##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-K
 ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 0-21059
 ACE*COMM CORPORATION
  Maryland
(State or other jurisdiction of incorporation or organization)
    
    52-1283030
(I.R.S. Employer I.D. No.)
 704 Quince Orchard Road 
Gaithersburg, Maryland 20878
(Address of principal executive offices)
    
    20878
(Zip Code)
    
 o þ
 o þ
 þ o
 o
  o o þ
 o þ
  DOCUMENTS INCORPORATED BY REFERENCE




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##### 



ACE*COMM Corporation
Form 10-K
Year Ended June 30, 2007
 TABLE OF CONTENTS
 PAGEPART IItem 1.
    
    BUSINESS
    
    
    4Item 1a.
    
    RISK FACTORS
    
    
    20Item 2.
    
    PROPERTIES
    
    
    24Item 3.
    
    LEGAL PROCEEDINGS
    
    
    24Item 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    24PART IIItem 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    25Item 6.
    
    SELECTED FINANCIAL DATA
    
    
    27Item 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    27Item 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    40Item 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    41Item 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    41Item 9A.
    
    CONTROLS AND PROCEDURES
    
    
    41Item 9B.
    
    OTHER INFORMATION
    
    
    41PART IIIItem 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    41Item 11.
    
    EXECUTIVE COMPENSATION
    
    
    41Item 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    42Item 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,AND DIRECTOR INDEPENDENCE
    
    
    42Item 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    42PART IVItem 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    42
 -2-




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##### 



INTRODUCTION
  Unless otherwise noted, all references to years in this
document are assumed to be fiscal years.
 FORWARD LOOKING STATEMENTS
  -3-




---



##### 



PART I
 ITEM 1. BUSINESS
 General
   ® ®
  Advanced OSS for Carriers and Others
  ®
  -4-




---



##### 



Enterprise OSS/TMS for Private Networks and Enterprises
 ® ®
 Patrol Suite (Value-added Services)
  
    
    The core application, Parent Patrol®,which provides a simple Web
interface for parents to manage their childrens phone usage. New content
filtering capabilities provide a consistent way for even non-technical
computer users to manage not only voice calls and messaging services, but
also prevent access to inappropriate material. The Patrol Suite is designed
to be offered by mobile service providers as part of their subscriber
service plans. The products are optimized for Voice-over-IP (VoIP), 3G, and
IP data transmission.
    
    Enterprise Patrol, which allows enterprise communications managers to
specify, monitor and enforce appropriate-use policies of company-owned
mobile phones. Policies may be personalized for individuals or groups to
control credits, time of day, the type of service used, specific telephone
numbers, and classification of appropriate content.
    
    Plan Patrol, which provides spending controls for subscribers to ensure
that phone usage does not result in unexpected charges. Users may define
usage and monetary limits for voice, messaging and data services, and warns
when the user is approaching or has exceeded the included-minutes limit. It
also generates a warning when the phone is being used to call outside of the
service plans low-rate or free off-peak timeframes.
    
    Content Patrol, which provides content filtering controls for browsing
and content download services. Content Patrol may be packaged with other
Patrol Suite applications to provide personalized content filters, or may be
deployed as its own service to provide network-wide controls. Content
Patrol provides a rich set of Content Classification algorithms to ensure
that subscribers have access only to the content that has been identified as
appropriate for their profile.
 Strategy
 Focus on Business Fundamentals
  
    
    Parent Patrol®.We continued development of our Parent Patrol® and related suite of
products. We expanded our content filtering capabilities for Parent Patrol®, providing
controls that allow parents to curb childrens exposure to unsuitable mobile Web content.
Enterprise Patrol, a service that mobile operators can
offer enterprise communications managers to manage use of company-owned mobile phones, was
also enhanced and upgraded.
 -5-




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##### 




    
    We announced the launch of OpenARMS, an Advanced Revenue Management solution for
telecommunications service providers. The solution is designed to satisfy a new breed of
multi-media service providers with diverse order, product, contract and customer
relationship management needs as well as billing, invoicing, and settlement needs, at a
fraction of the price of traditional proprietary solutions.
 New and Expanded Partnerships and Customer Relationships
  
    
    Parent Patrol®.We are actively engaged in the sales process with our partnerships with
both Alcatel-Lucent and VeriSign. Alcatel-Lucent is to integrate ACE*COMM technology into
their mobile services offerings directed at enabling global wireless carriers to offer
their customers parental control of their mobile services. The solution consists of
Alcatel-Lucents SurePay® real-time rating and charging solution and ACE*COMMS Parent
Patrol® software, which provides configurable child-profile management when it
interoperates with the SurePay® solutions policy management function. The partnership is
expected to involve joint marketing by Alcatel-Lucent and us to carriers that buy other
Lucent and ACE*COMM products. Similarly, the VeriSign partnership has enabled ACE*COMM
deeper penetration and scale into the mobile space. We are leveraging VeriSigns large
customer base and sales personnel around the world to actively pursue Parent Patrol®
opportunities.We signed multiple contracts with North American wireless service providers for the
deployment of Parent Patrol®, Enterprise Patrol and Content Patrol during the year. Most
of these operators are scheduled to make these services available to their subscribers
before the end of calendar 2007.
    
    Market Maker technology partnership.We announced a technology partnership with
Experian, a global leader in consumer-level information, to supply new demographic data
capabilities for our Market Maker market visualization tool.
    
    Advanced OSS.The company signed a $2.6 million contract with mBlox to deploy our
OpenARMS solution. This is a significant first step to expanding our presence in the
revenue management space of mobility players.
    
    Enterprise OSS.We continued to work under our major contract with the U.S. Air Force
to provide our NetPlus® telecommunications management system (TMS) for a global TMS
deployment program. Under the present Department of Defense plan, the program will
encompass more than 100 installations and is expected to total in excess of $22 million of
our products and services over its lifespan. The deployment phase of the contract is
expected to begin in November 2007.
 Focus on New Technologies and Continued Sales in Existing Markets
 ®
 
    
    Penetrate carrier market with new value-added services.We believe we have attractive
value-added services to offer to carriers, either directly or through our strategic
relationships with VeriSign and Alcatel-Lucent, and intend to pursue growth in this new
area of our business. We are also continuing to add applications as we seek to define
customer demand in this area, such as the content filtering capabilities for
Parent Patrol®, providing controls that allow parents to curb childrens exposure to
unsuitable mobile Web content, and the new Enterprise Patrol, which will enable enterprise
communications managers to manage use of company-owned mobile phones. We believe the recent
announcement by AT&T offering their version of parental controls will increase demand.
 -6-




---



##### 




    
    Continue to feature advanced OSS applications.This area of the market continues to
demand new products and features, and we are seeking to maintain or increase our market
share by introducing new generations of our products with additional features and
capabilities. This past year we introduced the OpenARMS solution that has strong growth
potential for the company.
    
    Promote our enhanced product portfolio.We continue to receive interest in our network
business intelligence solutions for telecom service providers and enterprises. This
solution has also been attractive to potential customers as part of a comprehensive
solution integrating several of our products
    
    Continue to seek and perform under contracts with major customers.Our business has
been dependent for several years on large procurements by major customers. A significant
portion of our revenues for the most recent fiscal year came from our major contract with
the U.S. Air Force to provide our NetPlus® telecommunications management system (TMS) for a
global TMS deployment program, and that contract accounts for a significant portion of our
present backlog. We continue to expect to devote significant effort during the current
fiscal year to delivering products and services and supporting our customers under this and
other major contracts, while seeking additional such contracts, in Enterprise OSS, Advanced
OSS and other areas.
    
    Continue to look for synergistic products to broaden product offerings.We believe that
there still are technologies currently available on the market that can expedite our
product development and expand our offerings. We will continue to look for prudent
licensing or partnership opportunities designed to help us enhance our technological
standing and capabilities.
 Industry Background
    Markets and Applications
  -7-




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##### 



Private Networks (Enterprises)
 ®
 Tier 1
  IXPs (Triple and Quad Play Players)
  VoIP
  Content
  Wireless
 ®
 Traditional/Wireline
  MVNO
  WiFi
  -8-




---



##### 



Products and Services
  Advanced OSS  N*VISION®2 (NV2)
 ®
    Data Collection
 Activation Gateway
 Intelligent Charging
 Advanced Mediation
 Enterprise OSS  NetPlus®
 ® ® ®
 -9-




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##### 



® ®
 ACE*COMM Network Business Intelligence (NBI)
     ACE*COMMs Patrol Suite  Value-Added Services (VAS)
    -10-




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##### 



Parent Patrol®
 Enterprise Patrol
 Plan Patrol
 Content Patrol
  Geographic markets
  Canada and United States
  Latin America
  Europe
  Middle East and Africa
  -11-




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##### 



Asia Pacific
  Professional Services and Support
   Sales and Marketing
      -12-




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##### 



Customers
  Strategic Alliances
    OEM
  Cisco Systems, Inc.
 -13-




---



##### 



Compagnie Financiere Alcatel Alcatel) 
 Motorola, Inc.
 Resellers and Systems Integrators
  General Dynamics Corporation  ®
 Giza Systems
 Huawei Technologies
 Alcatel-Lucent  ® ® ®
 MOSECO Jordan
 Northrop Grumman Corporation
 Unisys Corporation ®
 Verizon ®
 VeriSign
 -14-




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##### 



Technology Partners
  Avaya ®
 Business Objects
 Computer Associates
 Experian
 Halcyon
 Oracle ® ® ®
 Remedy
 RuleSpace LLC
 Sun Microsystems
 Veritas
 Vertel
 -15-




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##### 



Industry Affiliations
  ACUTA
 AeA
 AFCEA Armed Forces Communications and
Electronics Association
 GSA
 GSM Association
 INAAU International Alliance of Avaya Users
 Just-US
 NASTD
 NTCA
 OMA
 SIP Center
 -16-




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##### 



TIA
 USTA
 Backlog
   Competition
    -17-




---



##### 




    
    large service providers who develop full-system products internally, tailored to their
particular specifications;
    
    other companies, such as Comptel Corporation and Openet, that can provide data
collection, mediation components, and data storage capabilities;
    
    vendors that supply more inclusive products, such as Intec Telecom Systems PLC, and EDB
Telesciences;
    
    telecommunications equipment manufacturers that provide network products, such as Lucent
Technologies Inc., and Ericsson;
    
    companies that provide OSS software applications for carriers, such as MetaSolv
Software, Inc.;
    
    companies that provide billing and customer care applications, such as Amdocs Limited,
Convergys, Martin-Dawes, UshaComm, and Portal Software, Inc.;
    
    companies that develop custom solutions, such as EDS, Inc. and Computer Sciences
Corporation;
    
    companies that provide revenue assurance focused solutions such as Azure, cVidya
Networks, Inc., and Elron Telesoft;
    
    companies that develop service delivery platforms and/or value-added services such as
Boston Communications Group, Inc. (bcgi), Redknee, and Comverse; and
    
    companies that provide products for enterprise telephony networks, such as Paetec
Communications, Inc., Veramark Technologies, Inc., and Unique, and companies that provide
products for data networks, such as Remedy Corp. and Computer Associates International,
Inc.; and system integrators such as Accenture, Capgemini, Ernst & Young, and KPMG.
 Competitive Advantage
    -18-




---



##### 



Research and Product Development
 .
 Proprietary Rights and Licenses
    -19-




---



##### 



Employees
  Financial Information about Geographic Areas
  ITEM 1A. RISK FACTORS
  Because of our reliance on significant customers and large orders, failures to obtain a
sufficient number of large contracts has had and could continue to have a material adverse
effect on our revenues for one or more periods.
  We have experienced severe liquidity demands as a result of revenue shortfalls.
  Our products must be continuously updated to work with changing technology and demand for
our products could be impacted by any competitors introducing more advanced technology.
  -20-




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##### 



An inability to move to over-the-counter bulletin board, coupled with our recent delisting
from the Nasdaq Capital Market could reduce the marketability of our shares and our ability to
raise equity capital could be harmed.
  We may be unable to repay the notes issued in our recent private placement unless we raise
additional funds or satisfy those notes in shares of common stock.
  We may cease to comply with the restrictive financial covenants in our recent private
placement.
  
    
    certain levels of tangible net worth (as described on Schedule 3 to the Notes),
    
    certain levels of cash (as described on Schedule 3 to the Notes),
    
    certain levels of EBITDA (as described on Schedule 3 to the Notes)
    
    quarterly revenues of not less than $3,000,0000 and
    
    eligible working capital of not less than $4,200,000.
  -21-




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##### 



The anti-dilution rights in our recent private placement may make it difficult for us to
raise funds and may result in a significant increase in the number of shares issuable under
the notes and warrants.
  Other provisions from our recent private placement could make it more difficult for us to
raise financing in the future.
  Demand for our Parent Patrol® product has not developed as rapidly as expected and overall
demand is still uncertain
  The adverse conditions in the telecommunications industry continue despite improvements in
the economy and may continue to do so.
  Unless we continue to maintain existing strategic alliances and develop new ones, our sales
will suffer.
  -22-




---



##### 



Many of our telecommunications customers involve credit risks for us.
  We are increasingly subject to the risks and costs of international sales, and failure to
manage these risks would have an adverse effect on us.
  Continuing market consolidation may reduce the number of potential customers for our
products.
  Failure to estimate accurately the resources necessary to complete fixed-price contracts
would have an adverse effect on our bottom line.
  -23-




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##### 



Inability to forecast revenue accurately may result in costs that are out of line with
revenues, leading either to additional losses or downsizing that may not have been
necessary.
  We may be subject to additional risks
  ITEM 2. PROPERTIES
  Square
    
    
    
    CurrentLocation
    
    Footage
    
    Lease Expiration
    
    Annual RentGaithersburg, Maryland
    
    24,289
    
    November 30, 2008
    
    $618,000 (subject to annual increases of approximately $17,000 and allocated operating costs each year)Montreal, Quebec, Canada
    
    6,020
    
    February 29, 2012
    
    $147,000Leith Edinburgh, Scotland
    
    4,171
    
    January 26, 2010
    
    $125,000London, England
    
    603
    
    January 31, 2009
    
    $35,000Bundall, Queensland,
Australia
    
    2,119
    
    March 31, 2008
    
    $36,000
 ITEM 3. LEGAL PROCEEDINGS
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  -24-




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##### 



PART II
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
 Common Stock Prices
   Year Ended June 30,2007
    

2006High
    
    Low
    
    High
    
    Low1st Quarter
    
    $
    2.72
    
    
    $
    1.81
    
    
    $
    2.66
    
    
    $
    2.202nd Quarter
    
    
    1.77
    
    
    
    0.86
    
    
    
    3.14
    
    
    
    2.363rd Quarter
    
    
    1.39
    
    
    
    0.86
    
    
    
    3.62
    
    
    
    2.584th Quarter
    
    
    1.17
    
    
    
    0.67
    
    
    
    2.83
    
    
    
    2.55
  Common Stockholders
  Dividends
  Equity Compensation Plan Information
  (c)(a)
    
    (b)
    
    Number of securities remainingNumber of securities to
    
    Weighted-average
    
    available for future issuancebe issued upon exercise
    
    exercise price of
    
    under equity compensation plansof outstanding options,
    
    outstanding options,
    
    (excluding securitieswarrants and rights
    
    warrants and rights
    
    reflected in column (a))Equity compensation
plans approved by
security holders
    
    
    4,420,823
    
    
    $
    2.11
    
    
    
    1,033,288Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    4,420,823
    
    
    $
    2.11
    
    
    
    1,033,288
 -25-




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##### 



Performance Graph
  COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
ACE*COMM CORPORATION, NASDAQ COMPOSITE
AND NASDAQ TELECOMMUNICATIONS INDEX
 
 ASSUMES $100 INVESTED ON JUNE 30, 2002
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING JUNE 30, 2007
 -26-




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##### 



ITEM 6. SELECTED FINANCIAL DATA
  Year Ended June 30,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(in thousands except per share data)Statement of Operations Data:Revenue
    
    $
    13,282
    
    
    $
    26,671
    
    
    $
    19,961
    
    
    $
    13,671
    
    
    $
    13,794Gross profit
    
    
    3,893
    
    
    
    16,530
    
    
    
    11,012
    
    
    
    5,830
    
    
    
    6,255Selling, general and administrative
    
    
    10,862
    
    
    
    12,159
    
    
    
    9,774
    
    
    
    9,304
    
    
    
    7,861Research and development
    
    
    2,229
    
    
    
    3,866
    
    
    
    2,694
    
    
    
    1,226
    
    
    
    347In process research and development
acquired
    
    
    
    
    
    
    
    
    
    
    5,118
    
    
    
    1,160
    
    
    
    Net income (loss)
    
    $
    (9,462
    )
    
    $
    319
    
    
    $
    (6,462
    )
    
    $
    (5,898
    )
    
    $
    (1,982
    )Net income (loss) per share:Basic
    
    $
    (0.53
    )
    
    $
    0.02
    
    
    $
    (0.44
    )
    
    $
    (0.49
    )
    
    $
    (0.21
    )Diluted
    
    $
    (0.53
    )
    
    $
    0.02
    
    
    $
    (0.44
    )
    
    $
    (0.49
    )
    
    $
    (0.21
    )
 June 30,2007
    
    2006
    
    2005
    
    2004
    
    2003(in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    2,971
    
    
    $
    946
    
    
    $
    2,683
    
    
    $
    2,881
    
    
    $
    1,570Working capital
    
    
    945
    
    
    
    3,107
    
    
    
    653
    
    
    
    3,665
    
    
    
    3,941Total assets
    
    
    10,503
    
    
    
    16,361
    
    
    
    14,153
    
    
    
    10,331
    
    
    
    8,244Long-term liabilities
    
    
    2,420
    
    
    
    17
    
    
    
    72
    
    
    
    
    
    
    
    Total liabilities
    
    
    9,734
    
    
    
    10,264
    
    
    
    8,776
    
    
    
    4,863
    
    
    
    3,419Stockholders equity
    
    
    769
    
    
    
    6,097
    
    
    
    5,377
    
    
    
    5,468
    
    
    
    4,825
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
 Sources of Revenue
   -27-




---



##### 



Trends and Strategy
     ® ®
   -28-




---



##### 



Recent Developments
 Series A Senior Secured Convertible Note
  Delisting from Nasdaq Capital Market
   -29-




---



##### 



Critical Accounting Policies
   Revenue Recognition
     -30-




---



##### 



Allowance for Bad Debts
  Impairment of Long-Lived Assets
  Income Taxes
    -31-




---



##### 



-32-




---



##### 



Results of Operations
  Years Ended June 30,2007
    
    2006
    
    2005Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of revenue
    
    
    70.7
    %
    
    
    38.0
    %
    
    
    44.8
    %Selling, general and administrative
    
    
    81.8
    %
    
    
    45.6
    %
    
    
    49.0
    %Research and development
    
    
    16.8
    %
    
    
    14.5
    %
    
    
    13.5
    %In process research and development
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    25.6
    %Income (loss) from operations
    
    
    (69.3
    )%
    
    
    1.9
    %
    
    
    (32.9
    )%Net interest expense
    
    
    1.5
    %
    
    
    0.8
    %
    
    
    0.3
    %Gain from settlement of debt obligation
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    1.1
    %Income (loss) before income taxes
    
    
    (70.8
    )%
    
    
    1.1
    %
    
    
    (32.1
    )%Income tax (benefit) provision
    
    
    0.4
    %
    
    
    (0.1
    )%
    
    
    0.3
    %Net income (loss)
    
    
    (71.2
    )%
    
    
    1.2
    %
    
    
    (32.4
    )%
 Revenues
  Years Ended June 30,2007
    
    
    2006
    
    
    2005RevenueLicenses and hardware
    
    $
    3,670
    
    
    $
    12,875
    
    
    $
    8,734Services
    
    
    9,612
    
    
    
    13,796
    
    
    
    11,227Total Revenue
    
    $
    13,282
    
    
    $
    26,671
    
    
    $
    19,961
    -33-




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##### 



2007
    
    
    2006
    
    
    2005Revenue by TypeEnterprise
    
    $
    4,325
    
    
    $
    10,179
    
    
    $
    6,656Network Service Provider (NSP)
    
    
    5,902
    
    
    
    10,069
    
    
    
    7,554Operations Support Systems (OSS)
    
    
    3,055
    
    
    
    6,423
    
    
    
    5,732IT and Other
    
    
    
    
    
    
    
    
    
    
    19Total Revenue
    
    $
    13,282
    
    
    $
    26,671
    
    
    $
    19,961
     Cost of Revenues
  -34-




---



##### 



Selling, General and Administrative Expenses
  ®
  -35-




---



##### 



Research and Development Expenses
  ®
 ®
 Liquidity and Capital Resources
 Asset and Cash Flow Analysis
   -36-




---



##### 



Cost Containment Program
  -37-




---



##### 



Contractual Obligations and Commitments
  Contractual Obligation
 Payments Due by Period(amounts in thousands)Less than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 yearsOperating leases
    
    $
    2,028
    
    
    $
    976
    
    
    $
    796
    
    
    $
    256
    
    
    $
    Other commitments
    
    
    24
    
    
    
    19
    
    
    
    5
    
    
    
    
    
    
    
    Total commitments
    
    $
    2,052
    
    
    $
    995
    
    
    $
    801
    
    
    $
    255
    
    
    $
    
  Other Commercial Commitments
 Amount of Commitment Expiration Per Period(amounts in thousands)Total Amounts
    
    Less than
    
    
    
    
    
    
    
    
    
    OverCommitted
    
    1 year
    
    1-3 years
    
    4-5 years
    
    5 yearsStandby Letters of Credit
    
    $
    349
    
    
    $
    296
    
    
    $
    53
    
    
    $
    
    
    
    $
    
 Series A Senior Secured Convertible Note
    -38-




---



##### 



Lines of Credit
     -39-




---



##### 



Liquidity Analysis
     
 ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  -40-




---



##### 



ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  ITEM 9A.
    
    CONTROLS AND PROCEDURES
   ITEM 9B.
    
    OTHER INFORMATION
  PART III
 ITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  ITEM 11.
    
    EXECUTIVE COMPENSATION
  -41-




---



##### 



ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  PART IV
 ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)(1)
    
    INDEX TO FINANCIAL STATEMENTS
  PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Balance Sheets as of June 30, 2007 and 2006
    
    
    F-3Statements of Operations for the years ended June 30, 2007, 2006 and 2005
    
    
    F-4Statements of Stockholders Equity for the years ended June 30, 2007, 2006 and 2005
    
    
    F-5Statements of Cash Flows for the years ended June 30, 2007, 2006 and 2005
    
    
    F-6Notes to Financial Statements
    
    
    F-7
 -42-




---



##### 



(a)(2)
    
    FINANCIAL STATEMENT SCHEDULESExcept for the schedule listed below, all other schedules are omitted because they are not
applicable or the required information is shown in the financial statements or notes
thereto.Schedule II  Valuation and Qualifying Accounts
 (a)(3)
    
    EXHIBITS
 3.1
    
    Articles of Amendment and Restatement dated August 19, 1996 (Incorporated by
reference to the identically numbered exhibit filed as an exhibit to our
Registration Statement on Form S-1, File No. 333-25439).3.2
    
    Bylaws of ACE*COMM as amended and restated dated October 23, 2003
(Incorporated by reference to the identically numbered exhibit filed as an
exhibit to our Form 10-Q, filed November 14, 2003).4.1
    
    Form of Specimen of Common Stock Certificate (Incorporated by reference to
the identically numbered exhibit filed as an exhibit to our Registration
Statement on Form S-1, File No. 333-25439).10.1*
    
    Form of Non-Qualified Stock Option Grant Agreement (certain executive
officers  fiscal 1997).10.2*
    
    Amended and Restated Omnibus Stock Plan (Incorporated by reference to our
Proxy Statement, dated October 26, 2005).10.3*
    
    2000 Stock Option Plan for Directors (Incorporated by reference to our Proxy
Statement, dated October 26, 2005).10.4
    
    Lease Between New Boston Fund and ACE*COMM as Tenant dated December 30, 2002
(Incorporated by reference to the identically numbered exhibit filed as an
exhibit to our Form 10-K, filed September 29, 2003).10.5*
    
    2006 Incentive Compensation Plan (Incorporated by reference to Exhibit 10.1
filed as an exhibit to our Form 8-K, filed January 30, 2006).10.6*
    
    Form of Restricted Stock Agreement  Performance Based Vesting. 10.7*
    
    Form of Restricted Stock Agreement  Time Based Vesting. 10.8
    
    Form of Series A Senior
Secured Convertible Note Due June 8, 2010 (Incorporated by
reference to Exhibit 4.2 filed as an exhibit to our Form 8-K, filed June 14, 2007).10.9
    
    Form of Warrant (Incorporated by reference to Exhibit 4.2 filed as an
exhibit to our Form 8-K, filed June 14, 2007).10.10
    
    Securities Purchase Agreement, dated as of June 4, 2007 by and among ACE*COMM
Corporation and the purchasers named therein (Incorporated by reference to
exhibit 2.1 to our Form 8-K dated June 14, 2007).10.11*
    
    Employment Agreement, dated as of the 23 rd day of August 2007, by and
between ACE*COMM Corporation and James Greenwell (Incorporated by reference
to exhibit 10.1to our Form 8-K dated September 26, 2007.21.1
    
    List of Subsidiaries. 23.1
    
    Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm.31.1
    
    Certification of Chief Executive Officer.31.2
    
    Certification of Chief Financial Officer.32
    
    Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    Identifies exhibit that consists of or includes a management contract or compensatory plan
or arrangement.
    
    Filed herewith. -43-




---



##### 



SIGNATURES
  ACE*COMM CORPORATIONBy:
    /s/ James GreenwellJames GreenwellChief Executive OfficerDate: September 28, 2007  Name
    
    Title
    
    Date/s/James Greenwell

(James Greenwell)
    
    Chief Executive Officer
and President
    
    September 28, 2007/s/ Steven R. Delmar

(Steven R. Delmar)
    
    Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
    
    September 28, 2007/s/ George T. Jimenez

(George T. Jimenez)
    
    Chairman of the Board
    
    September 28, 2007/s/ Paul G. Casner, Jr.

(Paul G. Casner, Jr.)
    
    Director
    
    September 28, 2007/s/ Gilbert A. Wetzel)

(Gilbert A. Wetzel)
    
    Director
    
    September 28, 2007/s/ Harry M. Linowes

(Harry M. Linowes)
    
    Director
    
    September 28, 2007/s/ Matthew J. Stover

(Matthew J. Stover)
    
    Director
    
    September 28, 2007/s/ J. William Grimes

(J. William Grimes)
    
    Director
    
    September 28, 2007
 -44-




---



##### 



ACE*COMM CORPORATION
 INDEX TO FINANCIAL STATEMENTS
  PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets as of June 30, 2007 and 2006
    
    F-3Consolidated Statements of Operations for the years ended June 30,
2007, 2006 and 2005
    
    F-4Consolidated Statements of Stockholders Equity for the years ended
June 30, 2007, 2006 and 2005
    
    F-5Consolidated Statements of Cash Flows for the years ended June 30,
2007, 2006 and 2005
    
    F-6Notes to Consolidated Financial Statements
    
    F-7
 F-1




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 F-2




---



##### 



ACE*COMM CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share amounts)
 June 30,2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,622
    
    
    $
    946Restricted cash
    
    
    349
    
    
    
    Accounts receivable, net
    
    
    3,831
    
    
    
    10,981Inventories, net
    
    
    769
    
    
    
    838Deferred contract costs
    
    
    
    
    
    
    18Prepaid expenses and other
    
    
    688
    
    
    
    571Total current assets
    
    
    8,259
    
    
    
    13,354Property and equipment, net
    
    
    749
    
    
    
    787Goodwill
    
    
    386
    
    
    
    522Acquired intangibles, net
    
    
    512
    
    
    
    1,041Other non-current assets
    
    
    597
    
    
    
    657Total assets
    
    $
    10,503
    
    
    $
    16,361Liabilities and Stockholders EquityCurrent liabilities:Borrowings
    
    $
    
    
    
    $
    2,970Accounts payable
    
    
    880
    
    
    
    1,114Accrued expenses
    
    
    1,758
    
    
    
    1,940Accrued compensation
    
    
    878
    
    
    
    606Deferred revenue
    
    
    3,798
    
    
    
    3,617Total current liabilities
    
    
    7,314
    
    
    
    10,247Series A Senior Convertible Note, net of a debt discount
of $1,780 at June 30, 2007
    
    
    2,420
    
    
    
    Long-term notes payable
    
    
    
    
    
    
    17Total liabilities
    
    
    9,734
    
    
    
    10,264Commitments and contingencies (Note 12 )
    
    
    
    
    
    
    Stockholders equity:Preferred stock, $.01 par value, 5,000,000 shares authorized, none
issued and outstandingCommon stock, $.01 par value, 45,000,000 shares authorized,
18,647,962 and 17,788,032 shares issued and outstanding
    
    
    186
    
    
    
    178Additional paid-in capital
    
    
    39,320
    
    
    
    35,257Other comprehensive loss
    
    
    (28
    )
    
    
    (91
    )Accumulated deficit
    
    
    (38,709
    )
    
    
    (29,247
    )Total stockholders equity
    
    
    769
    
    
    
    6,097Total liabilities and stockholders equity
    
    $
    10,503
    
    
    $
    16,361
  F-3




---



##### 



ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 Years Ended June 30,2007
    
    
    2006
    
    
    2005RevenueLicenses and hardware
    
    $
    3,670
    
    
    $
    12,875
    
    
    $
    8,734Services
    
    
    9,612
    
    
    
    13,796
    
    
    
    11,227Total revenue
    
    
    13,282
    
    
    
    26,671
    
    
    
    19,961Cost of licenses and hardware revenue
    
    
    1,900
    
    
    
    2,970
    
    
    
    3,276Cost of services revenue
    
    
    7,489
    
    
    
    7,171
    
    
    
    5,673Total cost of revenue
    
    
    9,389
    
    
    
    10,141
    
    
    
    8,949Gross profit
    
    
    3,893
    
    
    
    16,530
    
    
    
    11,012Selling, general and administrative
    
    
    10,862
    
    
    
    12,159
    
    
    
    9,774Research and development
    
    
    2,229
    
    
    
    3,866
    
    
    
    2,694In process research and development acquired
    
    
    
    
    
    
    
    
    
    
    5,118(Loss) income from operations
    
    
    (9,198
    )
    
    
    505
    
    
    
    (6,574
    )Interest expense
    
    
    208
    
    
    
    223
    
    
    
    53Gain from settlement of debt obligation
    
    
    
    
    
    
    
    
    
    
    228(Loss) income before income tax provision
    
    
    (9,406
    )
    
    
    282
    
    
    
    (6,399
    )Income tax provision (benefit)
    
    
    56
    
    
    
    (37
    )
    
    
    63Net (loss) income
    
    $
    (9,462
    )
    
    $
    319
    
    
    $
    (6,462
    )Net (loss) income per shareBasic
    
    $
    (0.53
    )
    
    $
    0.02
    
    
    $
    (0.44
    )Diluted
    
    $
    (0.53
    )
    
    $
    0.02
    
    
    $
    (0.44
    )Shares used in computing net (loss) income per share:Basic
    
    
    17,861
    
    
    
    16,899
    
    
    
    14,555Diluted
    
    
    17,861
    
    
    
    17,442
    
    
    
    14,555
  F-4




---



##### 



ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
 OtherCommon Stock
    
    
    Additional Paid-In
    
    
    Comprehensive
    
    
    AccumulatedShares
    
    
    Par Value
    
    
    Capital
    
    
    Loss
    
    
    Deficit
    
    
    TotalBalance, July 1, 2004
    
    
    13,761
    
    
    $
    138
    
    
    $
    28,475
    
    
    $
    (41
    )
    
    $
    (23,104
    )
    
    $
    5,468Exercise of common stock options
    
    
    29
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    33Employee stock purchase plan
    
    
    41
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    53Foreign currency translations
repurchases and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Issuance of warrants to consultant
    
    
    123
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Private financing
    
    
    1,000
    
    
    
    10
    
    
    
    2,120
    
    
    
    
    
    
    
    
    
    
    
    2,1302helix transaction
    
    
    1,740
    
    
    
    18
    
    
    
    4,128
    
    
    
    
    
    
    
    
    
    
    
    4,146Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,462
    )
    
    
    (6,462
    )Balance, June 30, 2005
    
    
    16,694
    
    
    
    167
    
    
    
    34,808
    
    
    
    (32
    )
    
    
    (29,566
    )
    
    
    5,377Exercise of common stock options
    
    
    331
    
    
    
    3
    
    
    
    585
    
    
    
    
    
    
    
    
    
    
    
    588Employee stock purchase plan
    
    
    30
    
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    64Stock option compensation expense
    
    
    
    
    
    
    
    
    
    
    99
    
    
    
    
    
    
    
    
    
    
    
    99Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59
    )
    
    
    
    
    
    
    (59
    )Exercise of warrants
    
    
    152
    
    
    
    2
    
    
    
    352
    
    
    
    
    
    
    
    
    
    
    
    354Purchase of software license
    
    
    326
    
    
    
    3
    
    
    
    787
    
    
    
    
    
    
    
    
    
    
    
    790Issuance of restricted stock
    
    
    137
    
    
    
    2
    
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    842helix re-negotiation
    
    
    118
    
    
    
    1
    
    
    
    (1,520
    )
    
    
    
    
    
    
    
    
    
    
    (1,519
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319
    
    
    
    319Balance, June 30, 2006
    
    
    17,788
    
    
    
    178
    
    
    
    35,257
    
    
    
    (91
    )
    
    
    (29,247
    )
    
    
    6,097Exercise of common stock options
    
    
    14
    
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    18Employee stock purchase plan
    
    
    37
    
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    692helix notes payable settlement
    
    
    139
    
    
    
    1
    
    
    
    287
    
    
    
    
    
    
    
    
    
    
    
    288Exercise of warrants
    
    
    688
    
    
    
    7
    
    
    
    1,591
    
    
    
    
    
    
    
    
    
    
    
    1,598Payment of interest from financing
    
    
    27
    
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    26Restricted
stock grants, net of forfeitures
    
    
    (45
    )
    
    
    
    
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    82Warrants granted in connection with
the sale of Series A Senior Secured
Convertible Notes
    
    
    
    
    
    
    
    
    
    
    1,814
    
    
    
    
    
    
    
    
    
    
    
    1,814Stock option compensation expense
    
    
    
    
    
    
    
    
    
    
    176
    
    
    
    
    
    
    
    
    
    
    
    176Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    63Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,462
    )
    
    
    (9,462
    )Balance, June 30, 2007
    
    
    18,648
    
    
    $
    186
    
    
    $
    39,320
    
    
    $
    (28
    )
    
    $
    (38,709
    )
    
    $
    769
  F-5




---



##### 



ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Years ended June 30,2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    (9,462
    )
    
    $
    319
    
    
    $
    (6,462
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,479
    
    
    
    1,452
    
    
    
    732Provision for doubtful accounts and inventory obsolescence
    
    
    (1
    )
    
    
    195
    
    
    
    126Stock option and restricted stock compensation expense
    
    
    258
    
    
    
    181
    
    
    
    Gain from settlement of debt obligation
    
    
    
    
    
    
    
    
    
    
    (228
    )Issuance of common stock as payment of interest
    
    
    26In process research and development costs acquired
    
    
    
    
    
    
    
    
    
    
    5,118Changes in operating assets and liabilities, net of effects of merger:Deposit of
restricted cash
    
    
    (349
    )
    
    
    
    
    
    
    Accounts receivable
    
    
    7,151
    
    
    
    (5,720
    )
    
    
    (1,131
    )Inventories, net
    
    
    69
    
    
    
    174
    
    
    
    51Prepaid expenses and other assets
    
    
    102
    
    
    
    30
    
    
    
    (270
    )Deferred contract costs
    
    
    18
    
    
    
    67
    
    
    
    486Accounts payable
    
    
    (234
    )
    
    
    (265
    )
    
    
    31Accrued liabilities
    
    
    136
    
    
    
    (570
    )
    
    
    (102
    )Deferred revenue
    
    
    181
    
    
    
    1,577
    
    
    
    332Net cash used in operating activities
    
    
    (626
    )
    
    
    (2,560
    )
    
    
    (1,317
    )Cash flows from investing activities:Cash acquired in 2helix acquisition
    
    
    
    
    
    
    
    
    
    
    392Purchases of property and equipment
    
    
    (384
    )
    
    
    (626
    )
    
    
    (183
    )Purchases of other non-current assets
    
    
    (82
    )
    
    
    (438
    )
    
    
    (226
    )Contract rights acquired from Intasys
    
    
    
    
    
    
    
    
    
    
    (100
    )Net cash used in investing activities
    
    
    (466
    )
    
    
    (1,064
    )
    
    
    (117
    )Cash flows from financing activities:Net borrowings on line of credit
    
    
    (2,607
    )
    
    
    997
    
    
    
    1,060Payment on 2helix notes related to acquisition
    
    
    
    
    
    
    
    
    
    
    (2,076
    )Other notes payable
    
    
    17
    
    
    
    (57
    )
    
    
    72Proceeds from employee stock purchase plan and exercise of stock options
    
    
    87
    
    
    
    652
    
    
    
    87Proceeds
from sale of Series A Senior Secured Convertible Note, net of
costs
    
    
    3,594
    
    
    
    
    
    
    
    Net proceeds
from private financing transactions
    
    
    
    
    
    
    
    
    
    
    2,131Proceeds from exercise of stock warrants
    
    
    1,597
    
    
    
    354
    
    
    
    Net cash provided by financing activities
    
    
    2,688
    
    
    
    1,946
    
    
    
    1,274Net increase (decrease) in cash and cash equivalents
    
    
    1,596
    
    
    
    (1,678
    )
    
    
    (160
    )Effect of exchange rate change on cash
    
    
    80
    
    
    
    (59
    )
    
    
    (38
    )Cash and cash equivalents at beginning of year
    
    
    946
    
    
    
    2,683
    
    
    
    2,881Cash and cash equivalents at end of year
    
    $
    2,622
    
    
    $
    946
    
    
    $
    2,683Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    142
    
    
    $
    222
    
    
    $
    57Cash paid during the period for income taxes
    
    $
    2
    
    
    $
    24
    
    
    $
    63Supplemental disclosure of non-cash investing and financing activities:Issuance of common stock in connection with software purchase
    
    $
    
    
    
    $
    790
    
    
    $
    Issuance of common stock in connection with 2helix purchase
    
    $
    
    
    
    $
    
    
    
    $
    5,508Return of common stock in connection with the 2helix re-negotiation
    
    $
    
    
    
    $
    1,519
    
    
    $
    2helix re-negotiation reduction of notes payable and accrued interest
    
    $
    
    
    
    $
    356
    
    
    $
    Common stock issued in connection with the settlement of 2helix note payable
    
    $
    288
    
    
    $
    
    
    
    $
    Warrants granted in connection with the Series A Senior Secured Convertible
Note
    
    $
    1,814
    
    
    $
    
    
    
    $
    
  F-6




---



##### 



ACE*COMM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  ORGANIZATION
   NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Use of estimates
  Earnings (Loss) per Share
  Revenue Recognition
 .
 F-7




---



##### 



Software Revenue Recognition,
     Cash and cash equivalents
   F-8




---



##### 



Impairment of Long-Lived Assets
  Intangibles and Goodwill
   Year
    
    Amount2008
    

    $3762009
    
    $136
 Inventories
  Property and Equipment
  Income Taxes
 Accounting for Income Taxes
 F-9




---



##### 



Fair Value of Financial Instruments
  Foreign Currency
   Years ended June 30,2007
    
    
    2006
    
    
    2005Net (loss) income
    
    $
    (9,462
    )
    
    $
    319
    
    
    $
    (6,462
    )Other comprehensive income (loss) - Foreign Currency Translation
    
    
    63
    
    
    
    (59
    )
    
    
    9Total other comprehensive income (loss)
    
    $
    (9,399
    )
    
    $
    260
    
    
    $
    (6,453
    )
 Share Based Payments -
 Share-based Payments
  F-10




---



##### 



Accounting for Stock Issued to Employees Accounting for Stock-Based
Compensation Accounting for Stock-Based
Compensation-Transition and Disclosure
  For Year EndedJune 30, 2005(in thousands)Net income, as reported
    
    $
    (6,462
    )Add: Stock-based employee compensation expense included in
reported net income, net of related tax effectsDeduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects
    
    $
    (1,227
    )Pro forma net income
    
    $
    (7,689
    )Income per share:Basic  as reported
    
    $
    (0.44
    )Basic  pro forma
    
    $
    (0.53
    )Diluted  as reported
    
    $
    (0.44
    )Diluted  pro forma
    
    $
    (0.53
    )
    F-11




---



##### 



Recently Issued Accounting Pronouncements
    NOTE 3  ACCOUNTS RECEIVABLE
  June 30,2007
    
    
    2006Billed receivables
    
    $
    2,380
    
    
    $
    8,517Unbilled and other receivables
    
    
    1,616
    
    
    
    2,697Allowance for doubtful accounts
    
    
    (165
    )
    
    
    (233
    )$
    3,831
    
    
    $
    10,981
 Billed
  Unbilled
  F-12




---



##### 



NOTE 4  INVENTORIES
  June 30,2007
    
    
    2006Inventories
    
    $
    1,203
    
    
    $
    1,196Allowance for obsolescence
    
    
    (434
    )
    
    
    (358
    )$
    769
    
    
    $
    838
  NOTE 5  PROPERTY AND EQUIPMENT
  June 30,2007
    
    
    2006Computer equipment
    
    $
    4,965
    
    
    $
    5,272Lab test equipment
    
    
    136
    
    
    
    137Office equipment
    
    
    764
    
    
    
    729Leasehold improvements
    
    
    613
    
    
    
    560Vehicles
    
    
    49
    
    
    
    496,527
    
    
    
    6,747Less accumulated depreciation
    
    
    (5,778
    )
    
    
    (5,960
    )$
    749
    
    
    $
    787
  NOTE 6  BORROWINGS
 Series A Senior Secured Convertible Note
   F-13




---



##### 



Lines of Credit
    F-14




---



##### 



2helix Notes Payable
  NOTE 7  RETIREMENT PLANS
   NOTE 8  INCOME TAXES
   2007
    
    
    2006
    
    
    2005Current:Federal
    
    $
    (1
    )
    
    $
    (42
    )
    
    $
    42State
    
    
    2
    
    
    
    5
    
    
    
    20Foreign
    
    
    55
    
    
    
    
    
    
    
    1Deferred:Federal
    
    
    
    
    
    
    
    
    
    
    State
    
    
    
    
    
    
    
    
    
    
    $
    56
    
    
    $
    (37
    )
    
    $
    63
 F-15




---



##### 



June 30,2007
    
    
    2006Tax assets:Allowance for doubtful accounts
    
    $
    63
    
    
    $
    88Inventories
    
    
    311
    
    
    
    292Accrued expenses
    
    
    533
    
    
    
    381Amortization
    
    
    2,496
    
    
    
    2,377Net operating loss carryforwards
    
    
    17,502
    
    
    
    14,254Tax credit carryforwards
    
    
    26
    
    
    
    26Other
    
    
    31
    
    
    
    69Gross deferred tax assets
    
    
    20,962
    
    
    
    17,487Tax liabilities:Income on contracts
    
    
    (560
    )
    
    
    (1,023
    )Depreciation
    
    
    (92
    )
    
    
    (88
    )Gross deferred tax liabilities
    
    
    (652
    )
    
    
    (1,111
    )Net deferred tax asset
    
    
    20,310
    
    
    
    16,376Valuation allowance
    
    
    (20,310
    )
    
    
    (16,376
    )Net deferred tax
    
    $
    
    
    
    $
    
    F-16




---



##### 



Years ended June 30,2007
    
    
    2006
    
    
    2005Income tax benefit at statutory rate
    
    $
    (3,198
    )
    
    $
    96
    
    
    $
    (2,197
    )State income taxes net of Federal benefit
    
    
    (365
    )
    
    
    9
    
    
    
    (236
    )Nondeductible expenses
    
    
    56
    
    
    
    (102
    )
    
    
    56Impact of foreign operations
    
    
    212
    
    
    
    (266
    )
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    44Adjustment to deferred tax assets
    
    
    (173
    )
    
    
    (223
    )
    
    
    Valuation allowance
    
    
    3,524
    
    
    
    449
    
    
    
    2,396Actual (benefit) provision
    
    $
    56
    
    
    $
    (37
    )
    
    $
    63
 NOTE 9  STOCKHOLDERS EQUITY
 Employee Stock Purchase Plan
  Issuance of Common Stock
     F-17




---



##### 



Issuance of Warrants
    Stock Options
 Amended and Restated Omnibus Stock Plan (Omnibus Plan)
  F-18




---



##### 



2000 Stock Option Plan for Directors (Directors Plan)
   F-19




---



##### 



Omnibus Plan
    
    

Directors Plan
    
    
    i3 MobileWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Avg.
    
    
    Number
    
    
    Avg.
    
    
    Number
    
    
    Avg.of
    
    
    Share
    
    
    of
    
    
    Share
    
    
    of
    
    
    ShareShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding Options at
June 30, 2004
    
    
    1,708,900
    
    
    $
    2.88
    
    
    
    90,000
    
    
    $
    5.41
    
    
    
    55,990
    
    
    $
    33.32Granted
    
    
    397,000
    
    
    
    1.99
    
    
    
    21,000
    
    
    
    2.08
    
    
    
    
    
    
    
    Exercised
    
    
    (29,352
    )
    
    
    1.12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    (57,755
    )
    
    
    2.78
    
    
    
    (33,000
    )
    
    
    9.75
    
    
    
    
    
    
    
    Outstanding Options at
June 30, 2005
    
    
    2,018,793
    
    
    
    2.73
    
    
    
    78,000
    
    
    
    2.68
    
    
    
    55,990
    
    
    
    33.32Granted
    
    
    148,667
    
    
    
    
    
    
    
    42,000
    
    
    
    2.17
    
    
    
    
    
    
    
    Exercised
    
    
    (331,368
    )
    
    
    1.77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    (51,943
    )
    
    
    1.62
    
    
    
    (21,000
    )
    
    
    3.84
    
    
    
    (11,442
    )
    
    
    30.49Outstanding Options at
June 30, 2006
    
    
    1,784,149
    
    
    
    2.71
    
    
    
    99,000
    
    
    
    2.21
    
    
    
    44,548
    
    
    
    34.05Granted
    
    
    585,500
    
    
    
    0.89
    
    
    
    21,000
    
    
    
    0.97
    
    
    
    
    
    
    
    Exercised
    
    
    (30,628
    )
    
    
    0.60
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    (434,506
    )
    
    
    2.52
    
    
    
    (9,000
    )
    
    
    1.22
    
    
    
    
    
    
    
    Outstanding Options
atJune 30, 2007
    
    
    1,904,515
    
    
    
    2.23
    
    
    
    111,000
    
    
    
    2.06
    
    
    
    44,548
    
    
    
    34.05Options exercisable atJune 30, 2005
    
    
    1,777,639
    
    
    $
    2.92
    
    
    
    39,000
    
    
    $
    2.98
    
    
    
    55,990
    
    
    $
    33.32June 30, 2006
    
    
    1,536,649
    
    
    $
    3.02
    
    
    
    45,002
    
    
    $
    2.16
    
    
    
    44,548
    
    
    $
    34.05June 30, 2007
    
    
    1,351,268
    
    
    $
    2.80
    
    
    
    66,001
    
    
    $
    2.36
    
    
    
    44,548
    
    
    $
    34.05Options available for
granting
    
    
    744,288
    
    
    
    
    
    
    
    289,000
    
    
    
    
    
    
    
    
  Options Outstanding
    
    Options ExercisableWeighted-AverageNumber
    
    Remaining
    
    Weighted-
    
    Number
    
    Weighted-Range of
    
    Outstanding
    
    Contractual
    
    Average
    
    Exercisable
    
    AverageExercise Prices
    
    at June 30, 2007
    
    Life (yrs)
    
    Exercise Price
    
    at June 30, 2007
    
    Exercise Price$0.00 - $2.00
    
    
    1,133,169
    
    
    
    6.2
    
    
    $
    1.13
    
    
    
    558,922
    
    
    $
    1.43$2.01 - $4.00
    
    
    655,009
    
    
    
    5.2
    
    
    
    2.67
    
    
    
    631,010
    
    
    
    2.69$4.01 - $6.00
    
    
    38,438
    
    
    
    0.9
    
    
    
    5.00
    
    
    
    38,438
    
    
    
    5.00$6.01 - $8.00
    
    
    196,778
    
    
    
    1.4
    
    
    
    6.51
    
    
    
    196,778
    
    
    
    6.51$8.01 - $10.00
    
    
    1,500
    
    
    
    2.6
    
    
    
    8.50
    
    
    
    1,500
    
    
    
    8.50$10.01 - $15.00
    
    
    7,504
    
    
    
    3.9
    
    
    
    13.54
    
    
    
    7,504
    
    
    
    13.54$15.01 - $100.00
    
    
    27,665
    
    
    
    5.3
    
    
    
    49.80
    
    
    
    27,665
    
    
    
    49.802,060,063
    
    
    
    
    
    
    
    
    
    
    
    1,461,817
 F-20




---



##### 



,
 NOTE 10  MERGERS AND ACQUISITIONS
 Double Helix Solutions Limited
     F-21




---



##### 



NOTE 11  EARNINGS PER SHARE (in thousands, except per share amounts)
  Years ended June 30,2007
    
    
    2006
    
    
    2005Basic EPS:Net income (loss) (numerator):Net income (loss) available to common shareholders
    
    $
    (9,462
    )
    
    $
    319
    
    
    $
    (6,462
    )Shares (denominator):Weighted average common shares
    
    
    17,861
    
    
    
    16,899
    
    
    
    14,555Basic EPS
    
    $
    (0.53
    )
    
    $
    0.02
    
    
    $
    (0.44
    )Diluted EPS:Net income (loss)(numerator):Net income (loss) available to common shareholders
    
    $
    (9,462
    )
    
    $
    319
    
    
    $
    (6,462
    )Shares (denominator):Weighted average common shares
    
    
    17,861
    
    
    
    16,899
    
    
    
    14,555Stock options
    
    
    
    
    
    
    400
    
    
    
    Restricted stock
    
    
    
    
    
    
    88
    
    
    
    Warrants
    
    
    
    
    
    
    55
    
    
    
    Total weighted shares and equivalents
    
    
    17,861
    
    
    
    17,442
    
    
    
    14,555Diluted EPS
    
    $
    (0.53
    )
    
    $
    0.02
    
    
    $
    (0.44
    )
  NOTE 12  COMMITMENTS AND CONTINGENCIES
   Year ending June 30,
    
    Amount2008
    
    $
    9762009
    
    
    5722010
    
    
    2242011
    
    
    1532012
    
    
    103$
    2,028
  F-22




---



##### 



NOTE 13  SEGMENT INFORMATION AND BUSINESS CONCENTRATION
  2007
    
    
    2006
    
    
    2005Revenue by TypeEnterprise
    
    $
    4,325
    
    
    $
    10,179
    
    
    $
    6,656Network Service Provider (NSP)
    
    
    5,902
    
    
    
    10,069
    
    
    
    7,554Operations Support Systems (OSS)
    
    
    3,055
    
    
    
    6,423
    
    
    
    5,732IT and Other
    
    
    
    
    
    
    
    
    
    
    19Total Revenue
    
    $
    13,282
    
    
    $
    26,671
    
    
    $
    19,961Revenue by LocationU.S.
    
    $
    5,732
    
    
    $
    11,447
    
    
    $
    6,241Canada and Mexico
    
    
    824
    
    
    
    1,226
    
    
    
    734Asia
    
    
    2,539
    
    
    
    3,054
    
    
    
    3,049Europe
    
    
    2,966
    
    
    
    7,049
    
    
    
    7,418South America
    
    
    40
    
    
    
    427
    
    
    
    38Africa and Middle East
    
    
    1,181
    
    
    
    3,468
    
    
    
    2,481Total revenue
    
    $
    13,282
    
    
    $
    26,671
    
    
    $
    19,961
     June 30,2007
    
    2006
    
    2005North America:Total revenue
    
    $
    10,389
    
    
    $
    19,882
    
    
    $
    14,353Identifiable assets
    
    $
    9,511
    
    
    $
    14,169
    
    
    $
    10,733United Kingdom:Total revenue
    
    $
    2,179
    
    
    $
    5,447
    
    
    $
    4,694Identifiable assets
    
    $
    650
    
    
    $
    2,046
    
    
    $
    2,283Australia:Total revenue
    
    $
    715
    
    
    $
    1,342
    
    
    $
    914Identifiable assets
    
    $
    342
    
    
    $
    146
    
    
    $
    515
 F-23




---



##### 



NOTE 14: SELECTED QUARTERLY FINANCIAL DATA
  Fiscal Three Months Ended2007
    
    
    2006June 30,
    
    
    March 31,
    
    
    Dec. 31,
    
    
    Sept. 30,
    
    
    June 30,
    
    
    March 31,
    
    
    Dec. 31,
    
    
    Sept. 30,2007
    
    
    2007
    
    
    2006
    
    
    2006
    
    
    2006
    
    
    2006
    
    
    2005
    
    
    2005(in thousands except per share data)Statement of Operations Data:Revenue
    
    $
    4,008
    
    
    $
    3,106
    
    
    $
    3,146
    
    
    $
    3,022
    
    
    $
    6,545
    
    
    $
    6,703
    
    
    $
    6,737
    
    
    $
    6,686Gross profit
    
    
    1,479
    
    
    
    552
    
    
    
    916
    
    
    
    946
    
    
    
    3,481
    
    
    
    4,408
    
    
    
    4,636
    
    
    
    4,005Net income (loss)
    
    
    (1,575
    )
    
    
    (2,604
    )
    
    
    (2,538
    )
    
    
    (2,745
    )
    
    
    (492
    )
    
    
    365
    
    
    
    347
    
    
    
    99Net income (loss) per share:Basic
    
    $
    (0.09
    )
    
    $
    (0.14
    )
    
    $
    (0.14
    )
    
    $
    (0.16
    )
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.01Diluted
    
    $
    (0.09
    )
    
    $
    (0.14
    )
    
    $
    (0.14
    )
    
    $
    (0.16
    )
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.01
    F-24




---



##### 



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS (in thousands):
 RecoveriesBeginning
    
    Charged to
    
    of Prior
    
    
    
    
    
    EndingDescription
    
    Balance
    
    Expenses
    
    Write-offs
    
    Write-offs
    
    BalanceYear ended June 30, 2007:Allowance for doubtful accounts
    
    $
    233
    
    
    $
    (1
    )
    
    $
    9
    
    
    $
    76
    
    
    $
    165Reserve for obsolete inventory
    
    $
    358
    
    
    $
    76
    
    
    $
    
    
    
    $
    
    
    
    $
    434Tax valuation allowance
    
    $
    16,377
    
    
    $
    4,028
    
    
    $
    
    
    
    $
    
    
    
    $
    20,405Year ended June 30, 2006:Allowance for doubtful accounts
    
    $
    89
    
    
    $
    195
    
    
    $
    2
    
    
    $
    53
    
    
    $
    233Reserve for obsolete inventory
    
    $
    325
    
    
    $
    37
    
    
    $
    
    
    
    $
    4
    
    
    $
    358Tax valuation allowance
    
    $
    15,927
    
    
    $
    450
    
    
    $
    
    
    
    $
    
    
    
    $
    16,377Year ended June 30, 2005:Allowance for doubtful accounts
    
    $
    535
    
    
    $
    126
    
    
    $
    32
    
    
    $
    604
    
    
    $
    89Reserve for obsolete inventory
    
    $
    199
    
    
    $
    126
    
    
    $
    
    
    
    $
    
    
    
    $
    325Tax valuation allowance
    
    $
    13,826
    
    
    $
    2,101
    
    
    $
    
    
    
    $
    
    
    
    $
    15,927
 F-25