##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-K
 FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 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, 2006
 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
    
    52-1283030(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer I.D. No.)704 Quince Orchard RoadGaithersburg, Maryland 20878
    
    20878(Address of principal executive offices)
    
    (Zip Code)
    
 o þ
 o þ
 þ o
 o
 o o þ
 o þ




---



##### 



ACE*COMM Corporation
Form 10-K
Year Ended June 30, 2006
 TABLE OF CONTENTS
 PAGEPART IItem 1.
    
    BUSINESS
    
    
    4Item 1a.
    
    RISK FACTORS
    
    
    22Item 2.
    
    PROPERTIES
    
    
    25Item 3.
    
    LEGAL PROCEEDINGS
    
    
    25Item 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    25PART IIItem 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    
    26Item 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
    
    
    37Item 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    37Item 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    38Item 9A.
    
    DISCLOSURE OF CONTROLS AND PROCEDURES
    
    
    38Item 9B.
    
    OTHER INFORMATION
    
    
    38PART IIIItem 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    38Item 11.
    
    EXECUTIVE COMPENSATION
    
    
    38Item 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
    
    38Item 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    38Item 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    38PART IVItem 15.
    
    EXHIBITS, FINANCIAL STATEMENTS, AND SCHEDULES
    
    
    39
 -2-




---



##### 



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
 ®
 Enterprise OSS/TMS for Private Networks and Enterprises
 ® ®
 ACE*COMM Network Business Intelligence
  -4-




---



##### 



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 and control usage of company-owned mobile phones. Control can be
based on individual or group credits, time of day, the type of service used,
specific telephone numbers, and classification of appropriate content.
    
    Plan Patrol, which monitors a subscribers usage 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.
    
    Expense Patrol, which lets subscribers set up and maintain an automatic
call categorization and sorting scheme for their mobile phone. They can
specify which numbers are for personal calls, which are for business, and
even subcategorize business calls by client.
 Strategy
 A Pivotal Product Year
  
    
    Parent Patrol.We continued development of our Parent Patrol and related suite of
products. We announced new content filtering capabilities for Parent Patrol, providing
controls that allow parents to curb childrens exposure to unsuitable mobile Web content.
We also launched Enterprise Patrol, a service that mobile operators can offer enterprise
communications managers to manage use of company-owned mobile phones.
    
    N*VISION®2 (NV2).We unveiled N*VISION®2 (NV2), the next generation of our award
winning convergent mediation solution, which has evolved dramatically to meet the demands
of carriers mediation and collection environments.
    
    Network Business Intelligence.We announced the launch of our new, expanded Network
Business Intelligence (NBI) suite of products and underlying application platform that
collects, correlates, and transforms disparate data into actionable business information
for operators to increase revenues, improve operating margins, and enhance utilization of
network assets.
    
    Market Maker for MSOs.We announced the release and general availability of the
ACE*COMM Market Maker network and market visualization tool specifically geared to North
American cable multiple system operators (MSOs).
 -5-




---



##### 




    
    Market Maker for GSM.We launched ACE*COMM Market Maker for wireless GSM operators
which provides mobile operators with the ability to correlate data from across their
operations and to visualize their market, network, and services to optimize resources,
target sales and marketing campaigns and reduce churn.
    
    Intelligent Charging.We launched our Intelligent Charging product  a hyperconvergent
product for the valuation of network-based charges and services. It provides flexible,
rules-based convergence of legacy applications, network elements, and next-generation
elements.
 New and Expanded Partnerships and Customer Relationships
  
    
    Parent Patrol.We announced a pivotal partnership with Lucent Technologies to
integrate ACE*COMM technology into Lucents mobile services offerings directed at enabling
global wireless carriers to offer their customers parental control of their mobile
services. The solution consists of 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 Lucent and us to carriers that
buy other Lucent and ACE*COMM products.We signed a contract with a Tier 1 North American wireless service provider for the first
deployment of Parent Patrol in one of its regional divisions.
    
    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.
    
    Network Business Intelligence sales.We signed a contract with the Saudi Telecom audit
department to analyze the operators GSM network utilizing our NBI suite of products. This
was also extended for a second phase to evaluate Saudi Telecoms switched voice and GPRS
service to address revenue leakage and improve asset recovery.We also signed a deal with Comcel, a leading Latin American wireless services provider, for
components of our NBI suite to better manage both revenue and margin growth. This contract
marks both the addition of a new customer in Latin America for ACE*COMM and the first sale
of NBI to the region.
    
    Advanced OSS.We secured a major contract to provide improved data collection and
mediation capabilities to TurkTel in Turkey for a $2.3 million dollar deployment which
involves collecting and integrating network data from over a thousand switches and varied
data networks.We signed a joint contract with Giza Systems to provide a new subscriber connection and
service activation solution to Telecom Egypt, the largest fixed line telecom provider in the
Middle East with over 10 million subscribers.We extended our engagement with Level 3 Communications to further expand our IP mediation
solution with a new service delivery platform that includes advanced rating capabilities and
new levels of flexibility and configurability.We added Cameroon Telecommunications (Camtel), the incumbent telecommunications service
provider for Cameroon, to deploy our advanced OSS solutions, including the APG service
activation and data collection modules, to provide the basis for accurate billing processes
and ensure the seamless integration with their BSS/OSS systems.
 -6-




---



##### 




    
    Enterprise OSS.We continued delivery 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.Additionally we signed three new North American customers in the municipal and federal
government sectors for our NetPlus® enterprise OSS and telemanagement product suite. They
included the county government for one of the most populous counties on the United States
west coast, a major western municipal utility supplying basic utilities to millions of
residents, and a congressional agency encompassing thousands of employees in multiple
locations.
 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 new strategic
relationship with 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 recently-introduced 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.
    
    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 N*VISION®2 (NV2), the next generation of our
award winning convergent mediation solution, which also supports critical legacy network
and existing infrastructure investments of our customers.
    
    Promote our enhanced product portfolio.We are beginning to get traction with our
network business intelligence solutions for telecom service providers and enterprises, with
our first significant orders received during the most recent fiscal year. We also have
introduced a new product which we will be promoting in the coming fiscal year, ACE*COMM
Market Maker network and market visualization tool, specifically geared to North American
cable multiple system operators and GSM providers.
    
    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 (over 20%) 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
acquisition opportunities designed to help us enhance our technological standing and
capabilities.
 
 -7-




---



##### 



Industry Background
    Markets and Applications
  Private Networks (Enterprises)
 ®
 Tier 1
  IXPs (Triple & Quad Play Players)
  VoIP
  -8-




---



##### 



Cable
  Content
  Wireless
  Traditional/Wireline
  MVNO
  WiFi
  IPTV
  Products and Services
  ADVANCED OSS  N*VISION®2 (NV2)
 ®
 -9-




---



##### 



Data Collection
 Activation Gateway
 Intelligent Charging
 Advanced Mediation
 ENTERPRISE OSS  NETPLUS®
 ® ® ®
   ® ®
 -10-




---



##### 



ACE*COMM Network Business Intelligence (NBI)
     ACE*COMMs Patrol Suite  Value-Added Services (VAS)
    Parent Patrol
 Enterprise Patrol
 -11-




---



##### 



Plan Patrol
 Expense Patrol
  Geographic markets
  Canada & United States
  Latin America
  Europe
  Middle East and Africa
  Asia Pacific
  -12-




---



##### 



Professional Services and Support
   Quality
  Sales and Marketing
      -13-




---



##### 



Customers
  Strategic Alliances
    OEM
  Cisco Systems, Inc.
 -14-




---



##### 



Compagnie Financiere Alcatel Alcatel) 
 Motorola, Inc.
 Zhone Technologies, Inc. 
 Resellers & Systems Integrators
  General Dynamics Corporation  ®
 Giza Systems
 Huawei Technologies
 Lucent Technologies ® ®
 MOSECO Jordan
 NetSource America Inc. ®
 Northrop Grumman Corporation
 Science Applications International Corporation, or SAIC
 Siemens AG
 -15-




---



##### 



Unisys Corporation ®
 Verizon ®
 Technology Partners
  Avaya ®
 Business Objects
 Computer Associates
 Experian
 Halcyon
 Oracle ® ® ®
 Remedy
 RuleSpace LLC
 Sun Microsystems
 Veritas
 Vertel
 -16-




---



##### 



Industry Affiliations
  ACUTA
 AeA
 AFCEA
 GSA
 GSM Association
 INAAU
 ISO
 Just-US
 NASTD
 NTCA
 OMA
 SIP
Center
 -17-




---



##### 



TIA
 USTA
 Backlog
   Competition
    -18-




---



##### 




    
    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
   ® ®
 -19-




---



##### 



Research and Product Development
 .
 Proprietary Rights and Licenses
 ®
   -20-




---



##### 



Employees
  Executive Officers
 Name of Director
    
    
    
    
    
    Director
    
    Class ofor Nominee
    
    Age
    
    Since
    
    Director
    
    Recent Business ExperienceGeorge T. Jimenez
    
    
    70
    
    
    
    1983
    
    
    III
    
    Chief Executive Officer
of the Company since
1996, and Treasurer from
1983 to present.
President from 1983 to
September 1999 and July
2001 to June 2005. Mr.
Jimenez has been Chairman
of the Board of Directors
since 1983.Paul G. Casner, Jr.
    
    
    68
    
    
    
    1983
    
    
    II
    
    Business management
consultant. Prior to
retirement in April 2005,
was Executive Vice
President and Chief
Operating Officer of DRS
Technologies, Inc., a
defense electronics
corporation starting in
June 2000. Executive
Vice President,
Operations, DRS, from
December 1998 to May
2000; President of DRS
Electronic Systems Group,
a division of DRS
Technologies, from 1994
to 1998; and Chairman and
Chief Executive Officer
of Technology
Applications & Service
Company from March 1991
to September 1993.Gilbert A. Wetzel
    
    
    74
    
    
    
    1992
    
    
    I
    
    Senior Vice President,
Mayer Leadership Group
(formerly Mayer &
Associates), a human
resources consulting
firm, since 2004 and
Managing Director from
1999 to 2004. Executive
Vice President, Right
Management Consultants,
from 1994 to 1999;
retired Chairman and
Chief Executive Officer
of Bell of Pennsylvania
and Diamond State
Telephone and founder and
retired Chief Executive
Officer of Geographic
Business Publishers, Inc.Harry M. Linowes
    
    
    78
    
    
    
    1999
    
    
    I
    
    Business management
consultant. Currently an
associate of Business
Mediation Associates.
Senior Partner (1992 to
retirement in 1996) and a
Managing Partner (1986 to
1992) of BDO Seidman,
Accountants and
Consultants.
 -21-




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##### 



Name of Director
    
    
    
    
    
    Director
    
    Class ofor Nominee
    
    Age
    
    Since
    
    Director
    
    Recent Business ExperienceJ. William Grimes
    
    
    65
    
    
    
    2004
    
    
    III
    
    General Partner, BG Media
Investors LLC, a private
equity capital firm
specializing in
investments in media and
telecommunications
companies, since 1996.
President and Interim
Chief Executive Officer
of i3 Mobile, Inc. from
March 2003 to December
2003. Chief Executive
Officer, Zenith Media,
from 1994 to 1996;
President and CEO of
Multimedia, Inc. from
1991 to 1993, and
President and CEO of
Univision Holdings, Inc.
from 1988 to 1991.Matthew J. Stover
    
    
    51
    
    
    
    2004
    
    
    II
    
    Chairman and CEO of ypOne
Publishing, an
independent publisher of
local yellow pages
shopping directories in
the United States and
Canada, since November
2005. Chairman, LKM
Ventures, LLC, an
investment and advisory
firm, since January 2000.
President and then Chief
Executive Officer,
edu.com, Inc., a
marketing services
company, from May 2000 to
June 2001. Group
President of Bell
Atlantic Directory
Services, and its predecessor, NYNEX
Information Services
Group, from January 1994
to December 1999.
 ITEM 1A. RISK FACTORS
 Risk Factors Affecting Future Operating Results
 Because of our reliance on significant customers and large orders, any failure to obtain a
sufficient number of large contracts could have a material adverse effect on our revenues for
one or more periods
  -22-




---



##### 



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
  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
  Many of our telecommunications customers involve credit risks for us
  We have experienced liquidity demands as a result of large contracts
  -23-




---



##### 



We are dependent on our ability to borrow
  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
  Failure to manage risks of potential acquisitions 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
  -24-




---



##### 



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
  ITEM 2. PROPERTIES
  Square
    
    
    
    CurrentLocation
    
    Footage
    
    Lease Expiration
    
    Annual RentGaithersburg, Maryland
    
    24,289
    
    
    November 30, 2008
    
    $
    600,000 (subject
to annual increases
of approximately
$17,000 and allocated operating
costs each year)Montreal, Quebec, Canada
    
    3,415
    
    
    December 31, 2006
    
    $
    62,000Leith Edinburgh, Scotland
    
    4,171
    
    
    January 26, 2010
    
    $
    114,000London, England
    
    2,104
    
    
    January 31, 2008
    
    $
    220,000Bundall, Queensland, Australia
    
    2,119
    
    
    March 31, 2008
    
    $
    40,000
 ITEM 3. LEGAL PROCEEDINGS
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  -25-




---



##### 



PART II
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 Common Stock Prices
   Year Ended June 30,2006
    
    2005High
    
    Low
    
    High
    
    Low1st Quarter
    
    $
    2.66
    
    
    $
    2.20
    
    
    $
    2.38
    
    
    $
    0.962nd Quarter
    
    
    3.14
    
    
    
    2.36
    
    
    
    2.42
    
    
    
    1.103rd Quarter
    
    
    3.62
    
    
    
    2.58
    
    
    
    3.62
    
    
    
    2.264th Quarter
    
    
    2.83
    
    
    
    2.55
    
    
    
    2.77
    
    
    
    2.05
  Common Stockholders
  Dividends
  Equity Compensation Plan Information
  (a)
    
    (b)
    
    (c)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
    
    
    4,175,697
    
    
    $
    3.05
    
    
    
    1,196,282Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    4,175,697
    
    
    $
    3.05
    
    
    
    1,196,282
 -26-




---



##### 



ITEM 6. SELECTED FINANCIAL DATA
  Year Ended June 30,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(in thousands except per share data)Statement of Operations Data:Revenue
    
    $
    26,671
    
    
    $
    19,961
    
    
    $
    13671
    
    
    $
    13,794
    
    
    $
    18,094Gross profit
    
    
    16,530
    
    
    
    11,012
    
    
    
    5,830
    
    
    
    6,255
    
    
    
    8,982Selling, general and administrative
    
    
    12,159
    
    
    
    9,774
    
    
    
    9,304
    
    
    
    7,861
    
    
    
    12,231Research and development
    
    
    3,866
    
    
    
    2,694
    
    
    
    1,226
    
    
    
    347
    
    
    
    780In process research and development acquired
    
    
    
    
    
    
    5,118
    
    
    
    1,160
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    319
    
    
    $
    (6,462
    )
    
    $
    (5,898
    )
    
    $
    (1,982
    )
    
    $
    (3,988
    )Net income (loss) per share:Basic
    
    $
    0.02
    
    
    $
    (0.44
    )
    
    $
    (0.49
    )
    
    $
    (0.21
    )
    
    $
    (0.43
    )Diluted
    
    $
    0.02
    
    
    $
    (0.44
    )
    
    $
    (0.49
    )
    
    $
    (0.21
    )
    
    $
    (0.43
    )
 June 30,2006
    
    2005
    
    2004
    
    2003
    
    2002(in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    946
    
    
    $
    2,683
    
    
    $
    2,881
    
    
    $
    1,570
    
    
    $
    3,530Working capital
    
    
    3,107
    
    
    
    653
    
    
    
    3,665
    
    
    
    3,941
    
    
    
    4,702Total assets
    
    
    16,361
    
    
    
    14,153
    
    
    
    10,331
    
    
    
    8,244
    
    
    
    10,402Long-term liabilities
    
    
    17
    
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    44Total liabilities
    
    
    10,264
    
    
    
    8,776
    
    
    
    4,863
    
    
    
    3,419
    
    
    
    4,071Stockholders equity
    
    
    6,097
    
    
    
    5,377
    
    
    
    5,468
    
    
    
    4,825
    
    
    
    6,331
 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
 2helix
  Warrant Exercises Under Revised Private Placement
   Critical Accounting Policies
   Revenue Recognition
  -29-




---



##### 



Allowance for Bad Debts
  -30-




---



##### 



Impairment of Long-Lived Assets
  Results of Operations
  Years Ended June 30,2006
    
    
    2005
    
    
    2004Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of revenue
    
    
    38.0
    %
    
    
    44.8
    %
    
    
    57.3
    %Selling, general and administrative
    
    
    45.6
    %
    
    
    49.0
    %
    
    
    68.1
    %Research and development
    
    
    14.5
    %
    
    
    13.5
    %
    
    
    9.0
    %In process research and development
    
    
    0.0
    %
    
    
    25.6
    %
    
    
    8.5
    %Income (loss) from operations
    
    
    1.9
    %
    
    
    (32.9
    )%
    
    
    (42.9
    )%Net interest expense
    
    
    0.8
    %
    
    
    0.3
    %
    
    
    0.2
    %Gain from settlement of debt obligation
    
    
    0.0
    %
    
    
    1.1
    %
    
    
    0.0
    %Income (loss) before income taxes
    
    
    1.1
    %
    
    
    (32.1
    )%
    
    
    (43.1
    )%Income tax (benefit) provision
    
    
    (0.1
    )%
    
    
    0.3
    %
    
    
    0.0
    %Net income (loss)
    
    
    1.2
    %
    
    
    (32.4
    )%
    
    
    (43.1
    )%
 The above reflects the results of operations from the purchase of 2helix in March 2005. Previous
periods do not include the revenue and expenses of 2helix.
 Revenues
  Years Ended June 30,2006
    
    
    2005
    
    
    2004RevenueLicenses and hardware
    
    $
    12,875
    
    
    $
    8,734
    
    
    $
    6,387Services
    
    
    13,796
    
    
    
    11,227
    
    
    
    7,284Total Revenue
    
    $
    26,671
    
    
    $
    19,961
    
    
    $
    13,671
  -31-




---



##### 



2006
    
    
    2005
    
    
    2004Revenue by TypeEnterprise
    
    $
    10,179
    
    
    $
    6,656
    
    
    $
    4,187Network Service Provider (NSP)
    
    
    10,069
    
    
    
    7,554
    
    
    
    7,092Operations Support Systems (OSS)
    
    
    6,423
    
    
    
    5,732
    
    
    
    2,358IT and Other
    
    
    
    
    
    
    19
    
    
    
    34Total Revenue
    
    $
    26,671
    
    
    $
    19,961
    
    
    $
    13,671
     -32-




---



##### 



Cost of Revenues
       Selling, General and Administrative Expenses
   -33-




---



##### 



Research and Development Expenses
   TM
 ,
 -34-




---



##### 



Liquidity and Capital Resources
 Asset and Cash Flow Analysis
        -35-




---



##### 



Cost Containment Program
  Contractual Obligations and Commitments
  Payments Due by Period(amounts in thousands)Less than 1
    
    
    
    
    
    
    
    
    
    After 5Contractual Obligation
    
    Total
    
    year
    
    1-3 years
    
    4-5 years
    
    yearsOperating leases
    
    $
    2,428
    
    
    $
    1,065
    
    
    $
    1,295
    
    
    $
    68
    
    
    $
    Other commitments
    
    
    74
    
    
    
    57
    
    
    
    17
    
    
    
    
    
    
    
    Total commitments
    
    $
    2,502
    
    
    $
    1,122
    
    
    $
    1,312
    
    
    $
    68
    
    
    $
    
   Amount of Commitment Expiration Per Period(amounts in thousands)TotalAmounts
    
    Less than 1
    
    
    
    
    
    
    
    
    
    Over 5Other Commercial Commitments
    
    Committed
    
    year
    
    1-3 years
    
    4-5 years
    
    yearsStandby Letters of Credit
    
    $
    306
    
    
    $
    253
    
    
    $
    53
    
    
    $
    
    
    
    $
    
 Lines of Credit
  -36-




---



##### 



Liquidity Analysis
   ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  -37-




---



##### 



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
  ITEM 9A.
    
    DISCLOSURE OF CONTROLS AND PROCEDURES
   ITEM 9B.
    
    OTHER INFORMATION
  PART III
 ITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 Directors
  Executive Officers
  ITEM 11.
    
    EXECUTIVE COMPENSATION
  ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
  -38-




---



##### 



PART IV
 ITEM 15.
    
    EXHIBITS, FINANCIAL STATEMENTS, AND SCHEDULES
   PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Balance Sheets as of June 30, 2006 and 2005
    
    
    F-3Statements of Operations for the years ended June 30,
2006, 2005 and 2004
    
    
    F-4Statements of Stockholders Equity for the years
ended June 30, 2006, 2005 and 2004
    
    
    F-5Statements of Cash Flows for the years ended June 30,
2006, 2005 and 2004
    
    
    F-6Notes to Financial Statements
    
    
    F-7
 -39-




---



##### 



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. 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. -40-




---



##### 



SIGNATURES
  ACE*COMM CORPORATIONBy:
    
    /s/ George T. Jimenez

George T. JimenezChief Executive OfficerDate: September 26, 2006
  Name
    
    
    
    Title
    
    Date/s/ George T. Jimenez
    
    
    
    Chief Executive Officer
and Chairman of the Board
    
    September 26, 2006(George T. Jimenez)
    
    
    
    (Principal Executive Officer)/s/ Steven R. Delmar
    
    
    
    Senior Vice President and
Chief Financial Officer
    
    September 26, 2006(Steven R. Delmar)
    
    
    
    (Principal Financial and Accounting Officer)/s/  Paul G. Casner, Jr.

(Paul G. Casner, Jr.)
    
    
    
    Director
    
    September 26, 2006/s/ Gilbert A. Wetzel)

(Gilbert A. Wetzel)
    
    
    
    Director
    
    September 26, 2006/s/ Harry M. Linowes

(Harry M. Linowes)
    
    
    
    Director
    
    September 26, 2006/s/ Matthew J. Stover

(Matthew J. Stover)
    
    
    
    Director
    
    September 26, 2006/s/ J. William Grimes

(J. William Grimes)
    
    
    
    Director
    
    September 26, 2006
 -41-




---



##### 



ACE*COMM CORPORATION
 INDEX TO FINANCIAL STATEMENTS
  PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of June 30, 2006 and 2005
    
    
    F-3Consolidated Statements of Operations for the years ended June 30,
2006, 2005 and 2004
    
    
    F-4Consolidated Statements of Stockholders Equity for the years ended
June 30, 2006, 2005 and 2004
    
    
    F-5Consolidated Statements of Cash Flows for the years ended June 30,
2006, 2005 and 2004
    
    
    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 30,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    946
    
    
    $
    2,683Accounts receivable, net
    
    
    10,981
    
    
    
    5,456Inventories, net
    
    
    838
    
    
    
    532Deferred contract costs
    
    
    18
    
    
    
    85Prepaid expenses and other
    
    
    571
    
    
    
    601Total current assets
    
    
    13,354
    
    
    
    9,357Property and equipment, net
    
    
    787
    
    
    
    636Goodwill
    
    
    522
    
    
    
    1,681Acquired intangibles, net
    
    
    1,041
    
    
    
    2,001Other non-current assets
    
    
    657
    
    
    
    478Total assets
    
    $
    16,361
    
    
    $
    14,153Liabilities and Stockholders EquityCurrent liabilities:Borrowings
    
    $
    2,970
    
    
    $
    2,332Accounts payable
    
    
    1,114
    
    
    
    1,379Accrued expenses
    
    
    1,940
    
    
    
    1,940Accrued compensation
    
    
    606
    
    
    
    1,013Deferred revenue
    
    
    3,617
    
    
    
    2,040Total current liabilities
    
    
    10,247
    
    
    
    8,704Long-term notes payable
    
    
    17
    
    
    
    72Total liabilities
    
    
    10,264
    
    
    
    8,776Commitments 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,
17,788,032 and 16,694,330 shares issued and outstanding
    
    
    178
    
    
    
    167Additional paid-in capital
    
    
    35,257
    
    
    
    34,808Other comprehensive loss
    
    
    (91
    )
    
    
    (32
    )Accumulated deficit
    
    
    (29,247
    )
    
    
    (29,566
    )Total stockholders equity
    
    
    6,097
    
    
    
    5,377Total liabilities and stockholders equity
    
    $
    16,361
    
    
    $
    14,153
  F-3




---



##### 



(ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 Years Ended June 30,2006
    
    
    2005
    
    
    2004RevenueLicenses and hardware
    
    $
    12,875
    
    
    $
    8,734
    
    
    $
    6,387Services
    
    
    13,796
    
    
    
    11,227
    
    
    
    7,284Total revenue
    
    
    26,671
    
    
    
    19,961
    
    
    
    13,671Cost of licenses and hardware revenue
    
    
    2,970
    
    
    
    3,276
    
    
    
    2,976Cost of services revenue
    
    
    7,171
    
    
    
    5,673
    
    
    
    4,865Total cost of revenue
    
    
    10,141
    
    
    
    8,949
    
    
    
    7,841Gross profit
    
    
    16,530
    
    
    
    11,012
    
    
    
    5,830Selling, general and administrative
    
    
    12,159
    
    
    
    9,774
    
    
    
    9,304Research and development
    
    
    3,866
    
    
    
    2,694
    
    
    
    1,226In process research and development acquired
    
    
    
    
    
    
    5,118
    
    
    
    1,160Income (loss) from operations
    
    
    505
    
    
    
    (6,574
    )
    
    
    (5,860
    )Interest expense
    
    
    223
    
    
    
    53
    
    
    
    32Gain from settlement of debt obligation
    
    
    
    
    
    
    228
    
    
    
    Income (loss) before income tax provision
    
    
    282
    
    
    
    (6,399
    )
    
    
    (5,892
    )Income tax (benefit) provision
    
    
    (37
    )
    
    
    63
    
    
    
    6Net income (loss)
    
    $
    319
    
    
    $
    (6,462
    )
    
    $
    (5,898
    )Net income (loss) per shareBasic
    
    $
    0.02
    
    
    $
    (0.44
    )
    
    $
    (0.49
    )Diluted
    
    $
    0.02
    
    
    $
    (0.44
    )
    
    $
    (0.49
    )Shares used in computing net loss per share:Basic
    
    
    16,899
    
    
    
    14,555
    
    
    
    12,068Diluted
    
    
    17,442
    
    
    
    14,555
    
    
    
    12,068
  F-4




---



##### 



ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
 Additional
    
    
    OtherCommon Stock
    
    
    Paid-In
    
    
    Comprehensive
    
    
    AccumulatedShares
    
    
    Par Value
    
    
    Capital
    
    
    Loss
    
    
    Deficit
    
    
    TotalBalance, July 1, 2003
    
    
    9,807
    
    
    $
    98
    
    
    $
    21,933
    
    
    $
    
    
    
    $
    (17,206
    )
    
    $
    4,825Exercise of common stock options
    
    
    140
    
    
    
    1
    
    
    
    191
    
    
    
    
    
    
    
    
    
    
    
    192Employee stock purchase plan
    
    
    42
    
    
    
    1
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    51Stock repurchases and warrants
    
    
    (2
    )
    
    
    
    
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    (48
    )Issuance of warrants to consultant
    
    
    
    
    
    
    
    
    
    
    164
    
    
    
    
    
    
    
    
    
    
    
    164Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41
    )
    
    
    
    
    
    
    (41
    )i3 Mobile merger
    
    
    3,774
    
    
    
    38
    
    
    
    6,185
    
    
    
    
    
    
    
    
    
    
    
    6,223Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,898
    )
    
    
    (5,898
    )Balance, June 30, 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 translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    )
    
    $
    6,097
  F-5




---



##### 



ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Years ended June 30,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    319
    
    
    $
    (6,462
    )
    
    $
    (5,898
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,452
    
    
    
    732
    
    
    
    707Provision for doubtful accounts
    
    
    195
    
    
    
    126
    
    
    
    538Stock option and restricted stock compensation expense
    
    
    181
    
    
    
    
    
    
    
    Gain from settlement of debt obligation
    
    
    
    
    
    
    (228
    )
    
    
    In process research and development costs acquired
    
    
    
    
    
    
    5,118
    
    
    
    1,160Non cash compensation  issuance of stock warrants to consultant
    
    
    
    
    
    
    
    
    
    
    164Changes in operating assets and liabilities, net of effects of merger:Accounts receivable
    
    
    (5,720
    )
    
    
    (1,131
    )
    
    
    41Inventories, net
    
    
    174
    
    
    
    51
    
    
    
    127Prepaid expenses and other assets
    
    
    30
    
    
    
    (270
    )
    
    
    (294
    )Deferred contract costs
    
    
    67
    
    
    
    486
    
    
    
    (571
    )Accounts payable
    
    
    (265
    )
    
    
    31
    
    
    
    (1,582
    )Accrued liabilities
    
    
    (570
    )
    
    
    (102
    )
    
    
    367Deferred revenue
    
    
    1,577
    
    
    
    332
    
    
    
    216Net cash used in operating activities
    
    
    (2,560
    )
    
    
    (1,317
    )
    
    
    (5,025
    )Cash flows from investing activities:Cash acquired in 2helix acquisition
    
    
    
    
    
    
    392
    
    
    
    Purchases of property and equipment
    
    
    (626
    )
    
    
    (183
    )
    
    
    (351
    )Purchases of other non-current assets
    
    
    (438
    )
    
    
    (226
    )
    
    
    Contract rights acquired from Intasys
    
    
    
    
    
    
    (100
    )
    
    
    (2,132
    )Net cash used in investing activities
    
    
    (1,064
    )
    
    
    (117
    )
    
    
    (2,483
    )Cash flows from financing activities:Net borrowings on line of credit
    
    
    997
    
    
    
    1,060
    
    
    
    112Payment on 2helix notes related to acquisition
    
    
    
    
    
    
    (2,076
    )
    
    
    Other notes payable
    
    
    (57
    )
    
    
    72
    
    
    
    Proceeds from employee stock purchase plan and exercise of stock
options
    
    
    652
    
    
    
    87
    
    
    
    243Net proceeds from private financing transactions
    
    
    
    
    
    
    2,131
    
    
    
    Proceeds from exercise of stock warrants
    
    
    354
    
    
    
    
    
    
    
    Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    (48
    )Net proceeds from common stock issued in i3 Mobile transaction
    
    
    
    
    
    
    
    
    
    
    8,553Net cash provided by financing activities
    
    
    1,946
    
    
    
    1,274
    
    
    
    8,860Net increase (decrease) in cash and cash equivalents
    
    
    (1,678
    )
    
    
    (160
    )
    
    
    1,352Effect of exchange rate change on cash
    
    
    (59
    )
    
    
    (38
    )
    
    
    (41
    )Cash and cash equivalents at beginning of year
    
    
    2,683
    
    
    
    2,881
    
    
    
    1,570Cash and cash equivalents at end of year
    
    $
    946
    
    
    $
    2,683
    
    
    $
    2,881Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    222
    
    
    $
    57
    
    
    $
    38Cash paid during the period for income taxes
    
    $
    24
    
    
    $
    63
    
    
    $
    6Supplemental 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
    
    $
    
    
    
    $
    5,508
    
    
    $
    Return of common stock in connection with the 2helix re-negotiation
    
    $
    1,519
    
    
    $
    
    
    
    $
    2helix re-negotiation reduction of notes payable and accrued
interest
    
    $
    356
    
    
    $
    
    
    
    $
    
  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
  Impairment of Long-Lived Assets
  F-8




---



##### 



Inventories
  Property and equipment
  Income taxes
 Accounting for Income Taxes
 Reclassifications
  Fair value of financial instruments
  Foreign Currency
   Years ended June 30,2006
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    319
    
    
    $
    (6,462
    )
    
    $
    (5,898
    )Other comprehensive
income (loss) -
Foreign Currency
Translation
    
    
    (59
    )
    
    
    9
    
    
    
    (41
    )Total other
comprehensive
income (loss)
    
    $
    260
    
    
    $
    (6,453
    )
    
    $
    (5,939
    )
 F-9




---



##### 



Share Based Payments
       F-10




---



##### 



For the year
    
    
    For the yearJune 30,
    
    
    June 30,2005
    
    
    2004Net loss
    
    $
    (6,462
    )
    
    $
    (5,898
    )Add: Total stock-based compensation expense reported in net loss
    
    
    
    
    
    
    Deduct: Total stock-based compensation expense determined
under fair value based method for all awards*
    
    
    (1,227
    )
    
    
    (755
    )Pro forma net loss
    
    $
    (7,689
    )
    
    $
    (6,653
    )Earnings per shareBasic and diluted as reported
    
    $
    (0.44
    )
    
    $
    (0.49
    )Basic and diluted Pro forma
    
    $
    (0.53
    )
    
    $
    (0.55
    )Weighted average common shares outstanding:Basic
    
    
    14,555
    
    
    
    12,068Diluted
    
    
    14,555
    
    
    
    12,068
 
 *
    
    All awards refers to awards granted, modified or settled in fiscal periods beginning after
December 15, 1994  awards for which the fair value was required to be measured under Statement
123.  Recently Issued Accounting Pronouncements
  F-11




---



##### 



NOTE 3  ACCOUNTS RECEIVABLE
  June 30,2006
    
    
    2005Billed receivables
    
    $
    8,517
    
    
    $
    4,832Unbilled and other receivables
    
    
    2,697
    
    
    
    713Allowance for doubtful accounts
    
    
    (233
    )
    
    
    (89
    )$
    10,981
    
    
    $
    5,456
 Billed
  Unbilled
  Allowance for doubtful accounts
   NOTE 4  INVENTORIES
  June 30,2006
    
    
    2005Inventories
    
    $
    1,196
    
    
    $
    857Allowance for obsolescence
    
    
    (358
    )
    
    
    (325
    )$
    838
    
    
    $
    532
  F-12




---



##### 



NOTE 5  PROPERTY AND EQUIPMENT
  June 30,2006
    
    
    2005Computer equipment
    
    $
    5,272
    
    
    $
    4,913Lab test equipment
    
    
    137
    
    
    
    137Office equipment
    
    
    729
    
    
    
    729Leasehold improvements
    
    
    560
    
    
    
    560Vehicles
    
    
    49
    
    
    
    496,747
    
    
    
    6,388Less accumulated depreciation
    
    
    (5,960
    )
    
    
    (5,752
    )$
    787
    
    
    $
    636
  NOTE 6  BORROWINGS
 Line of Credit
   F-13




---



##### 



2helix Notes Payable
  NOTE 7  RETIREMENT PLANS
   NOTE 8  INCOME TAXES
  June 30,2006
    
    
    2005Tax assets:Allowance for doubtful accounts
    
    $
    88
    
    
    $
    34Inventories
    
    
    292
    
    
    
    279Accrued expenses
    
    
    381
    
    
    
    144Amortization
    
    
    2,377
    
    
    
    2,407Net operating loss carryforwards
    
    
    14,254
    
    
    
    13,392Tax credit carryforwards
    
    
    26
    
    
    
    26Other
    
    
    69
    
    
    
    3Gross deferred tax assets
    
    
    17,487
    
    
    
    16,285Tax liabilities:Income on contracts
    
    
    (1,023
    )
    
    
    (270
    )Depreciation
    
    
    (88
    )
    
    
    (88
    )Gross deferred tax liabilities
    
    
    (1,111
    )
    
    
    (358
    )Net deferred tax asset
    
    
    16,376
    
    
    
    15,927Valuation allowance
    
    
    (16,376
    )
    
    
    (15,927
    )Net deferred tax
    
    $
    
    
    
    $
    
 F-14




---



##### 



Years ended June 30,2006
    
    
    2005
    
    
    2004Income tax benefit at statutory rate
    
    $
    96
    
    
    $
    (2,197
    )
    
    $
    (2,005
    )State income taxes net of Federal benefit
    
    
    9
    
    
    
    (236
    )
    
    
    (233
    )Nondeductible expenses
    
    
    (102
    )
    
    
    56
    
    
    
    28Foreign taxes paid
    
    
    
    
    
    
    1
    
    
    
    5Impact of foreign operations
    
    
    (266
    )
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    43
    
    
    
    Adjustment to deferred tax assets
    
    
    (223
    )
    
    
    
    
    
    
    Valuation allowance
    
    
    449
    
    
    
    2,396
    
    
    
    2,211Actual (benefit) provision
    
    $
    (37
    )
    
    $
    63
    
    
    $
    6
 NOTE 9  STOCKHOLDERS EQUITY
 Employee Stock Purchase Plan
 F-15
       Issuance of Common Stock
     Issuance of Warrants
   Stock Repurchases
  F-16      Stock Options
 Amended and Restated Omnibus Stock Plan (Omnibus Plan)
     2000 Stock Option Plan for Directors (Directors Plan)
   F-17
      Omnibus Plan
    
    
    Directors Plan
    
    
    i3 MobileWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAvg.
    
    
    Number
    
    
    Avg.
    
    
    Number
    
    
    Avg.Number of
    
    
    Share
    
    
    of
    
    
    Share
    
    
    of
    
    
    ShareShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding Options at
June 30, 2003
    
    
    1,524,094
    
    
    $
    2.96
    
    
    
    75,000
    
    
    $
    6.25
    
    
    
    
    
    
    $
    Granted
    
    
    471,000
    
    
    
    2.60
    
    
    
    27,000
    
    
    
    2.72
    
    
    
    
    
    
    
    Exercised
    
    
    (139,905
    )
    
    
    1.37
    
    
    
    
    
    
    
    
    
    
    
    80,997
    
    
    
    24.76Expired
    
    
    (146,289
    )
    
    
    4.27
    
    
    
    (12,000
    )
    
    
    4.61
    
    
    
    (25,007
    )
    
    
    5.60Outstanding 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
    
    
    
    34.05Options
exercisable atJune 30, 2004
    
    
    825,036
    
    
    $
    3.40
    
    
    
    60,000
    
    
    $
    6.83
    
    
    
    55,990
    
    
    $
    33.32June 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
    
    
    $
    34.05Options available for granting
    
    
    895,282
    
    
    
    
    
    
    
    301,000
    
    
    
    
    
    
    
    
  Options Outstanding
    
    
    Options ExercisableWeighted-AverageNumber
    
    
    Remaining
    
    
    Weighted-
    
    
    Number
    
    
    Weighted-Range of
    
    Outstanding
    
    
    Contractual
    
    
    Average
    
    
    Exercisable
    
    
    AverageExercise Prices
    
    at June 30, 2006
    
    
    Life (yrs)
    
    
    Exercise Price
    
    
    at June 30, 2006
    
    
    Exercise Price$  0.00 - $    2.00
    
    
    805,138
    
    
    
    6.3
    
    
    $
    1.19
    
    
    
    557,638
    
    
    $
    1.37$  2.01 - $    4.00
    
    
    776,009
    
    
    
    6.5
    
    
    
    2.62
    
    
    
    722,011
    
    
    
    2.65$  4.01 - $    6.00
    
    
    69,966
    
    
    
    1.5
    
    
    
    5.00
    
    
    
    69,966
    
    
    
    5.00$  6.01 - $    8.00
    
    
    206,278
    
    
    
    2.5
    
    
    
    6.51
    
    
    
    206,278
    
    
    
    6.51$  8.01 - $  10.00
    
    
    2,500
    
    
    
    2.3
    
    
    
    8.50
    
    
    
    2,500
    
    
    
    8.50$10.01 -
$  15.00
    
    
    40,141
    
    
    
    1.6
    
    
    
    12.19
    
    
    
    40,141
    
    
    
    12.19$15.01 - $100.00
    
    
    27,665
    
    
    
    4.9
    
    
    
    49.80
    
    
    
    27,665
    
    
    
    49.801,927,697
    
    
    
    
    
    
    
    
    
    
    
    1,626,199
 F-18
      NOTE 10  MERGERS AND ACQUISITIONS
 Fiscal 2005
 Double Helix Solutions Limited
      F-19
      F-20
      Fiscal 2004
 Intasys
   In process research and development
    
    $
    1,160Contract rights and related technology
    
    
    972Property and equipment
    
    
    130$
    2,262
     i3 Mobile
 Business Combinations, Determining Whether a Non-monetary Transaction Involves Receipt of Productive Assets of a
Business.
  F-21
      NOTE 11  EARNINGS PER SHARE (in thousands, except per share amounts)
  Years ended June 30,2006
    
    
    2005
    
    
    2004Basic EPS:Net income (loss) (numerator):Net income (loss) available to common shareholders
    
    $
    319
    
    
    $
    (6,462
    )
    
    $
    (5,898
    )Shares (denominator):Weighted average common shares
    
    
    16,899
    
    
    
    14,555
    
    
    
    12,068Basic EPS
    
    $
    0.02
    
    
    $
    (0.44
    )
    
    $
    (0.49
    )Diluted EPS:Net income (loss)(numerator):Net income (loss) available to common shareholders
    
    $
    319
    
    
    $
    (6,462
    )
    
    $
    (5,898
    )Shares (denominator):Weighted average common shares
    
    
    16,899
    
    
    
    14,555
    
    
    
    12,068Stock options *
    
    
    400
    
    
    
    
    
    
    
    Restricted stock
    
    
    88
    
    
    
    
    
    
    
    Warrants
    
    
    55
    
    
    
    
    
    
    
    Total weighted shares and equivalents
    
    
    17,442
    
    
    
    14,555
    
    
    
    12,068Diluted EPS
    
    $
    0.02
    
    
    $
    (0.44
    )
    
    $
    (0.49
    )
 
 *
    
    Due to the loss incurred during the years ended June 30, 2005 and
2004, zero incremental shares related to stock options are included in the
calculation of Diluted EPS because the effect would be anti-dilutive. The total
number of potentially dilutive shares not included in the EPS calculation at
June 30, 2005 due to anti-dilution was 307,283.
 NOTE 12  COMMITMENTS AND CONTINGENCIES
   Year ending June 30,
    
    Amount2007
    
    $
    1,0652008
    
    
    9052009
    
    
    3912010
    
    
    672011
    
    
    1$
    2,429
  F-22
      NOTE 13  SEGMENT INFORMATION AND BUSINESS CONCENTRATION
  2006
    
    
    2005
    
    
    2004Revenue by TypeEnterprise
    
    $
    10,179
    
    
    $
    6,656
    
    
    $
    4,187Network Service Provider (NSP)
    
    
    10,069
    
    
    
    7,554
    
    
    
    7,092Operations Support Systems (OSS)
    
    
    6,423
    
    
    
    5,732
    
    
    
    2,358IT and Other
    
    
    
    
    
    
    19
    
    
    
    34Total Revenue
    
    $
    26,671
    
    
    $
    19,961
    
    
    $
    13,671Revenue by LocationU.S.
    
    $
    11,447
    
    
    $
    6,241
    
    
    $
    5,572Canada and Mexico
    
    
    1,226
    
    
    
    734
    
    
    
    501Asia
    
    
    3,054
    
    
    
    3,049
    
    
    
    1,392Europe
    
    
    7,049
    
    
    
    7,418
    
    
    
    3,217South America
    
    
    427
    
    
    
    38
    
    
    
    118Africa and Middle East
    
    
    3,468
    
    
    
    2,481
    
    
    
    2,871Total revenue
    
    $
    26,671
    
    
    $
    19,961
    
    
    $
    13,671
     June 30,2006
    
    2005
    
    2004North America:Total revenue
    
    $
    19,882
    
    
    $
    14,353
    
    
    $
    11,363Identifiable assets
    
    $
    14,169
    
    
    $
    10,733
    
    
    $
    8,256United Kingdom:Total revenue
    
    $
    5,447
    
    
    $
    4,694
    
    
    $
    1,724Identifiable assets
    
    $
    2,046
    
    
    $
    2,283
    
    
    $
    1,493Australia:Total revenue
    
    $
    1,342
    
    
    $
    914
    
    
    $
    584Identifiable assets
    
    $
    146
    
    
    $
    515
    
    
    $
    582
 F-23
      NOTE 14: SELECTED QUARTERLY FINANCIAL DATA
  Fiscal Three Months Ended2006
    
    
    2005June 30,
    
    
    March 31,
    
    
    Dec. 31,
    
    
    Sept. 30,
    
    
    June 30,
    
    
    March 31,
    
    
    Dec. 31,
    
    
    Sept. 30,2006
    
    
    2006
    
    
    2005
    
    
    2005
    
    
    2005
    
    
    2005
    
    
    2004
    
    
    2004(in thousands except per share data)Statement of Operations
Data:Revenue
    
    $
    6,545
    
    
    $
    6,703
    
    
    $
    6,737
    
    
    $
    6,686
    
    
    $
    6,765
    
    
    $
    3,760
    
    
    $
    4,778
    
    
    $
    4,661Gross profit
    
    
    3,481
    
    
    
    4,408
    
    
    
    4,636
    
    
    
    4,005
    
    
    
    3,926
    
    
    
    1,764
    
    
    
    2,806
    
    
    
    2,516Net income (loss)
    
    
    (492
    )
    
    
    365
    
    
    
    347
    
    
    
    99
    
    
    
    337
    
    
    
    (6,592
    )
    
    
    176
    
    
    
    (383
    )Net income (loss) per share:Basic
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    (0.47
    )
    
    $
    0.01
    
    
    $
    (0.03
    )Diluted
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    (0.47
    )
    
    $
    0.01
    
    
    $
    (0.03
    )
    F-24
      SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS (in thousands):
 RecoveriesBeginning
    
    Charged
    
    of Prior
    
    
    
    
    
    EndingDescription
    
    Balance
    
    to Expenses
    
    Write-offs
    
    Write-offs
    
    BalanceYear 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
    
    
    $
    
    
    
    $
    
    
    
    $
    15,927Year ended June 30, 2004:Allowance for doubtful accounts
    
    $
    218
    
    
    $
    538
    
    
    $
    28
    
    
    $
    249
    
    
    $
    535Reserve for obsolete inventory
    
    $
    194
    
    
    $
    155
    
    
    $
    
    
    
    $
    150
    
    
    $
    199Tax valuation allowance
    
    $
    9,898
    
    
    $
    3,928
    
    
    $
    
    
    
    $
    
    
    
    $
    13,826
 F-25