capitalized. Other repairs and
maintenance charges are expensed as incurred. The cost and related accumulated
depreciation applicable to assets retired are removed from the accounts and the
gain or loss on disposition is recognized in operations. The Company regularly
evaluates whether events or circumstances have occurred that indicate the
carrying value of its furniture, fixtures, equipment and software may not be
recoverable. When factors indicate the asset may not be recoverable, the Company
compares the related future net cash flows to the carrying value of the asset to
determine if impairment exists. If the expected future net cash flows are less
than the carrying value, impairment is recognized to the extent that the
carrying value exceeds the fair value of the asset.





**Investments**





Dividends
and realized gains and losses on equity securities are included in other income
in the consolidated statements of operations.





Investments
are accounted for under the cost method, as the equity securities or the
underlying common stock are not readily marketable and the Company’s ownership
interests do not allow it to exercise significant influence over these entities.
The Company monitors these investments for impairment by considering current
factors including economic environment, market conditions and operational
performance and other specific factors relating to the business underlying the
investment, and will record impairments in carrying values when necessary. The
fair values of the securities are estimated using the best available information
as of the evaluation date, including the quoted market prices of comparable
public companies, market price of the common stock underlying the preferred
stock, recent financing rounds of the investee and other investee specific
information.





**Intangible
assets**





Effective
January 1, 2002, the Company accounts for intangible assets in accordance with
SFAS No. 141, *Business
Combinations* (“SFAS
141”) and SFAS No. 142, *Goodwill
and Other Intangible Assets* (“SFAS
142”). All business combinations are accounted for using the purchase method and
goodwill and intangible assets with indefinite useful lives are not amortized,
but are tested for impairment at least annually. Intangible assets having a
finite life are amortized over the estimated useful life of the
asset.





The
Company regularly evaluates whether events or circumstances have occurred that
indicate the carrying value of its intangible assets may not be recoverable.
When factors indicate the asset may not be recoverable, the Company compares the
related future net cash flows to the carrying value of the asset to determine if
impairment exists. If the expected future net cash flows are less than carrying
value, impairment is recognized to the extent that the carrying value exceeds
the fair value of the asset. Amortization of intangible assets is calculated
using the straight-line method over the following periods:





Enterprise
      customer contracts and relationships
    60
      monthsRetail
      customer contracts and relationships
    12
      monthsAgent
      relationships
    30
      monthsAcquired
      patents
    60
      monthsAgent
      contracts
    12
      months





In the
fourth quarter of 2004, management assessed the future cash flows expected to be
derived from the Commercial Agent Channel based on both the continued margin
compression and the high commission levels paid to third party agents. Based on
this assessment, management made the decision to write down the unamortized
intangible asset described as Agent Relationships to $360. The writedown
resulted in an increase of $637 in the depreciation and amortization expense for
2004. In conjunction with this impairment assessment the Company has also
reduced the amortization life of the intangible from 36 months to 30 months. The
monthly amortization in 2005 will be $30 per month.










F-12




**Advertising
costs**





Advertising
production costs are expensed the first time the advertisement is run. Media
(television and print) placement costs are expensed in the month the advertising
appears. During 2004, the Company incurred $223 (2003 - $127; 2002 - $1,590) in
advertising costs.





**Customer
acquisition costs and residual commission costs**





Customer
acquisition costs paid upfront are expensed when customers are first
provisioned. During 2004, the Company incurred $2,857 (2003 - $2,316; 2002 -
$1,590) in customer acquisition costs. Residual external commission costs are
expense when incurred and are based on the revenue derived from services
delivered to customers. During 2004, the Company incurred $7,499 (2003 - $9,441;
2002 - $4,827) in residual external commission costs.





**Research
and development costs**





The
Company expenses internal research and development costs, which primarily
consist of salaries, when they are incurred.





**Computer
software costs**





The
Company capitalizes qualified costs associated with developing computer software
for internal use. Such costs are amortized over the expected useful life,
usually three years. During 2004, the Company capitalized approximately $23
(2003 - $128) in costs associated with the development and installation of a new
billing system to launch a local product offering. No such costs were
capitalized during 2002.





**Concentrations
of credit risk**





The
Company’s retail telecommunications subscribers are primarily residential and
small business subscribers in the United States. The Company’s customers are
generally concentrated in the areas of highest population in the United States,
more specifically California, Florida, New York, Texas and Illinois. No single
customer accounted for over 10% of revenues in 2004, 2003 or 2002.





**Concentration
of third party service providers**





Acceris
utilizes the services of certain Competitive Local Exchange Carriers (“CLECs”)
to bill and collect from customers. A significant portion of revenues in the
years ended December 31, 2002, 2003 and 2004 were derived from customers billed
by CLECs. If the CLECs were unwilling or unable to provide such services in the
future, the Company would be required to significantly enhance its billing and
collection capabilities in a short amount of time and its collection experience
could be adversely affected during this transition period.





The
Company depends on certain large telecommunications carriers to provide network
services for significant portions of the Company’s telecommunications traffic.
If these carriers were unwilling or unable to provide such services in the
future, the Company’s ability to provide services to its customers would be
adversely affected and the Company might not be able to obtain similar services
from alternative carriers on a timely basis.





**Income
taxes**





The
Company records deferred taxes in accordance with SFAS No. 109, *Accounting
for Income Taxes* (“SFAS
109”). This Statement requires recognition of deferred tax assets and
liabilities for temporary differences between the tax bases of assets and
liabilities and the amounts at which they are carried in the financial
statements, based upon the enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company establishes a valuation
allowance when necessary to reduce deferred tax assets to the amount expected to
be realized. The determination of that allowance includes a projection of the
Company’s future taxable income, as well as consideration of any limitations
that may exist on the Company’s use of its net operating loss or credit
carryforwards.







F-13




**Stock-based
compensation**





At
December 31, 2004, the Company has several stock-based compensation plans, which
are described more fully in Note 18. The Company accounts for those plans under
the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, *Accounting
for Stock Issued to Employees* , and
related Interpretations (collectively, “APB 25”). Stock-based employee
compensation cost is not reflected in net loss, as all options granted under
those plans had an exercise price equal to the market value of the underlying
common stock on the date of grant. In accordance with SFAS No. 123, *Accounting
for Stock-Based Compensation* (“SFAS
123”), as amended by SFAS No. 148, *Accounting
for Stock-Based Compensation - Transition and Disclosure,* see
below for a tabular presentation of the pro forma stock-based compensation cost,
net loss and loss per share as if the fair value-based method of expense
recognition and measurement prescribed by SFAS 123 had been applied to all
employee options. Options granted to non-employees (excluding options granted to
non-employee members of the Company’s Board of Directors for their services as
Board members) are recognized and measured using the fair value-based method
prescribed by SFAS 123.





**Year
      ended December 31,****2004**
    
    **2003**
    
    **2002**Net
      loss as reported
    
    $
    (22,783
    )
    $
    (31,428
    )
    $
    (27,838
    )Deduct:Total
      compensation cost determined under fair value based methodfor all
      awards, net of $0 tax
    
    
    (559
    )
    
    (92
    )
    
    (1,300
    )Pro
      forma net loss
    
    $
    (23,342
    )
    $
    (31,520
    )
    $
    (29,138
    )Loss
      per shareBasic
      and diluted - as reported
    
    $
    (1.18
    )
    $
    (4.48
    )
    $
    (4.78
    )Basic
      and diluted - pro forma
    
    $
    (1.21
    )
    $
    (4.50
    )
    $
    (5.00
    )





The fair
value of each option grant is estimated on the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected volatility in 2004 ranging from 81% to 98% (2003 - 98%,
2002 - 150%), risk free rates ranging from 3.10% to 3.83%, 2.76% to 3.00% and
2.02% to 4.40% in 2004, 2003 and 2002, respectively, expected lives of four
years in 2004, four years in 2003, and three years in 2002, and dividend yield
of zero for each year.





**Fair
Value of Financial Instruments**





The fair
value of the financial instruments is the amount at which the instruments could
be exchanged in a current transaction between willing parties, other than in a
forced sale or liquidation. The carrying value at December 31, 2004 and 2003 for
the Company’s financial instruments, which include cash, accounts receivable,
deposits, accounts payable and accrued liabilities, and the revolving credit
facility, approximates fair value. The carrying value of the Company’s debt is
lower than the fair value of the debt due to the discounts set out in Note
10.





**Segment
reporting**





The
Company reports its segment information based upon the internal organization
that is used by management for making operating decisions and assessing the
Company’s performance. The Company operates in two business segments,
Technologies and Telecommunications.





**Reclassifications**





Certain
balances in the consolidated financial statements as of and for the years ended
December 31, 2004, 2003 and 2002 have been reclassified to conform to current
year presentation. These changes had no effect on previously reported net loss,
total assets, liabilities or stockholders’ deficit.







F-14




**Recent
accounting pronouncements**





In
December 2004, the FASB issued SFAS No. 123 (revised 2004), *Share-Based
Payment* (“SFAS
123(R)”). SFAS 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS 123(R) covers a wide
range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS 123(R) replaces FASB Statement No. 123, *Accounting
for Stock-Based Compensation* (“SFAS
123”), and supersedes APB Opinion No. 25, *Accounting
for Stock Issued to Employees* (“APB
25”).





SFAS 123,
as originally issued in 1995, established as preferable a fair-value-based
method of accounting for share-based payment transactions with employees.
However, SFAS 123 permitted entities the option of continuing to apply the
guidance of APB 25, as long as the footnotes to financial statements disclosed
what net income (loss) would have been had the preferable fair-value-based
method been used. Public entities (other than those filing as small business
issuers) will be required to apply SFAS 123 (R) as of the first interim or
annual reporting period that begins after June 15, 2005. We are currently
evaluating the effect that adoption of SFAS 123(R) will have on our overall
results of operations and financial position.





**Note
4 - Net Loss per Share and Reverse Stock Split**





Basic
earnings (loss) per share is computed based on the weighted average number of
common shares outstanding during the period. Options, warrants, convertible
preferred stock and convertible debt are included in the calculation of diluted
earnings (loss) per share, except when their effect would be anti-dilutive. As
the Company had a net loss from continuing operations for 2004, 2003 and 2002,
basic and diluted loss per share are the same.





On
December 6, 2002, the Board of Directors approved a 1-for-20 reverse split of
Acceris’ common stock (the “Stock Split”). The stockholders of Acceris approved
the Stock Split by stockholder vote on November 26, 2003. In connection with the
Stock Split the par value of the common stock was changed from $0.007 to $0.01
per share. The Stock Split reduced the shares of common stock outstanding at
that time by 365,977,409 shares. The basic and diluted net loss per common share
and all other share amounts in these financial statements are presented as if
the reverse stock split had occurred on December 31, 2001. Contemporaneous with
the Stock Split, Counsel exercised its right to convert certain debt instruments
into shares of the Company’s common stock. As a result of the conversion, the
Company issued to Counsel 13,428,492 shares of common stock on a post-split
basis.





In
January 2003, 150 shares of the Company’s Class N preferred stock held by an
unrelated third party were converted into 6,000 shares of common stock. In
November 2004, 1 share of the Company’s Class N preferred stock held by an
unrelated third party was converted into 40 shares of common stock.





Potential
common shares that were not included in the computation of diluted earnings
(loss) per share because they would have been anti-dilutive are as follows as at
December 31:




**2004**
    
    
    **2003**
    
    
    **2002**Assumed
      conversion of Class N preferred stock
    
    
    24,720
    
    
    24,760
    
    
    30,760Assumed
      conversion of convertible debt
    
    
    3,329,482
    
    
    2,486,299
    
    
    6,272,030Assumed
      conversion of Laurus convertible debt
    
    
    5,681,818
    
    
    —
    
    
    —Assumed
      exercise of options and warrants to purchase shares of common
      stock
    
    
    3,441,643
    
    
    1,807,879
    
    
    1,258,46312,477,663
    
    
    4,318,938
    
    
    7,561,253




**Note
5 - Investments**





The
Company’s investments as of December 31, 2004 consist of convertible preferred
stock holdings. The investment in convertible preferred stock is in AccessLine
Communications Corporation, a privately-held corporation. This stock was
received as consideration for a licensing agreement (reflected in technology
licensing and related services revenues) in the second quarter of 2003, the
estimated fair value of which was determined to be $1,100. The fair value of the
securities are estimated using the best available information as of the
evaluation date, including the quoted market prices of comparable public
companies, recent financing rounds of the investee and other investee specific
information.




F-15




Prior to
June 21, 2004, the Company held an investment in the common stock of BUI,
which investment was acquired as consideration received related to the sale of
the operations of ILC. At the time of the sale of the ILC business, the purchase
price consideration paid by BUI was in the form of convertible preferred stock,
with additional shares of preferred stock received subsequently based on
contingent earn out provisions in the purchase agreement. In addition, common
stock dividends were earned on the preferred stock holding. On March 16,
2004, the Company converted its preferred stock into 1,500,000 shares of BUI
common stock, and sold 750,000 shares at $2.30 per share in a private placement
transaction. This sale resulted in a gain of approximately $565, which is
included in interest and other income in the three months ended March 31,
2004 and was based on specific identification of the securities sold and their
related cost basis. Through several open market transactions during the three
months ended June 30, 2004, the Company sold the remaining 808,546 of these
shares, resulting in a gain of approximately $811.





**Note
6 - Discontinued Operations**




On
December 6, 2002, the Company entered into an agreement to sell
substantially all of the assets and customer base of ILC to BUI. The sale
included the physical assets required to operate Acceris’ nationwide network
using its patented VoIP technology (constituting the core business of ILC) and a
license in perpetuity to use Acceris’ proprietary software platform. The sale
closed on May 1, 2003 and provided for a post closing cash settlement
between the parties. The sale price consisted of 300,000 shares of Series B
convertible preferred stock (8% dividend) of BUI, subject to adjustment in
certain circumstances, of which 75,000 shares are subject to an earn-out
provision (contingent consideration) based on future events related to ILC’s
single largest customer. The earn-out took place on a monthly basis over a
fourteen-month period which began January 2003. The Company recognized the
value of the earn-out shares as additional sales proceeds when earned. During
the year ending December 31, 2003, 64,286 shares of the contingent
consideration were earned and were included as a component of gain
(loss) from discontinued operations. The fair value of the 225,000 shares
(non-contingent consideration to be received) of Buyers United convertible
preferred stock was determined to be $1,350 as of December 31, 2002. As of
December 31, 2003, the combined fair value of the original shares (225,000)
and the shares earned from the contingent consideration (64,286 shares) was
determined to be $1,916. The value of the shares earned from the contingent
consideration was included in the calculation of gain from discontinued
operations for the year ended December 31, 2003. As additional contingent
consideration was earned, it was recorded as a gain from discontinued
operations. In the first quarter of 2004, the Company recorded a gain from
discontinued operations of $104. This gain was due to the receipt in January
2004 of the remaining 10,714 shares of common stock as contingent consideration,
which is recorded as additional gain from discontinued operations.




Upon
closing of the sale, BUI assumed all operational losses since December 6,
2002. Accordingly, the gain of $529 for the year ended December 31, 2003,
included the increase in the sales price for the losses incurred since
December 6, 2002. In the year ended December 31, 2002, the Company
recorded a loss from discontinued operations related to ILC of $12,508. No
income tax provision or benefit was recorded on discontinued
operations.




Net
assets and liabilities of the discontinued operations are as
follows:





**2004**
    
    **2003**Accounts
      Receivable
    
    $
    0
    
    $
    91Accrued
      Expenses
    
    
    0
    
    
    841Net
      assets (liabilities) of discontinued operations
    
    $
    0
    
    $
    (750
    )





Revenues
of the discontinued operation were $2,108 and $7,806 in 2003 and 2002,
respectively.







F-16





**Note
7 - Composition of Certain Financial Statement Captions**





Furniture,
fixtures, equipment and software consisted of the following at December
31:





****
    
    **2004**
    
    **2003**Telecommunications
      network equipment
    
    $
    14,508
    
    $
    14,196Furniture,
      fixtures and office equipment
    
    
    4,144
    
    
    4,059Building
      and leasehold improvements
    
    
    272
    
    
    305Software
      and information systems
    
    
    2,155
    
    
    1,98621,079
    
    
    20,546Less
      accumulated depreciation and amortization
    
    
    (16,927
    )
    
    (12,063
    )$
    4,152
    
    $
    8,483





Included
in telecommunications network equipment is $9,752 and $9,739 in assets acquired
under capital leases at December 31, 2004 and 2003, respectively. Accumulated
amortization on these leased assets was $8,757 and $6,382 at December 31, 2004
and 2003, respectively.





Accounts
payable and accrued liabilities consisted of the following at December
31:





****
    
    **2004**
    
    **2003**Legal
      and regulatory fees
    
    $
    9,983
    
    $
    6,749Accounts
      payable
    
    
    8,737
    
    
    976Telecommunications
      and related costs
    
    
    2,658
    
    
    11,841Payroll
      and benefits
    
    
    1,436
    
    
    1,267Billing
      and collection fees
    
    
    867
    
    
    2,859Agent
      commissions
    
    
    585
    
    
    865Other
    
    
    3,043
    
    
    3,715$
    27,309
    
    $
    28,272





During
the fourth quarter of 2004, the Company resolved disputes with two service
providers related to telecommunications services delivered to the Company in
current and prior years. This resulted in a reduction of telecommunications
expense and the related obligation recorded by the Company in 2004 of $1,869.
The recognition of these cost savings is not expected to be recurring in nature.





In 2003,
the Company completed settlement agreements totaling $1,141 with network
carriers, reducing its related obligations. The recognition of these cost
savings is not expected to be recurring in nature.





**Note
8 - Acquisitions**





**Purchase
of the Enterprise and Agent business of RSL COM USA Inc** .





On
December 10, 2002, Acceris through its subsidiary, ACC, completed the purchase
of the Enterprise and Agent business of RSL COM USA Inc. (“RSL”). The purchase
of RSL was accounted for under the purchase method, wherein its revenues,
expenses, assets and liabilities were included from the date of acquisition on
December 12, 2002. The business purpose of the acquisition was to advance the
Company’s commercial agent business, to increase network utilization and to
provide an entry into the management of information technology services for
enterprise clients. Acceris paid a purchase price of $7,500 in cash, which was
financed by a convertible loan from Counsel to Acceris and assumed a
non-interest bearing note for $1,000, from the vendor, that was scheduled to
mature on March 31, 2004. The purchase contract provided for additional purchase
consideration to be paid contingent on the achievement of certain revenue levels
by the Enterprise business during 2003. At December 31, 2003, the Company has
accrued an obligation of approximately $123 in connection with this earn out
provision. The Company also incurred $1,014 of transaction costs related to the
purchase. The $123 contingent payout resulted in an adjustment to the furniture,
fixtures and equipment and intangible assets included in the purchase price at
December 31, 2003. The Company does not expect any further adjustments to the
purchase price, as the contingency period has ended.










F-17




The
allocation of fair values of assets acquired and liabilities assumed was as
follows:





Accounts
      receivable and other current assets
    
    $
    6,444Furniture,
      fixtures and equipment
    
    
    3,307Intangible
      assets
    
    
    2,444Accounts
      payable and accrued liabilities
    
    
    (2,558
    )$
    9,637





Components
of the acquired intangible assets are as follows:





****
    
    **Amount**Intangible
      assets subject to amortization:Customer
      contracts and relationships
    
    $
    1,638Agent
      relationships
    
    
    564Agent
      contracts
    
    
    242$
    2,444




**Purchase
of Local Telcom Holdings, LLC**





In July
2002, the Company agreed to purchase from Transpoint Communications, LLC its
membership interest in Local Telcom Holdings, LLC (“Local Telcom”). The
acquisition closed on July 28, 2003. The purchase was accounted for under the
purchase method, wherein its revenues, expenses, assets and liabilities were
included from the date of closing July 28, 2003. As of the closing date, the
Company had an asset (which had been included in other assets) from Local Telcom
of $2,836 that represented uncollected revenues from Local Telcom prior to the
closing plus costs and expenses paid for Local Telcom, less collections on
accounts receivable of Local Telcom. At closing, the $2,836 was applied as part
of the total purchase price of $2,882. The intent of this acquisition was
primarily to increase the Company’s agent relationships in the Company’s
commercial agent business, increase its customer base and improve network
utilization.





The final
allocation of the purchase price to the fair values of assets acquired and
liabilities assumed is summarized below.





Accounts
      receivable and other current assets
    
    $
    685Furniture,
      fixtures, and equipment
    
    
    5Intangible
      assets
    
    
    1,917Goodwill
      (tax deductible)
    
    
    947Accounts
      payable and accrued liabilities
    
    
    (672
    )$
    2,882





Components
of the acquired intangible assets are as follows:





****
    
    **Amount**Intangible
      assets:Customer
      contracts and relationships
    
    $
    367Agent
      relationships
    
    
    1,550$
    1,917





Pro forma
results of operations for the years ended December 31, 2003 and 2002 as if the
acquisitions of certain assets of RSL and Local Telcom had been
completed as of the beginning of each year presented are shown below. The pro
forma results do not include any anticipated cost savings or other effects of
the planned integration of the operations, and are not necessarily indicative of
the results which would have occurred if the business combination had occurred
on the dates indicated, or which may result in the future.







F-18







****
    
    **Year
      ended December 31,******
    
    **2003**
    
    **2002**Revenues
    
    $
    140,995
    
    $
    148,404Loss
      from continuing operations
    
    $
    (32,999
    )
    $
    (20,915
    )Net
      loss
    
    $
    (32,470
    )
    $
    (33,424
    )Loss
      per share from continuing operations
    
    $
    (4.71
    )
    $
    (3.59
    )Net
      loss per share
    
    $
    (4.63
    )
    $
    (5.74
    )




**Note
9 - Intangible Assets and Goodwill**





Intangible
assets consisted of the following at December 31:





****
    
    **December
      31, 2004******
    
    **Amortization****period**
    
    **Cost**
    
    **Accumulated****amortization**
    
    **Net**Intangible
      assets subject to amortization:Customer
      contracts and relationships
    
    
    12
      - 60 months
    
    $
    2,006
    
    $
    (1,042
    )
    $
    964Agent
      relationships
    
    
    30
      months
    
    
    1,479
    
    
    (1,119
    )
    
    360Agent
      contracts
    
    
    12
      months
    
    
    242
    
    
    (242
    )
    
    —Patents
    
    
    60
      months
    
    
    100
    
    
    (20
    )
    
    80Goodwill
    
    
    
    
    
    1,120
    
    
    —
    
    
    1,120Total
      intangible assets and goodwill
    
    
    
    
    $
    4,947
    
    $
    (2,423
    )
    $
    2,524





****
    
    **December
      31, 2003******
    
    **Amortization****period**
    
    **Cost**
    
    **Accumulated****amortization**
    
    **Net**Intangible
      assets subject to amortization:Customer
      contracts and relationships
    
    
    12
      - 60 months
    
    $
    2,006
    
    $
    (510
    )
    $
    1,496Agent
      relationships
    
    
    36
      months
    
    
    2,116
    
    
    (415
    )
    
    1,701Agent
      contracts
    
    
    12
      months
    
    
    242
    
    
    (242
    )
    
    —Patents
    
    
    60
      months
    
    
    100
    
    
    —
    
    
    100Goodwill
    
    
    
    
    
    1,120
    
    
    —
    
    
    1,120Total
      intangible assets and goodwill
    
    
    
    
    $
    5,584
    
    $
    (1,167
    )
    $
    4,417





Aggregate
amortization expense of intangibles for the years ended December 31, 2004, 2003
and 2002 was $1,893, $1,117 and $937, respectively. In the fourth quarter of
2004, management assessed the future cash flows expected to be derived from the
Commercial Agent Channel based on both the continued margin compression and the
high commission levels paid to third party agents. Based on this assessment, the
unamortized intangible asset described as Agent Relationships was written down
to $360. The writedown resulted in an increase of $637 in the depreciation and
amortization expense for 2004. In conjunction with this impairment assessment,
the Company has also reduced the amortization life of the intangible from 36
months to 30 months. The monthly amortization in 2005 will be $30 per month.




F-19


**Note
10 - Debt**





Debt
consists of the following at December 31:





****
    
    **2004**
    
    **2003****Gross
      debt**
    
    **Discounts
      (1****)**
    
    **Reported
      debt**
    
    **Gross
      debt**
    
    **Discounts
      (1)**
    
    **Reported
      debt**Notes
      payable to Counsel, interest at 10.0%
    
    $
    35,386
    
    $
    —
    
    $
    35,386
    
    $
    19,929
    
    $
    (62
    )
    $
    19,867Note
      payable to Counsel, convertible to common stock, interest at
      9.0%
    
    
    16,714
    
    
    (6,085
    )
    
    10,629
    
    
    15,291
    
    
    (6,441
    )
    
    8,850Convertible
      Debenture, convertible to common stock, interest at WSJ plus 3.0% (10.25%
      at December 31, 2004)
    
    
    5,003
    
    
    (605
    )
    
    4,398
    
    
    —
    
    
    —
    
    
    —Warrants,
      convertible to common stock
    
    
    322
    
    
    —
    
    
    322
    
    
    —
    
    
    —
    
    
    —Revolving
      credit facility, interest at greater of 6% or prime rate plus 1.75% (6.0%
      at December 31, 2004)
    
    
    4,725
    
    
    —
    
    
    4,725
    
    
    12,127
    
    
    —
    
    
    12,127Note
      payable to equipment supplier, 12.5%, $6 per month until October
      2006
    
    
    138
    
    
    —
    
    
    138
    
    
    171
    
    
    —
    
    
    171Note
      payable, RSL estate, 10.0% imputed interest, due March 31,
      2004
    
    
    —
    
    
    —
    
    
    —
    
    
    1,123
    
    
    (18
    )
    
    1,105Note
      payable to equipment supplier, 7.0%, $11 per month until December 2005,
      then $16 per month thereafter
    
    
    667
    
    
    —
    
    
    667
    
    
    750
    
    
    —
    
    
    75062,955
    
    
    (6,690
    )
    
    56,265
    
    
    49,391
    
    
    (6,521
    )
    
    42,870Less
      current portion
    
    
    (6,653
    )
    
    —
    
    
    (6,653
    )
    
    (13,381
    )
    
    —
    
    
    (13,381
    )Long-term
      debt, less current portion
    
    $
    56,302
    
    $
    (6,690
    )
    $
    49,612
    
    $
    36,010
    
    $
    (6,521
    )
    $
    29,489





(1)
Accretions associated with Beneficial Conversion Feature, detachable
warrants, costs associated with raising facilities and imputed
interest.





**Payment
      due by period****Contractual
      obligations:**
    
    **Total**
    
    **Less
      than 1****year**
    
    **1-3****years**
    
    **3-5****years**
    
    **More
      than 5****years**Long
      term debt obligations - related party
    
    $
    52,100
    
    $
    —
    
    $
    52,100
    
    $
    —
    
    $
    —Long
      term debt obligations - third party
    
    $
    10,855
    
    $
    6,653
    
    $
    3,964
    
    $
    238
    
    $
    —




Counsel
Corporation is the controlling stockholder of the Company and is also the major
debt holder of the Company, owning 82% of the Company’s debt as at December 31,
2004. Counsel has subordinated its debt position and pledged its ownership
interest in Acceris in favor of the Company’s asset based lender and its
convertible debenture holder. Counsel, via a “Keep Well” agreement which expires
on June 30, 2005, has agreed to fund the cash requirements of Acceris through
the maturity of the Keep Well. At this time, the Company does not expect this
guarantee to be extended past its maturity date. Related party debt owing to
Counsel has been extended through January 31, 2006, subject to acceleration in
certain circumstances including certain events of default. Interest on related
party debt accrues to principal quarterly, and accordingly the Company has no
cash payment obligations to Counsel prior to maturity of its debt. During 2004,
Counsel advanced $12,584 (2003 - $7,896; 2002 - $16,823) and accrued interest
added to principal was $4,304 (2003 - $5,667; 2002 - $3,651). Advances have been
made to fund operations, to finance working capital, to fund acquisitions and to
pay down third party debt of Acceris. In the fourth quarter of 2003, Counsel
exercised some of its conversion rights, and converted $40,673 of notes payable
into shares of common stock of the Company. Pursuant to this conversion, Counsel
received 13,428,618 shares of common stock, increasing its ownership in Acceris
from 70% to approximately 91%.





In
connection with the note payable to Counsel which is convertible into common
stock, anti-dilution events have impacted the conversion price and the number of
shares issuable upon conversion of this debt. As well, the accumulation of
unpaid interest costs, which are required by the terms of the debt to be added
to the principal balance payable on maturity, is also convertible upon the same
terms. These anti-dilution events and deemed “paid in kind” interest
periodically result in the recognition of a beneficial conversion feature
(“BCF”). As a result of the above, in accordance with Emerging Issues Task Force
Issue No. 00-27, *Application
of Issue 98-5 to Certain Convertible Instruments* (“EITF
00-27”), in 2004 the Company recorded a BCF of $3,771 (2003 - $5,354; 2002 -
$6,522) as paid-in capital. The aggregate BCF is amortized over the term of the
debt, using the effective interest rate method, through a charge to the
statement of operations. For further discussion of notes payable and other
transactions with Counsel, see Note 2, above, and Note 14, below.










F-20




The
Company’s revolving credit facility matures on June 30, 2005. The asset-based
lender has first priority over all the assets and shares of common stock of
Acceris. The lender also has a pledge of Counsel’s shares in Acceris and its
debt is guaranteed by Counsel. During 2004, the borrowing base with the
asset-based lender was reduced from $12,127 to $4,725. This was primarily due to
changes in the underlying products offered to customers and the change in
billing methodology by the Company. That is, the Company added a local plus long
distance bundled offering to its customers that was not eligible for borrowings
under the existing facility. Additionally, the Company continued to migrate its
customer base from LEC billing to more direct billing because of marketing and
cost considerations. Under the existing facility, direct long distance billings
are advanced on a 65% basis whereas LEC billings are advanced on an 85% basis,
subject to other restrictions. The Company was in compliance with all covenants
of this agreement throughout 2004. No additional borrowings are available under
this facility at December 31, 2004. Amounts available for borrowing under an
asset-based lender fluctuate from day to day based on a number of factors
including billings, collections, concentrations, hold-backs, legal rights of
offset, etc. Revenue derived from the direct billings associated with the
Company’s local and long distance product offering, which commenced in 2004, is
not included in the borrowing base of the asset-based facility although cash
receipts from this offering are used to reduce the amounts owing under the
facility. This exclusion has the effect of reducing the average outstanding loan
balance under the asset-based facility. Such reductions are expected to continue
through the facility’s maturity.





On
October 14, 2004, the Company entered into an agreement for the sale by the
Company of a convertible debenture (the “Note”) with detachable warrants to
Laurus Master Fund, Ltd. (the “Purchaser”), in the principal amount of $5,000,
due October 14, 2007. The Note provides that the principal amount outstanding
bears interest at the prime rate as published in the Wall Street Journal (“WSJ”)
plus 3% (but not less than 7% per annum) decreasing by 2% (but not less than 0%)
for every 25% increase in the Market Price (as defined therein) above the fixed
conversion price following the effective date of the registration statement
covering the common stock issuable upon conversion of the Note. Should the
Company default under the agreement and fail to remedy the default on a timely
basis, interest under the Note will increase by 2% per month and the Note may
become immediately due inclusive of a 20% premium to the then outstanding
principal. Interest is payable monthly in arrears, commencing November 1, 2004.
Principal is payable at the rate of approximately $147 per month commencing
January 1, 2005, in cash or registered common stock. Payment amounts will be
converted into stock if (i) the average closing price for five trading days
immediately preceding the repayment date is at least 100% of the Fixed
Conversion Price, (ii) the amount of the conversion does not exceed 25% of the
aggregate dollar trading volume for the 22-day trading period immediately
preceding the repayment date, (iii) a registration statement is effective
covering the issued shares and (iv) no Event of Default exists and is
continuing. In the event the monthly payment must be paid in cash, then the
Company shall pay 102% of the amount due in cash. The Company has the right to
prepay the Note, in whole or in part, at any time by giving seven business days
written notice and paying 120% of the outstanding principal amount of the Note.
The holder may convert the Note, in whole or in part, into shares of common
stock at any time upon one business day’s prior written notice. The Note is
convertible into shares of the Company’s common stock at a fixed conversion
price of $0.88 per share (subject to anti-dilution) of common stock (105% of the
average closing price for the 30 trading days prior to the issuance of the Note)
not to exceed, however, 4.99% of the outstanding shares of common stock of the
Company (including issuable shares from the exercise of the warrants, payments
of interest, or any other shares owned). However, upon an Event of Default as
defined in and in respect of the Note, the 4.99% ownership restriction is
automatically rendered null and void. Laurus may also revoke the 4.99% ownership
restriction upon 75 days prior notice to the Company. In accordance with
Statement of Financial Accounting Standards No. 133, *Accounting
for Derivative Instruments and Hedging Activities* (“SFAS
133”) and Emerging Issues Task Force Issue No. 00-19, *Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock* (“EITF
00-19”) and EITF 00-27, the
Company analyzed the various embedded derivative elements of the debt at
inception of the Note and concluded that all of the individual elements should
be characterized as debt for accounting purposes and that the embedded
derivative elements had nominal value. The value of the embedded derivative
elements of the debt is reassessed on a quarterly basis on a mark-to-market
basis over the term of the debt, with any periodic changes recorded as either a
charge or credit to the statement of operations, as appropriate. At the end of
2004, the Company concluded that the value of the embedded derivatives remained
nominal.





The
embedded derivative elements include: (1) a variable interest rate component
dependent on the WSJ prime rate, (2) an interest rate forward contract
component, which adjusts the interest rate downward if certain conditions are
achieved related to the Company’s common stock, (3) a call option allowing the
Company an option to prepay the Note, (4) a put option requiring the Company to
repay the Note if certain events, including an event of default, occur, (5) an
equity-forward element, which requires the monthly principal, interest and other
fees to be paid in common stock if certain market conditions related to the
Company’s common stock occur, and (6) a conversion option permitting Laurus to
convert the Note into common stock of the Company. At December 31, 2004, the
aggregate debt, including interest, was convertible into 5,681,818 shares of the
common stock of the Company.







F-21




In the
event that, in the future, either the conversion price in respect of the Note is
reduced as a result of certain anti-dilution provisions that may cause the
aggregate number of shares issuable to Laurus to increase, or value is ascribed
to the embedded derivative components of the Note, the Company may need to
record a beneficial conversion feature (“BCF”) associated with the Note as a
credit to paid-in-capital. The aggregate BCF would then be amortized over the
term of the debt, using the effective interest rate method, through a charge to
the statement of operations.





In
addition, the Company issued a common stock purchase warrant (the “Warrant”) to
the Purchaser, entitling the Purchaser to purchase up to one million shares of
common stock, subject to adjustment. The Warrant entitles the Purchaser to
purchase the stock through the earlier of (i) October 13, 2009 or
(ii) the date on which the average closing price for any consecutive ten
trading dates shall equal or exceed 15 times the Exercise Price. The Exercise
Price shall equal $1.00 per share as to the first 250,000 shares, $1.08 per
share for the next 250,000 shares and $1.20 per share for the remaining 500,000
shares, or 125%, 135% and 150% of the average closing price for ten trading days
immediately prior to the date of the Warrant, respectively. The Company
concluded that, pursuant to EITF
00-19, the Warrant should be characterized as debt for accounting purposes,
primarily as a result of the Company undertaking to deliver registered shares to
Laurus upon conversion. Applying the Black-Scholes Model, t he
Company ascribed $430 of the proceeds of the Note as the market value of the
Warrant at inception using a volatility factor of 81 derived from an analysis
and weighting of: the volatility of the Company’s common stock over a 3 year
period, the volatility of the common stock of its peer group of competitors, the
volatility of small capitalization stocks and the volatility of the Small Cap
Telecom S&P Index, a rate for a five-year Treasury Note of 3.49% as a proxy
for the risk-free rate of return, and a term to maturity of five years. The
value of the Warrant is reassessed on a quarterly basis on a mark-to-market
basis while the Warrants are in existence, with any periodic changes recorded as
either a charge or credit to the statement of operations, as appropriate. The
Company adjusted the value of the Warrant to $322 at the end of 2004; the
reduction in the warrant liability was credited against the amortization of debt
discount. At December 31, 2004 none of the Warrants to purchase common stock had
been exercised by the holder.





In
connection with the Note, the Company recorded a debt discount of $656,
comprising $430 relating to the warrant allocation and $226 of financing costs
to Laurus, which was deducted from the amount advanced on closing. The debt
discount is being amortized over the term of the debt using the effective
interest method through a charge to the statement of operations.





The
Company filed a registration statement under the Securities Act of 1933, as
amended, to register the 6,681,818 shares issuable upon conversion of the Note
as well as those issued pursuable to the Warrant. This registration statement
was declared effective by the SEC on January 18, 2005.





Pursuant
to a Master Security Agreement, subordinated to the existing asset-based
facility, the Company granted a blanket lien on all its property and that of
certain of its subsidiaries to secure repayment of the obligation and, pursuant
to a Stock Pledge Agreement, Counsel Communications LLC and Counsel Corporation
(US) pledged the shares of the Company held by them as further security. In
addition, Acceris Communications Technologies, Inc., Acceris Communications
Corp., Counsel Corporation and Counsel Communications LLC and Counsel
Corporation (US) jointly and severally guaranteed the obligations to the
Lender. So long as 25% of principal amount of the Note is outstanding, the
Company agreed, among other things, that it will not pay dividends on its common
stock.





During
2004, the Company paid amounts owing under its note to the Estate of RSL,
pertaining to the 2002 purchase of the its residential and enterprise customers.





During
2003, the Company was discharged of obligations amounting to $1,141 owed to a
network service provider. The discharge of these obligations was reported as
other income in the consolidated statement of operations for the year ended
December 31, 2003.





**Note
11 - Commitments**





Agreements
classified as operating leases have terms ranging from one to six years. The
Company’s rental expense, which is recognized on a straight line basis, for
operating leases was approximately $2,251, $2,148, and $4,547 for 2004, 2003 and
2002, respectively.










F-22




Future
minimum rental payments required under non-cancelable capital and operating
leases with initial or remaining terms in excess of one year consist of the
following at December 31, 2004:





****
    
    **Capital****Leases**
    
    **Operating****Leases**Year
      ended December 31:2005
    
    $
    1,473
    
    
    1,8562006
    
    
    —
    
    
    1,1472007
    
    
    —
    
    
    7402008
    
    
    
    
    
    2532009
      and beyond
    
    
    —
    
    
    272Total
      minimum payments
    
    
    1,473
    
    $
    4,268Less
      amount representing interest
    
    
    (32
    )Present
      value of net minimum lease payments
    
    
    1,441Less
      current portion
    
    
    (1,441
    )Long-term
      obligations under capital leases
    
    $
    —





From time
to time, Acceris has various agreements with national carriers to lease local
access spans and to purchase carrier services. The agreements include minimum
usage commitments with termination penalties. At December 31, 2004 the Company
has minimum purchase commitments of $12,000 between December 2004 and November
2005. $6,000 of the commitments must be completed by June 2005. Failure to
achieve either element of the commitments will result in a penalty of $187 for
each occurrence.




**Note
12 - Patent Residual Option**




In the
fourth quarter of 2003, Acceris acquired Patent No. 6,243,373 from a third
party. Consideration provided was $100 plus a 35% residual payable to the third
party relating to the net proceeds from future licensing and or enforcement
actions from the Acceris VoIP Patent Portfolio (U.S. Patent Nos. 6,243,373
and 6,438,124). Net proceeds are defined as amounts collected from third parties
net of the direct costs associated with putting the licensing or enforcement in
place and related collection costs. At the time of closing, Acceris was granted
the right to decrease the residual payable from 35% to 30% on or before June 30,
2004 for an additional payment of $614 and, based upon exercising the
right to decrease the residual from 35% to 30%, Acceris would have the
additional right to decrease its residual payable from 30% to 15% for an
additional $5,000. In the second quarter, Acceris was granted an extension
through July 31, 2004 of its right to decrease the residual from 35% to 30% for
no additional consideration by the arms length party. Acceris was subsequently
granted additional extensions of its right to decrease its residual from 35% to
30% through November 30, 2004 for no additional consideration. The additional
right to decrease the residual from 30% to 15%, which is preconditioned on the
decrease of residual from 35% to 30% also remained in full force and effect. The
Company allowed all buy down rights to lapse effective November 30,
2004.





**Note
13 - Income Taxes**





The
Company recognized no income tax benefit from its losses in 2004, 2003 and 2002.
The reported tax benefit varies from the amount that would be provided by
applying the statutory U.S. Federal income tax rate to the loss from continuing
operations before taxes for the following reasons:





****
    
    **2004**
    
    **2003**
    
    **2002**Expected
      federal statutory tax benefit
    
    $
    (7,782
    )
    $
    (10,865
    )
    $
    (5,212
    )Increase
      (reduction) in taxes resulting from:State
      income taxes
    
    
    (563
    )
    
    (728
    )
    
    (430
    )Foreign
      loss not subject to domestic tax
    
    
    2
    
    
    5
    
    
    1Non-deductible
      interest on certain notes
    
    
    1,893
    
    
    3,364
    
    
    774Change
      in valuation allowance attributable to continuing
    operations
    
    
    6,177
    
    
    8,208
    
    
    4,859Other
    
    
    273
    
    
    16
    
    
    8$
    —
    
    $
    —
    
    $
    —





The
change in the valuation allowance, including discontinued operations, was
$6,139, $6,076 and $9,523 for the years ended 2004, 2003 and 2002,
respectively.





At
December 31, 2004, the Company had total net operating loss carryforwards for
federal income tax purposes of approximately $181,000. The Company has recorded
a full valuation allowance in respect of the tax effect of these losses. These
net operating loss carryforwards expire between 2006 and 2024.










F-23




The
Company’s utilization of approximately $157,000 of its available net operating
loss carryforwards against future taxable income is restricted pursuant to the
“change in ownership” rules in Section 382 of the Internal Revenue Code. These
rules in general provide that an ownership change occurs when the percentage
shareholdings of 5% direct or indirect stockholders of a loss corporation have
in aggregate increased by more than 50 percentage points during the immediately
preceding three years.





Restrictions
in net operating loss carryforwards occurred in 2001 as a result of the
acquisition of the Company by Counsel. Further restrictions may have occurred as
a result of subsequent changes in the share ownership and capital structure of
the Company and Counsel. Net operating loss carryforwards arising prior to such
a “change in ownership” would be available for usage against future taxable
income subject to an annual usage limitation of approximately $6,700 per annum
until 2008 and thereafter $1,700 per annum respectively.





Due to
the expiration of the Company’s net operating loss carryforwards and the above
possible usage restrictions, it is estimated that only $84,000 of the total
$181,000 of net operating loss carryforwards otherwise available will be able to
be utilized in the event the Company were to generate taxable income in the
future. In addition, further restrictions may occur through future merger,
acquisition and/or disposition transactions.





The
Company also has net operating loss carryforwards for state income tax purposes
in those states where it has conducted business. Available state tax loss
carryforwards however may differ substantially by jurisdiction and in general
are subject to the same or similar restrictions as to expiry and usage described
above. The Company is subject to state income tax in multiple
jurisdictions.





The
components of the deferred tax asset and liability as of December 31, 2004 and
2003 are as follows:





****
    
    **2004**
    
    **2003**Deferred
      tax assets:Tax
      net operating loss carryforwards
    
    $
    67,610
    
    $
    58,386Acquired
      in-process research and development and intangible assets
    
    
    3,595
    
    
    3,441Investments
    
    
    —
    
    
    405Reserve
      for accounts receivable
    
    
    714
    
    
    1,368Accrued
      officers wages
    
    
    —
    
    
    121Accrued
      vacation
    
    
    358
    
    
    275Accrued
      interest
    
    
    505
    
    
    11Unearned
      revenue
    
    
    —
    
    
    2,579Other
    
    
    321
    
    
    594Fixed
      assets
    
    
    1,070
    
    
    854Valuation
      allowance
    
    
    (74,173
    )
    
    (68,034
    )Total
      deferred tax asset
    
    
    —
    
    
    —Deferred
      tax liabilities:Total
      deferred tax liability
    
    
    —
    
    
    —Net
      deferred tax asset
    
    $
    —
    
    $
    —





As the
Company has not generated taxable income from its communications services in the
past, a valuation allowance has been provided at December 31, 2004 and 2003 to
reduce the total deferred tax asset to nil, the amount considered more likely
than not to be realized. The change in the valuation allowance in the year is
due primarily to an increase in the Company’s net operating loss
carryforwards.










F-24




**Note
14 - Transactions with Controlling Stockholder**





**Transactions
with Counsel:**





Initial
Acquisition of Acceris and Senior Convertible Loan





On March
1, 2001, Acceris entered into a Senior Convertible Loan and Security Agreement,
(the “Senior Loan Agreement”) with Counsel. Pursuant to the terms and provisions
of the Senior Loan Agreement, Counsel agreed to make periodic loans to Acceris
in the aggregate principal amount not to exceed $10,000, which was subsequently
increased to $12,000 through amendment on May 8, 2001. Advances against the
Senior Loan Agreement were structured as a 3-year convertible note with interest
at 9% per annum, compounded quarterly. Counsel initially could convert the loan
into shares of common stock of Acceris at a conversion price of $11.20 per
common share. The terms of the Senior Loan Agreement also provide that at any
time after September 1, 2002, the outstanding debt including accrued interest
will automatically be converted into common stock using the then current
conversion rate, on the first date that is the twentieth consecutive trading day
that the common stock has closed at a price per share that is equal to or
greater than $20.00 per share. The Senior Loan Agreement also provides that the
conversion price is in certain cases subject to adjustment and includes
traditional anti-dilution protection for the lender and is subject to certain
events of default, which may accelerate the repayment of principal plus accrued
interest. Total proceeds available to the Company were $12,000, less debt
issuance costs of $600, amortized over three years. The Senior Loan Agreement
has been amended several times and the maturity date of the loan plus accrued
interest has been extended to January 31, 2006. As a result of the application
of the anti-dilution provisions of the Senior Loan Agreement, the conversion
price has been adjusted to $5.02 per common share. As of December 31, 2004, the
total outstanding debt under the Note (including principal and accrued interest)
was $16,714 which is convertible into approximately 3,329,482 shares of common
stock *.*





In
connection with the above Senior Loan Agreement, Acceris granted Counsel a
security interest in all of Acceris’ assets owned at the time of execution of
the Senior Loan Agreement or subsequently acquired, including but not limited to
Acceris’ accounts receivable, intangibles, inventory, equipment, books and
records, and negotiable instruments held by the Company (collectively, the
“Collateral”).





In
addition to the foregoing agreements, Acceris and Counsel executed a Securities
Support Agreement, dated March 1, 2001 (the “Support Agreement”) for the purpose
of providing certain representations and commitments by Acceris to Counsel,
including demand registration rights for common stock issuable upon conversion
of the related loan. Counsel relied on these representations and commitments in
its decision to enter a separate agreement (the “Securities Purchase Agreement”)
with Winter Harbor and First Media L.P., a limited partnership and the parent
company of Winter Harbor (collectively the “Winter Harbor Parties”), Counsel
agreed to purchase from the Winter Harbor Parties all of their equity securities
in Acceris, including shares of Class M and Class N preferred stock of Acceris,
beneficially owned by the Winter Harbor Parties for aggregate consideration of
$5,000 in cash.





On March
1, 2001, as part of the agreements discussed above, Counsel converted all of the
Class M and N convertible preferred stock it obtained from Winter Harbor into
3,098,303 shares of Acceris’ common stock. The Class N shares were converted at
$25.00 per common share and Class M at $11.20 per common share, in accordance
with their respective conversion rights. Pursuant to the Securities Purchase
Agreement, certain shares of common stock owned by the Winter Harbor Parties
were held in escrow pending resolution of certain events.





Under the
Support Agreement of March 1, 2001, Acceris also agreed to engage appropriate
advisors and proceed to take all steps necessary to merge Nexbell
Communications, Inc. (a subsidiary of Counsel) into Acceris. The merger was
completed on April 17, 2001 and Counsel received 871,724 shares of common stock
in Acceris as consideration.





In
October 2004, Counsel agreed to subordinate its loan and security interest to
that of Wells Fargo Foothill, Inc., (“Foothill”), the Company’s asset-based
lender, and Laurus Master Fund, Ltd. (“Laurus”), a third party financier, in
connection with the Senior Convertible Loan.





Assignment
of Winter Harbor Common Stock and Debt Interests





Pursuant
to the terms of a settlement between Counsel and the Winter Harbor Parties
effective August 29, 2003, the Winter Harbor Parties relinquished their right to
118,750 shares of the common stock of Acceris to Counsel. These shares were
released from escrow and delivered to Counsel.







F-25




The
Winter Harbor Parties further assigned to Counsel all of their rights with
respect to a note payable by Acceris of $1,999 drawn down pursuant to a Letter
of Credit issued November 3, 1998 to secure certain obligations of Acceris
together with any accrued interest thereon. The
assigned amount together with accrued interest amounted to $2,577 on August 29,
2003. As a result of the settlement and assignment, Acceris entered into a new
loan agreement with Counsel the terms of which provide that from August 29, 2003
the loan balance of $2,577 shall bear interest at 10% per annum compounded
quarterly with the aggregate balance of principal and accrued interest payable
on maturity of the loan on January 31, 2006. This loan agreement was
subsequently amended and restated to increase the principal of the loan by a
further $100 for funding provided by Counsel to enable Acceris to acquire a
Voice over Internet Protocol patent in December 2003 and to allow for the making
of further periodic advances thereunder at Counsel’s discretion. The loan
increased due to operating advances in 2004 of $1,918. There are no conversion
features associated with this loan. The terms of the loan agreement provide that
certain events of default, may accelerate the repayment of principal plus
accrued interest. As of December 31, 2004, the total outstanding debt under
the loan (including principal and accrued interest) was $6,808. In October
of 2004, Counsel agreed to subordinate its loan repayment rights to the Foothill
and Laurus debts.





Loan
and Security Agreement and Amended Debt Restructuring





On June
6, 2001, Acceris and Counsel entered into a Loan and Security Agreement (the
“Loan Agreement”). Any funds advanced to Acceris between June 6, 2001 and April
15, 2002, (not to exceed $10,000) were governed by the Loan Agreement and due on
June 6, 2002. The loan was secured by all of the assets of Acceris. As of
December 31, 2001, advances under this loan agreement totaled $10,000. On June
27, 2002 the Loan Agreement was amended to an amount of $24,307, which included
additional capital advances from Counsel to Acceris made from December 31, 2001
through June 6, 2002. The amended agreement also further provided for additional
advances as needed to Acceris, which advances totaled $2,087 through December
31, 2002 and $650 through November 30, 2003.





On July
25, 2002 Acceris and Counsel entered into a Debt Restructuring Agreement (“Debt
Restructuring Agreement”) which was amended on October 15, 2002 pursuant to an
Amended and Restated Debt Restructuring Agreement (“Amended Agreement”). The
Amended Agreement included the following terms:





1)
    Principal
      ($24,307) and associated accrued interest ($2,284), as of October 15,
      2002, under the Loan Agreement, as amended, would be exchanged for common
      stock of Acceris at $3.77 per share (representing the average closing
      price of Acceris’ common stock during May
2002).




2)
    Funding
      provided by Counsel pursuant to the Loan Agreement, as amended ($2,087),
      and associated accrued interest ($1,996), from October 15, 2002 to
      December 31, 2002, would be exchanged for common stock of Acceris at $3.77
      per share (representing the average closing price of Acceris’ common stock
      during May 2002).




3)
    Counsel
      would advance to Acceris all amounts paid or payable by Acceris to its
      stockholders that exercised their dissenters’ rights in connection with
      the transactions subject to the debt restructuring transactions and
      advance the amount of the annual premium to renew the existing directors
      and officers’ insurance coverage through November
2003.




4)
    Counsel
      would reimburse Acceris for all costs, fees and expenses, in connection
      with the Debt Restructuring Agreement and the Amended Agreement and
      transactions contemplated thereby including all expenses incurred and yet
      to be incurred, including the Special Committee’s costs to negotiate these
      agreements and costs related to obtaining stockholder approval. During
      2003 and 2002, Counsel reimbursed Acceris $132 and $499, respectively, for
      certain reimbursable expenses, which have been recorded as additional
      paid-in capital.




5)
    The
      issuance of common stock by Acceris pursuant to this Agreement would
      result in a weighted average conversion price adjustment pursuant to the
      provisions of the March 1, 2001 Loan Agreement. Whereas the conversion
      price for the March 1, 2001 Loan Agreement had initially been $11.20, the
      new conversion price would be adjusted as a result of the anti-dilution
      provisions of the Senior Loan Agreement. At December 31, 2004, the
      conversion price was $5.02 per common share*.*





Effective
November 30, 2003, 8,681,096 shares of common stock were issued to Counsel in
settlement of the underlying debt and accrued interest totaling $32,721 on the
date of the conversion.







F-26




Convertible
Promissory Note to Fund RSL COM USA, Inc. (“RSL”) Acquisition





In
connection with the acquisition of certain assets of RSL in December 2002,
Acceris issued a $7,500 convertible note payable (the “Convertible Note”) to
Counsel, bearing interest at 10% per annum compounded quarterly which, as
amended, was due on June 30, 2005. The Convertible Note was convertible into
common stock of Acceris at a conversion rate of $1.68 per share. Effective
November 30, 2003 Counsel exercised its right to convert the Convertible Note
plus accrued interest to that date totaling $7,952 into common stock of Acceris.
This resulted in the issuance of 4,747,522 shares of Acceris common
stock.





Collateralized
Promissory Note and Loan Agreement





During
the fourth quarter of 2003, Counsel advanced the sum of $5,600 to Acceris
evidenced by a promissory note effective October 1, 2003. In January 2004
Acceris and Counsel entered into a loan agreement and an amended and restated
promissory note pursuant to which an additional $2,000 was loaned to Acceris and
pursuant to which additional periodic loans may be made from time to time
(collectively and as amended, the “Promissory Note”). The Promissory Note
matures on January 31, 2006 and accrues interest at 10% per annum compounded
quarterly from the date funds are advanced. The Promissory Note was
collateralized by certain shares of Series B Convertible Preferred Stock (the
“Preferred Stock”) of Buyers United, Inc. (a third party), which were held by
Acceris. In the event of the sale of the Preferred Stock (or the common stock to
which the Preferred Stock was convertible) by Acceris or an equity investment or
investments in Acceris by a third party through the capital markets and subject
to certain limitations, the terms of the Promissory Note stated that the
maturity date of the Promissory Note would accelerate to the date 10 calendar
days following either such event. The preferred stock was sold during the first
six months of 2004, and, with respect to the sale, Counsel waived its right to
accelerate the maturity date. The Promissory Note is further secured by the
assets of the Company and is subject to certain events of default which may
accelerate the repayment of principal plus accrued interest. In October of 2004,
Counsel agreed to subordinate its loan and security interest in connection with
the issuance of the Promissory Note to that of Foothill and Laurus. There are no
conversion features associated with the Promissory Note. The loan increased
primarily due to operating advances in 2004 of $10,662. The outstanding balance
at December 31, 2004 (including principal and accrued interest) was
$17,554.





Secured
Loan to Acceris





To fund
the acquisition of the WorldxChange Communications, Inc. assets purchased and
liabilities assumed by Acceris, on June 4, 2001 Counsel provided a loan (the
“Initial Loan”) to Acceris in the aggregate amount of $15,000. The loan was
subordinated to a revolving credit facility with Foothill, was collateralized by
all the assets of the Company and, as amended, had a maturity date of June 30,
2005. On October 1, 2003 Counsel assigned the balance owed in connection with
the Initial Loan of $9,743 including accrued interest (“the Assigned Loan”) to
Acceris in exchange for a new loan bearing interest at 10% per annum compounded
quarterly maturing on January 31, 2006 (“the New Loan”). Consistent with the
terms of the Initial Loan, subject to certain conditions, the New Loan provides
for certain mandatory prepayments upon written notice from Counsel including an
event resulting in the issuance of new shares by Acceris to a party unrelated to
Counsel where the funds are not used for an approved expanded business plan, the
purchase of the Company’s accounts receivable by a third party or where Acceris
has sold material assets in excess of cash proceeds of $1,000 and certain other
events. The New Loan is subject to certain events of default which may
accelerate the repayment of principal plus accrued interest. Pursuant to a Stock
Pledge Agreement as amended, the New Loan is secured by the common stock held
directly by Acceris in its operating subsidiary. Effective October 2004,
Counsel’s loan and security interest have been subordinated in favor of Foothill
and Laurus. There are no conversion features associated with the New Loan. As of
December 31, 2004, the total outstanding debt under the New Loan (including
principal and accrued interest) was $11,024.





Counsel
Keep Well





Counsel
has committed to fund, through long-term intercompany advances or equity
contribution, all capital investment, working capital or other operational cash
requirements of Acceris through June 30, 2005 (the “Keep Well”). Counsel is not
expected to extend the Keep Well beyond its current maturity.





Counsel
Guarantee, Subordination and Stock Pledge





Counsel
has guaranteed the debt that the Company owes to Foothill and Laurus. Counsel
has also agreed to subordinate all of its debt owed by the Company, and to
subrogate all of its related security interests in favor of its asset-based
lender, Foothill, and Laurus. Counsel further agreed to pledge all of its shares
owned in Acceris as security for the related debts. Counsel has also guaranteed
various other debts of the Company, including its debt obligations in respect of
its lease of telecommunications equipment as well as its obligations owed to a
network carrier. In accordance with the Foothill and Laurus agreements, amounts
owing to Counsel cannot be repaid while amounts remain owing to Foothill and
Laurus.







F-27




Counsel
Management Services




In
December 2004, Acceris entered into a management services agreement (the
“Agreement”) with Counsel. Under the terms of the Agreement, Acceris agreed to
make payment to Counsel for the past and future services to be provided by
certain Counsel personnel to Acceris for each of 2004 and 2005. The basis for
such services charged will be an allocation, based on time incurred, of the cost
of the base compensation paid by Counsel to those employees providing services
to Acceris, primarily Messrs. Clifford and Weintraub and Ms. Murumets. For the
year ended December 31, 2004, the cost of such services was $280. The foregoing
fees for 2004 and 2005 are due and payable within 30 days following the
respective year ends, subject to any subordination restrictions then in effect.
Any unpaid fee amounts will bear interest at 10% per annum commencing on the day
after such year-end. In the event of a change of control, merger or similar
event of the Company, all amounts owing, including fees incurred up to the date
of the event, will become due and payable immediately upon the occurrence of
such event, subject to any subordination restrictions then in effect. In
accordance with the Foothill and Laurus agreements, amounts owing to Counsel
cannot be repaid while amounts remain owing to Foothill and Laurus.





Counsel
provided management services to Acceris in 2003, for which no amounts were
charged to Acceris, resulting in the conferral of a benefit of
$130.





**Note
15 - Legal Proceedings**





On
April 16, 2004, certain stockholders of the Company (the “Plaintiffs”)
filed a putative derivative complaint in the Superior Court of the State of
California in and for the County of San Diego, (the “Complaint”) against the
Company, WorldxChange Corporation (sic), Counsel Communications LLC, and Counsel
Corporation as well as certain present and former officers and directors of the
Company, some of whom also are or were directors and/or officers of the other
corporate defendants (collectively, the “Defendants”). The Complaint alleges,
among other things, that the Defendants, in their respective roles as
controlling stockholder and directors and officers of the Company committed
breaches of the fiduciary duties of care, loyalty and good faith and were
unjustly enriched, and that the individual Defendants committed waste of
corporate assets, abuse of control and gross mismanagement. The Plaintiffs seek
compensatory damages, restitution, disgorgement of allegedly unlawful profits,
benefits and other compensation, attorneys’ fees and expenses in connection with
the Complaint. The Company believes that these claims are without merit and
intends to continue to vigorously defend this action. There is no assurance that
this matter will be resolved in the Company’s favor and an unfavorable outcome
of this matter could have a material adverse impact on its business, results of
operations, financial position or liquidity.





Acceris
and several of Acceris’ current and former executives and board members were
named in a securities action filed in the Superior Court of the State of
California in and for the County of San Diego on April 16, 2004, in which
the plaintiffs made claims nearly identical to those set forth in the Complaint
in the derivative suit described above. The Company believes that these claims
are without merit and intends to vigorously defend this action. There is no
assurance that this matter will be resolved in the Company’s favor and an
unfavorable outcome of this matter could have a material adverse impact on its
business, results of operations, financial position or liquidity.





In
connection with the Company’s efforts to enforce its patent rights, Acceris
Communications Technologies Inc., our wholly owned subsidiary, filed a patent
infringement lawsuit against ITXC Corp. (“ITXC”) in the United States District
Court of the District of New Jersey on April 14, 2004. The complaint
alleges that ITXC’s VoIP services and systems infringe the Company’s U.S. Patent
No. 6,243,373, entitled *“Method
and Apparatus for Implementing a Computer Network/Internet Telephone
System.”* On
May 7, 2004, ITXC filed a lawsuit against Acceris Communications
Technologies Inc., and the Company, in the United States District Court for the
District of New Jersey for infringement of five ITXC patents relating to VoIP
technology, directed generally to the transmission of telephone calls over the
Internet and the completion of telephone calls by switching them off the
Internet and onto a public switched telephone network. The Company believes that
the allegations contained in ITXC’s complaint are without merit and the Company
intends to continue to provide a vigorous defense to ITXC’s claims. There is no
assurance that this matter will be resolved in the Company’s favor and an
unfavorable outcome of this matter could have a material adverse impact on its
business, results of operations, financial position or liquidity.










F-28




At our
Adjourned Meeting of Stockholders held on December 30, 2003, our
stockholders, among other things, approved an amendment to our Articles of
Incorporation, deleting Article VI thereof (regarding liquidations,
reorganizations, mergers and the like). Stockholders who were entitled to vote
at the meeting and advised us in writing, prior to the vote on the amendment,
that they dissented and intended to demand payment for their shares if the
amendment was effectuated, were entitled to exercise their appraisal rights and
obtain payment in cash for their shares under Sections 607.1301 - 607.1333
of the Florida Business Corporation Act (the “Florida Act”), provided their
shares were not voted in favor of the amendment. In January 2004, we sent
appraisal notices in compliance with Florida corporate statutes to all
stockholders who had advised us of their intention to exercise their appraisal
rights. The appraisal notices included our estimate of fair value of our shares,
at $4.00 per share on a post-split basis. These stockholders had until
February 29, 2004 to return their completed appraisal notices along with
certificates for the shares for which they were exercising their appraisal
rights. Approximately 33 stockholders holding approximately 74,000 shares of our
stock returned completed appraisal notices by February 29, 2004. A
stockholder of 20 shares notified us of his acceptance of our offer of $4.00 per
share, while the stockholders of the remaining shares did not accept our offer.
Subject to the qualification that, in accordance with the Florida Act, we may
not make any payment to a stockholder seeking appraisal rights if, at the time
of payment, our total assets are less than our total liabilities, stockholders
who accepted our offer to purchase their shares at the estimated fair value will
be paid for their shares within 90 days of our receipt of a duly executed
appraisal notice. If we should be required to make any payments to dissenting
stockholders, Counsel will fund any such amounts through the purchase of shares
of our common stock. Stockholders who did not accept our offer were required to
indicate their own estimate of fair value, and if we do not agree with such
estimates, the parties are required to go to court for an appraisal proceeding
on a individual basis, in order to establish fair value. Because we did not
agree with the estimates submitted by most of the dissenting stockholders, we
have sought a judicial determination of the fair value of the common stock held
by the dissenting stockholders. On June 24, 2004, we filed suit against the
dissenting stockholders seeking a declaratory judgment, appraisal and other
relief in the Circuit Court for the 17 th Judicial
District in Broward County, Florida. On February 4, 2005, the declaratory
judgment action was stayed pending the resolution of the direct and derivative
lawsuits filed in California. This decision was made by the judge in the Florida
declaratory judgment action due to the similar nature of certain allegations
brought by the defendants in the declaratory judgment matter and the California
lawsuits described in Item 3 above. When the declaratory judgment matter
resumes, there is no assurance that this matter will be resolved in our favor
and an unfavorable outcome of this matter could have a material adverse impact
on our business, results of operations, financial position or
liquidity.





The
Company is involved in various other legal matters arising out of its operations
in the normal course of business, none of which are expected, individually or in
the aggregate, to have a material adverse effect on the
Company.





**Note
16 - Class N Preferred Stock**





Each
Class N preferred share has a voting entitlement equal to 40 common shares,
votes with the common stock on an as-converted basis and is senior to all other
preferred stock of the Company. Dividends, if any, will be paid on an
as-converted basis equal to common stock dividends. The current conversion price
in respect of each Class N preferred share is $25.00.





During
2004, holders of the Class N preferred stock converted one of those shares into
40 shares of common stock. As of December 31, 2004 and 2003, there were 618 and
619 shares of Class N preferred stock issued and outstanding,
respectively.





At
December 31, 2004 and 2003, of the 10,000,000 shares of preferred stock
authorized, 9,486,500 remain undesignated and unissued.





**Note
17 -**  **Dividends**





To date,
the Company has not paid dividends on its common stock nor is it anticipated
that the Company will pay dividends in the foreseeable future.





As of
December 31, 2004, the Company does not have any preferred stock
outstanding which has any preferential dividends.





The Loan
and Security Agreements with the Company's lenders restrict the
ability of one of its subsidiaries to make distributions or declare or pay
any dividends. So long as 25% of principal amount of the Note held by Laurus,
described in Note 10 of these financial statements, remains
outstanding, the Company may not pay any dividends on its common
stock.





Additionally,
under the Florida Act, the Company may not pay dividends while it has
negative stockholders’ equity.







F-29




**Note
18 - Stock-Based Compensation Plans**





In
November 2003, the Company’s stockholders approved a 1-for-20 reverse stock
split. Accordingly, all information presented below has been adjusted to reflect
the reverse split.





2004
Platinum Agent Warrant Program





During
2004, the Company launched the Acceris Communications Inc. Platinum Agent
Program (the "Agent Warrant Program"), which provides for the issuance of
warrants to purchase up to 1,000,000 shares of common stock to independent
agents who participate in the Agent Warrant Program.  Participants in the
Agent Warrant Program will be granted warrants upon commencement, the vesting of
which is based on maintaining certain revenue levels for a period of 24 months.
 The grants are classified into tiers based on commissionable revenue
levels, the vesting period of which begins upon the achievement of certain
commissionable revenue levels during the eighteen month period beginning
February 1, 2004.  Vesting of the warrants within each tier occurs 50%
after 12 months and 100% after 24 months, dependent on the agent maintaining the
associated commissionable revenue levels for the entire period of vesting.
 As at December 31, 2004, 650,000 warrants have been issued at an exercise
price of $3.50, none of which have met the requirements for
vesting.





2003
Stock Option and Appreciation Rights Plan





In
November 2003, the stockholders of the Company approved the 2003 Stock Option
and Appreciation Rights Plan (the “2003 Plan”) which provides for the issuance
of incentive stock options, non-qualified stock options and stock appreciation
rights (“SARs”) up to an aggregate of 2,000,000 shares of common stock (subject
to adjustment in the event of stock dividends, stock splits, and other similar
events). The price at which shares of common stock covered by the option can be
purchased is determined by the Company’s Board of Directors or its committee;
however, in the case of incentive stock options the exercise price shall not be
less than the fair market value of the Company’s common stock on the date the
option is granted. As of December 31, 2004, there were options to purchase
1,359,625 shares of the Company’s common stock outstanding under the 2003 Plan.
The outstanding options vest over four years at exercise prices ranging from
$0.60 to $4.60 per share. During 2004, options to purchase 433,726 shares of
common stock were forfeited or expired. There were no exercises during 2004. No
SARs have been issued under the 2003 Plan.





2000
Employee Stock Purchase Plan

During
2000, the Company obtained approval from its stockholders to establish the 2000
Employee Stock Purchase Plan. The Stock Purchase Plan provides for the purchase
of common stock, in the aggregate, up to 125,000 shares. This plan allows all
eligible employees of the Company to have payroll withholding of 1 to 15 percent
of their wages. The amounts withheld during a calendar quarter are then used to
purchase common stock at a 15 percent discount off the lower of the closing sale
price of the Company’s stock on the first or last day of each quarter. This plan
was approved by the Board of Directors, subject to stockholder approval, and was
effective beginning the third quarter of 2000. The Company issued 1,726 shares
to employees based upon payroll withholdings during 2001. There were no
issuances in 2004, 2003 or 2002.

The
purpose of the Stock Purchase Plan is to incent all eligible employees of
Acceris (or any of its subsidiaries) who have been employees for at least three
months to encourage stock ownership of Acceris by acquiring or increasing their
proprietary interest in Acceris. The Stock Purchase Plan is designed to
encourage employees to remain in the employ of Acceris. It is the intention of
Acceris to have the Stock Purchase Plan qualify as an “employee stock purchase
plan” within the meaning of Section 423 of the Internal Revenue Code, as amended
to issue shares of common stock to all eligible employees of Acceris (or any of
Acceris’ subsidiaries) who have been employees for at least three
months.





1997
Recruitment Stock Option Plan





In
October 2000, the stockholders of the Company approved an amendment of the 1997
Recruitment Stock Option Plan (the “1997 Plan”)which provides for the issuance
of incentive stock options, non-qualified stock options and SARs up to an
aggregate of 370,000 shares of common stock (subject to adjustment in the event
of stock dividends, stock splits, and other similar events). The price at which
shares of common stock covered by the option can be purchased is determined by
the Company’s Board of Directors; however, in all instances the exercise price
is never less than the fair market value of the Company’s common stock on the
date the option is granted.





As of
December 31, 2004, there were options to purchase 56,736 shares of the Company’s
common stock outstanding under the 1997 Plan. The outstanding options vest over
three years at exercise prices ranging from $1.40 to $127.50 per share. Options
issued under the 1997 Plan must be exercised within ten years of grant and can
only be exercised while the option holder is an employee of the Company. The
Company has not awarded any SARs under the 1997 Plan. During 2004 and 2003,
options to purchase 3,744 and 45,067 shares of common stock, respectively, were
forfeited or expired. There were no exercises during 2004.





Director
Stock Option Plan





The
Company’s Director Stock Option Plan authorizes the grant of stock options to
directors of the Company. Options granted under the Plan are non-qualified stock
options exercisable at a price equal to the fair market value per share of
common stock on the date of any such grant. Options granted under the Plan are
exercisable not less than six months or more than ten years after the date of
grant.





As of
December 31, 2004, options for the purchase of 117 shares of common stock at a
price of $17.50 per share were outstanding, all of which are exercisable. In
connection with the adoption of the 1995 Director Plan, the Board of Directors
authorized the termination of future grants of options under the plan; however,
outstanding options granted under the plan will continue to be governed by the
terms thereof until exercise or expiration of such options. In 2004, 116 options
expired.




F-30




1995
Director Stock Option and Appreciation Rights Plan





The 1995
Director Stock Option and Appreciation Rights Plan (the “1995 Director Plan”)
provides for the issuance of incentive options, non-qualified options and SARs
to directors of the Company up to 12,500 shares of common stock (subject to
adjustment in the event of stock dividends, stock splits, and other similar
events).





The 1995
Director Plan also provides for the grant of non-qualified options on a
discretionary basis to each member of the Board of Directors then serving to
purchase 500 shares of common stock at an exercise price equal to the fair
market value per share of the common stock on that date. Each option is
immediately exercisable for a period of ten years from the date of grant. The
Company has 9,500 shares of common stock reserved for issuance under the 1995
Director Plan. As of December 31, 2004, options to purchase 8,500 shares of
common stock at prices ranging from $20.00 to $25.00 per share are outstanding
and exercisable. No options were granted or exercised under this plan in 2004
and 2003.





1995
Employee Stock Option and Appreciation Rights Plan





The 1995
Employee Stock Option and Appreciation Rights Plan (the “1995 Employee Plan”)
provides for the issuance of incentive options, non-qualified options, and SARs.
Directors of the Company are not eligible to participate in the 1995 Employee
Plan. The 1995 Employee Plan provides for the grant of stock options which
qualify as incentive stock options under Section 422 of the Internal Revenue
Code, to be issued to officers who are employees and other employees, as well as
non-qualified options to be issued to officers, employees and consultants. In
addition, SARs may be granted in conjunction with the grant of incentive options
and non-qualified options.





The 1995
Employee Plan provides for the grant of incentive options, non-qualified options
and SARs of up to 20,000 shares of common stock (subject to adjustment in the
event of stock dividends, stock splits, and other similar events). To the extent
that an incentive option or non-qualified option is not exercised within the
period of exercisability specified therein, it will expire as to the then
unexercisable portion. If any incentive option, non-qualified option or SAR
terminates prior to exercise thereof and during the duration of the 1995
Employee Plan, the shares of common stock as to which such option or right was
not exercised will become available under the 1995 Employee Plan for the grant
of additional options or rights to any eligible employee. The shares of common
stock subject to the 1995 Employee Plan may be made available from either
authorized but unissued shares, treasury shares or both. The Company has 20,000
shares of common stock reserved for issuance under the 1995 Employee Plan. As of
December 31, 2004, there were no options outstanding under the 1995 Employee
Plan. During 2003, options to purchase 6,763 shares of common stock were
forfeited or expired. No options were granted or exercised in 2004.





Other
options and warrants





In 1996,
the Company approved the issuance of 87,500 options to executives of the
Company, as part of their employment agreements, and 3,200 options to a
consultant. The options expire in 2006 and have an option price of $78.00. No
options expired, were exercised or forfeited during 2004. As of December 31,
2004, there remained 78,200 options outstanding.





During
1997, the Company issued options to purchase 60,500 shares of common stock
(10,500 of which were issued under the 1997 recruitment stock option plan) to
consultants at exercise prices ranging from $97.50 to $168.75 (repriced to
$78.00 on December 13, 1998), which was based on the closing price of the stock
at the grant date. No options expired, were exercised or forfeited during 2004.
The remaining options must be exercised within ten years of the grant date. As
of December 31, 2004 there remained 44,500 options outstanding.





During
1997, the Company issued non-qualified options to purchase 114,750 shares of
common stock to certain executive employees. The options must be exercised
within ten years of the grant date and have an exercise price of $78.00. There
were no options forfeited in 2004, 2003 and 2002. No options expired or were
exercised during 2004. As of December 31, 2004 there remained 105,915 options
outstanding.





During
1998, the Company issued non-qualified options to purchase 46,750 shares of
common stock to certain executive employees at exercise prices ranging from
$51.26 to $62.50, which price was based on the closing price of the stock at the
grant date. The options must be exercised within ten years of the grant date. No
options expired, were exercised or forfeited during 2004. As of December 31,
2004 there remained 40,470 options outstanding.







F-31




During
1999, the Company issued non-qualified options to purchase 32,750 shares of
common stock to certain executive employees at exercise prices ranging from
$50.00 to $71.26, which price was based on the closing price of the stock at the
grant date. The options must be exercised within ten years of the grant date. No
options were exercised during 2004, 2003 and 2002. As of December 31, 2004,
there remained 18,750 options outstanding.





During
1999, the Company issued non-qualified options to purchase 10,000 shares of
common stock to a consultant at an exercise price of $60.00, which was based on
the closing price of the stock at the grant date. The fair value of the options
issued was recorded as deferred compensation of $300,000 to be amortized over
the expected period the services were to be provided. As of December 31, 2004
there remained 10,000 options outstanding.





During
2000, the Company issued non-qualified options to purchase 129,250 shares of
common stock to certain executive employees at exercise prices ranging from
$55.00 to $127.50, which price was based on the closing price of the stock at
the grant date. The options must be exercised within ten years of the grant
date. As of December 31, 2004, there remained 68,833 options
outstanding.




The
following table summarizes the changes in common stock options and warrants for
the common stock option plans described above:





****
    
    **2004**
    
    **2003**
    
    **2002******
    
    **Options****and
      Warrants**
    
    **Weighted****Average****Exercise****Price**
    
    **Options
      and****Warrants**
    
    **Weighted****Average****Exercise****Price**
    
    **Options****and****Warrants**
    
    **Weighted****Average****Exercise****Price**Outstanding
      at beginning of year
    
    
    1,807,879
    
    $
    18.20
    
    
    1,258,463
    
    $
    36.40
    
    
    1,401,673
    
    $
    45.40Granted
    
    
    421,350
    
    
    1.73
    
    
    1,377,662
    
    
    3.00
    
    
    4,750
    
    
    1.40Exercised
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Expired
    
    
    (116
    )
    
    77.50
    
    
    (828,246
    )
    
    20.46
    
    
    (130,271
    )
    
    126.80Forfeited
    
    
    (437,470
    )
    
    2.78
    
    
    —
    
    
    
    
    
    (17,689
    )
    
    85.40Outstanding
      at end of year
    
    
    1,791,643
    
    $
    18.08
    
    
    1,807,879
    
    $
    18.20
    
    
    1,258,463
    
    $
    36.40Options
      and warrants exercisable at year end
    
    
    696,012
    
    $
    42.46
    
    
    435,880
    
    $
    66.05
    
    
    1,256,828
    
    $
    36.40Weighted-average
      fair value of options and warrants granted during the year
    
    
    
    
    $
    1.34
    
    
    
    
    $
    2.07
    
    
    
    
    $
    0.60





The
following table summarizes information about fixed stock options and warrants
outstanding at December 31, 2004:





**Exercise
      price**
    
    **Options
      and****Warrants****Outstanding**
    
    **Weighted****Average****Remaining****Life
      (years)**
    
    **Weighted****Average****Exercise****Price**
    
    **Number****Exercisable**
    
    **Weighted****Average****Exercise****Price**$
      0.60 to $ 1.39
    
    
    219,300
    
    
    6.66
    
    $
    0.96
    
    
    —
    
    $
    —$
      1.40 to $ 3.00
    
    
    1,091,223
    
    
    5.99
    
    
    2.96
    
    
    270,192
    
    
    2.98$
      3.19 to $ 25.00
    
    
    74,882
    
    
    5.63
    
    
    7.12
    
    
    19,582
    
    
    16.84$42.50
      to $ 71.26
    
    
    168,291
    
    
    4.49
    
    
    56.87
    
    
    168,291
    
    
    56.87$78.00
      to $128.00
    
    
    237,947
    
    
    2.29
    
    
    79.22
    
    
    237,947
    
    
    79.221,791,643
    
    
    5.34
    
    $
    18.08
    
    
    696,012
    
    $
    42.46




F-32





**Note
19 - Segment of Business Reporting**





The
Company’s reportable segments are as follows:





§
    
    Telecommunications
      -includes the operations of the assets and liabilities purchased from
      WorldxChange in June 2001 and the Agent and Enterprise businesses of
      RSL.Com Inc. (“RSL”), which were acquired in December 2002. This
      segment offers a dial around telecommunications product, a 1+ product and
      a local dial tone bundled offering through MLM, commercial agents and
      telemarketing channels. This segment also offers voice and data solutions
      to business customers through an in-house sales
    force.§
    
    Telecommunications
      -includes the operations of the assets and liabilities purchased from
      WorldxChange in June 2001 and the Agent and Enterprise businesses of
      RSL.Com Inc. (“RSL”), which were acquired in December 2002. This
      segment offers a dial around telecommunications product, a 1+ product and
      a local dial tone bundled offering through MLM, commercial agents and
      telemarketing channels. This segment also offers voice and data solutions
      to business customers through an in-house sales force.§
    
    Technologies
      - is the former technology licensing and development segment, which
      segment offers a fully developed network convergence solution for voice
      and data. The Company licenses certain developed technology to third party
      users.




There are
no material inter-segment revenues. The Company’s business is conducted
principally in the U.S.; foreign operations are not significant. The table below
presents information about net loss and segment assets used by the Company as of
and for the three years ended December 31.




**For
      the Year ended December 31, 2004****Telecommunications**
    
    
    **Technologies**
    
    
    **Total****Reportable****Segments**Revenues
      from external customers
    
    $
    112,595
    
    $
    540
    
    $
    113,135Other
      income
    
    
    985
    
    
    —
    
    
    985Interest
      expense
    
    
    2,797
    
    
    1,424
    
    
    4,221Depreciation
      and amortization expense
    
    
    6,956
    
    
    20
    
    
    6,976Segment
      income (loss) from continuing operations
    
    
    (12,207
    )
    
    (3,120
    )
    
    (15,327
    )Other
      significant non-cash items:Provision
      for doubtful accounts
    
    
    5,229
    
    
    —
    
    
    5,229Expenditures
      for long-lived assets
    
    
    731
    
    
    —
    
    
    731Segment
      assets
    
    
    22,400
    
    
    1,181
    
    
    23,581





**For
      the Year ended December 31, 2003****Telecommunications**
    
    
    **Technologies**
    
    
    **Total****Reportable****Segments**Revenues
      from external customers
    
    $
    133,765
    
    $
    2,164
    
    $
    135,929Other
      income
    
    
    2
    
    
    —
    
    
    2Interest
      expense
    
    
    2,710
    
    
    —
    
    
    2,710Depreciation
      and amortization expense
    
    
    7,125
    
    
    —
    
    
    7,125Segment
      income (loss) from operations
    
    
    (20,396
    )
    
    1,014
    
    
    (19,382
    )Other
      significant non-cash items:Provision
      for doubtful accounts
    
    
    5,432
    
    
    6
    
    
    5,438Expenditures
      for long-lived assets
    
    
    2,800
    
    
    —
    
    
    2,800Segment
      assets
    
    
    35,454
    
    
    1,215
    
    
    36,669





**For
      the Year ended December 31, 2002****Telecommunications**
    
    
    **Technologies**
    
    
    **Total****Reportable****Segments**Revenues
      from external customers
    
    $
    85,252
    
    $
    2,837
    
    $
    88,089Other
      income
    
    
    357
    
    
    —
    
    
    357Interest
      expense
    
    
    3,298
    
    
    —
    
    
    3,298Depreciation
      and amortization expense
    
    
    4,214
    
    
    11
    
    
    4,225Segment
      income (loss) from operations
    
    
    (7,344
    )
    
    976
    
    
    (6,368
    )Other
      significant non-cash items:Provision
      for doubtful accounts
    
    
    5,999
    
    
    —
    
    
    5,999Expenditures
      for long-lived assets
    
    
    6,849
    
    
    —
    
    
    6,849Segment
      assets
    
    
    37,450
    
    
    173
    
    
    37,623













F-33




The
following table reconciles reportable segment information to the consolidated
financial statements of the Company:





****
    
    **2004**
    
    **2003**
    
    **2002**Total
      interest and other income for reportable segments
    
    $
    985
    
    $
    2
    
    $
    357Unallocated
      other income from corporate accounts
    
    
    1,486
    
    
    1,214
    
    
    38$
    2,471
    
    $
    1,216
    
    $
    395Total
      interest expense for reportable segments
    
    $
    4,221
    
    $
    2,710
    
    $
    3,298Unallocated
      interest expense from related party debt
    
    
    7,003
    
    
    9,337
    
    
    4,512Other
      unallocated interest expense from corporate debt
    
    
    125
    
    
    1,222
    
    
    385$
    11,349
    
    $
    13,269
    
    $
    8,195Total
      depreciation and amortization for reportable segments
    
    $
    6,976
    
    $
    7,125
    
    $
    4,225Other
      unallocated depreciation from corporate assets
    
    
    —
    
    
    —
    
    
    45$
    6,976
    
    $
    7,125
    
    $
    4,270Total
      segment loss
    
    $
    (15,327
    )
    $
    (19,382
    )
    $
    (6,368
    )Unallocated
      non-cash amounts in consolidated net loss:
      Amortization
      of discount on notes payable
    
    
    (50
    )
    
    (676
    )
    
    (560
    )Other
      income (primarily gain on extinguishment of debt)
    
    
    —
    
    
    1,220
    
    
    —Other
      income (primarily gain on sale of investment)
    
    
    1,486
    
    
    —
    
    
    —Other
      corporate expenses (primarily corporate level interest, general and
      administrative expenses)
    
    
    (8,996
    )
    
    (13,119
    )
    
    (8,402
    )Net
      loss from continuing operations
    
    $
    (22,887
    )
    $
    (31,957
    )
    $
    (15,330
    )Expenditures
      for segment long-lived assets
    
    $
    731
    
    $
    2,800
    
    $
    6,849Other
      unallocated expenditures for corporate assets
    
    
    —
    
    
    2,844
    
    
    309$
    731
    
    $
    5,644
    
    $
    7,158Segment
      assets
    
    $
    23,581
    
    $
    36,669
    
    $
    37,623Intangible
      assets not allocated to segments
    
    
    —
    
    
    —
    
    
    —Other
      assets not allocated to segments*
    
    
    428
    
    
    2,385
    
    
    3,823$
    24,009
    
    $
    39,054
    
    $
    41,446


____________


*
    Other
      assets not allocated to segments include corporate assets, and for 2003
      and 2002, assets associated with segments reported in previous periods
      which are no longer classified as reportable segments, primarily assets of
      and related to the discontinued operations of ILC (former
      telecommunications services segment).




F-34





**Note
20 - Summarized Quarterly Data (unaudited)**





Following
is a summary of the quarterly results of operations for the years ended December
31, 2004 and 2003.





****
    
    **March
      31**
    
    **June
      30**
    
    **September
      30**
    
    **December
      31**Net
      sales:
    
    
    2004
    
    $
    35,173
    
    $
    26,509
    
    $
    27,390
    
    $
    24,0632003
    
    
    30,367
    
    
    37,045
    
    
    36,051
    
    
    32,466Operating
      income (loss): (1)
    
    
    2004
    
    $
    844
    
    $
    (6,541
    )
    $
    (4,531
    )
    $
    (3,781
    )2003
    
    
    (12,607
    )
    
    (1,780
    )
    
    (1,462
    )
    
    (4,055
    )Net
      loss from continuing operations
    
    
    2004
    
    $
    (1,312
    )
    $
    (8,216
    )
    $
    (6,867
    )
    $
    (6,492
    )2003
    
    
    (15,520
    )
    
    (5,173
    )
    
    (4,807
    )
    
    (6,457
    )Gain
      (loss) from discontinued operations
    
    
    2004
    
    $
    104
    
    $
    —
    
    $
    —
    
    $
    —2003
    
    
    (277
    )
    
    371
    
    
    213
    
    
    222Net
      loss:
    
    
    2004
    
    $
    (1,208
    )
    $
    (8,216
    )
    $
    (6,867
    )
    $
    (6,492
    )2003
    
    $
    (15,797
    )
    $
    (4,802
    )
    $
    (4,594
    )
    $
    (6,235
    )Basic
      and diluted income (loss) from continuing operations per common
      share:
    
    
    2004
    
    $
    (0.07
    )
    $
    (0.43
    )
    $
    (0.35
    )
    $
    (0.34
    )2003
    
    
    (2.66
    )
    
    (0.88
    )
    
    (0.82
    )
    
    (0.60
    )Basic
      and diluted income (loss) per common share:
    
    
    2004
    
    $
    (0.06
    )
    $
    (0.43
    )
    $
    (0.35
    )
    $
    (0.34
    )2003
    
    
    (2.71
    )
    
    (0.82
    )
    
    (0.79
    )
    
    (0.59
    )





(1)
During the fourth quarter of 2004, the Company resolved disputes with two
service providers related to telecommunications services delivered to the
Company in current and prior years. This resulted in a reduction of
telecommunications expense and the related obligation recorded by the Company in
2004 of $1,869. The recognition of these cost savings is not expected to be
recurring in nature.




**Note
21 - Subsequent Event**





In March
2005, the Company made the decision to suspend competing for new local customers
in Pennsylvania, New Jersey, New York, Florida and Massachusetts, while
continuing to support its existing local customers in those states. The decision
was a result of the FCC‘s revision of its wholesale rules, originally designed
to introduce competition in local markets, that went into effect on March 11,
2005. The reversal of local competition policy by the FCC has permitted the Bell
Companies to substantially raise wholesale rates for the services known as
unbundled network elements (UNEs), and required the Company to re-assess its
local strategy while it attempts to negotiate long-term agreements for UNEs on
competitive terms.







F-35




**ACCERIS
COMMUNICATIONS INC.**


**SCHEDULE
OF VALUATION AND QUALIFYING ACCOUNTS**





**Description**
    
    **Balance
      at****Beginning****of
      Period**
    
    **Charged
      to****Costs
      and****Expenses**
    
    **Deductions****(a)**
    
    **Other**
    
    **Balance
      at****End
      of****Period**Allowance
      for doubtful accounts:December
      31, 2002
    
    $
    1,863
    
    $
    5,999
    
    $
    (6,112
    )
    $
    (46)
      (b
    )
    $
    1,704December
      31, 2003
    
    $
    1,704
    
    $
    5,438
    
    $
    (5,570
    )
    $
    192
      (c
    )
    $
    1,764December
      31, 2004
    
    $
    1,764
    
    $
    5,229
    
    $
    (4,830
    )
    $
    —
    
    $
    2,163


____________


(a)
    Deductions
      represents allowance amounts written off as uncollectible and recoveries
      of previously reserved amounts.





(b)
    Other
      includes an increase of $1,019 for the beginning allowance acquired in the
      acquisition of RSL in December 2002 and a decrease of $1,065 for the net
      change in discontinued operations during the year which are not included
      in charged to costs and expenses or deductions.





(c)
    Amount
      relates to the stock purchase of Transpoint in July 2003, which was
      accounted for using the purchase method.







S-1