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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-K/A FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2004
 OR
 o
 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)
 Registrants telephone number, including area code: (301) 721-3000 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock
$.01 par value
(Title of class) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
YESþ                     NO o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2):
YES o
                    
NO þ As of December 31, 2003, the aggregate market value of the Common Stock held by
non-affiliates of the registrant [(i.e. persons who are not directors, officers
or affiliated therewith)] was approximately $26,727,101 million (10,777,057
shares of Common Stock at a closing price on the Nasdaq National Market of
$2.48 on such date). Outstanding as of December 31, 2003 were 13,719,191
shares of Common Stock. -1-




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ACE*COMM CorporationForm 10-K/AYear Ended June 30, 2004Explanatory Note This amendment reflects a few corrections made to
the Managements Discussion and Analysis section of the document to delete
some language left over from an older version of the report that should not have been included. No changes were made to the financial
portions of the document, including the financial statements and notes thereto. ACE*COMM CORPORATION
TABLE OF CONTENTS PAGEPART IItem 1.
    
    BUSINESS
    
    
    4Item 2.
    
    PROPERTIES
    
    
    20Item 3.
    
    LEGAL PROCEEDINGS
    
    
    20Item 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    20PART IIItem 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
    
    
    21Item 6.
    
    SELECTED FINANCIAL DATA
    
    
    22Item 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    24Item 7A.
    
    QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    31Item 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    32Item 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    32Item 9A.
    
    DISCLOSURE OF CONTROLS AND PROCEDURES
    
    
    32Item 9B.
    
    OTHER INFORMATION
    
    
    32PART IIIItem 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    32Item 11.
    
    EXECUTIVE COMPENSATION
    
    
    32Item 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
    
    
    33Item 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    33PART IVItem 15.
    
    EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
    
    
    33
 -2-




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INTRODUCTION ACE*COMM Corporation, incorporated in Maryland in 1983, and its wholly owned
subsidiaries, Solutions ACE*COMM Corporation, incorporated in Quebec in 1996,
ACE*COMM Solutions UK Limited, incorporated in the United Kingdom in 2003 and
ACE*COMM Solutions Australia Pty Limited, incorporated in Australia in 2004,
and i3 Mobile acquired in December 2003 are referred to in this document
collectively as ACE*COMM, unless otherwise noted or the context indicates
otherwise. ACE*COMMs fiscal year ends on June 30. Unless otherwise noted, all references
to years in this document are assumed to be fiscal years.The consolidated
financial statements include the accounts of ACE*COMM and its subsidiaries.
All significant inter-company balances and transactions have been eliminated in
consolidation. FORWARD LOOKING STATEMENTS This annual report on Form 10-K and the information incorporated by reference
in it include forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. We intend the forwarding-looking statements to be covered by the safe
harbor provisions for forward-looking statements in these sections. These
forward-looking statements relate to future events or the future financial
performance of ACE*COMM (as defined below), some or all of which may involve
risk and uncertainty. ACE*COMM often introduces a forward-looking statement by
such words as anticipate, plan, projects, continuing, ongoing,
expects, management (or ACE*COMM) believes, or intend. Investors should
not place undue reliance on these forward-looking statements, which involve
estimates, assumptions, risks and uncertainties that could cause actual results
to vary materially from those expressed in this Report or from those indicated
by one or more forward-looking statements. The forward-looking statements speak
only as of the date on which they were made, and ACE*COMM undertakes no
obligation to update any of the forward-looking statements. In evaluating
forward-looking statements, the risks and uncertainties investors should
specifically consider include, but are not limited to, demand levels in the
relevant markets for ACE*COMMs products, the ability of ACE*COMMs customers
to make timely payment for purchases of its products and services, the risk of
additional losses on accounts receivable, success in marketing ACE*COMMs
products and services internationally, the effectiveness of cost containment
strategies, as well as the various factors identified in this annual report on
Form 10-K which could cause actual results to differ materially from those
indicated by such forward-looking statements, including the matters set forth
in Business  Backlog, Business  Proprietary Rights and Licenses,
Selected Financial Data, Managements Discussion and Analysis of Financial
Condition and Results of Operations and Risk Factors Affecting Future
Operating Results. Investors should not place undue reliance on these
forward-looking statements. These forward-looking statements speak only as of
the date in which they are made, and ACE*COMM undertakes no obligation to
update any forward-looking statements. -3-




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PART I ITEM 1. BUSINESS General We are a provider of advanced operations support systems (OSS) solutions for
telecommunications (telecom) service providers and enterprises. Our solutions
are applicable to a range of networks, from legacy through next-generation,
that include wired, wireless ,voice, data, multi-media, and Internet
communications. These products and services include the analytical tools
required for customers to extract information from their own operating networks
- information customers can use for revenue assurance, to reduce costs, to
accelerate time-to-market for new services, and to provide more effective
customer care. As a result of the acquisition in February 2004 of certain
assets of Intasys, we now also offer interoperable wireless customer care and
billing and electronic payment solutions for operators in both developed and
emerging markets around the world. We market the Intasys customer care and
billing solutions and the ACE*COMM line of Convergent Mediation product lines
to telecommunications carriers and Internet communications service providers,
and the ACE*COMM NetPlus® Enterprise Operations Support System (or NetPlus®
EOSS) and other products primarily to large enterprises. We believe that as telecommunications carriers and service providers focus on
improving their financial position, enhancing profitability, increasing
operational efficiencies, and adding new services to increase revenues, they
will require more use of the network and infrastructure and generate more usage
data for billing and accounting functions. Wireless operators are launching new
data networks in which content plays a major role. Data traffic is growing,
and we believe products designed to enable network users to make use of the
data they generate will becoming increasingly useful. OSS solutions, such as
our customer care, billing, and mediation systems, can be increasingly
important for operators. In the enterprise sector, an increased focus on
telecom cost management has created opportunities for telemanagement solutions
such as the ACE*COMM NetPlus® line of products. Over the past few years, the decline in the telecommunications and Internet
communications industries has caused a significant reduction in spending by
service providers in these industries. This has resulted in a significant
reduction in our revenues, from U.S., Canadian, and European customers in
particular. We responded to this industry decline in demand by reducing its
overhead and other costs, and conserving cash resources. In 2004, we perceived
the first increase in demand from service providers in over three years.
Demand from enterprise users is still being adversely affected by industry
conditions, and we cannot predict when the demand from this sector will have
the long-awaited improvement that we still expect to occur. Our management
believes that if and when the long anticipated upturn in the telecom industry
does occur, it will provide significant opportunities for companies in the OSS
market space, particularly in North America, and that OSS solutions will become
important to the telecom recovery as they are used to increase revenue, reduce
operating expenses, conserve capital, and promote customer stability. Over the past year, we saw potential in the telecommunications market to
acquire additional technologies to complement our core solutions, build our
product and service offerings and give us greater access to potential new
markets. A first step in this growth strategy was the completion of the
acquisition in December 2004 of the cash and other assets of i3 Mobile, Inc., a
mobile communications services firm that had ceased operation. Completion of
this first transaction gave us the liquidity need to broaden our product
offerings and expanding our geographic presence through acquisition and
consolidation. The next step in our growth strategy was to add key customer care and billing
capabilities to our OSS solutions product line. This was achieved through the
acquisition of certain assets of Intasys of Montreal, Canada. Management
believes that this acquisition strengthens our position in the wireless mobile
market sector.Intasys had been providing OSS products and services to the
communications industry for more than 10 years, accumulating a base of 35
implementations in five countries. These OSS products are comprised of billing, customer care, and electronic bill
presentment and payment solutions that were specifically designed for the
Tier-2 and Tier-3 wireless network service provider. They integrate all of the
operational functions required to effectively manage wireless communications
operations, including rating and discounting, billing, customer care, stock
management, payments, and reporting. They have been deployed around the -4-




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world in both developed and developing countries, and offer comprehensive
wireless billing and customer care capabilities in a small but sophisticated
package that is easy to install and operate. The Intasys solutions for
wireless carriers are complementary to our existing convergent mediation
offerings, and provide potential for growth in both the wireline and wireless
markets. In addition to offering the Intasys product line as a complement to
our existing line of products, we plan to integrate the subscriber-centric
technologies into our other products to create a more complete OSS solution
that targets Tier 2 and Tier 3 telecommunications service providers worldwide. We have been focusing over the last four years on non-domestic customers, and
have experienced an increase in revenue from outside of North America, although
the increase has not been sufficient to offset the decline in revenues from the
North American market. In fiscal year 2004, 56% of our revenues were derived
from outside of North America. During the past fiscal year we added new
customers and expanded to new geographical areas. In the carrier and service
provider marketplace we secured the following new business:  
    
    a broadband data mediation project for VSNL - a leading Indian
carrier with growing broadband service offerings;  
    
    a project to provide a complete customer care, billing, and mediation
solution to the Bahamas Telecommunications Company  a mobile carrier
with a new, next-generation GSM network - in partnership with Sentori
Inc;  
    
    a network data collection project for Kunming Tel in Kunming City -
the capital city and largest metropolitan area in Yunnan Province; and  
    
    a country-wide mediation project with Giza Systems for Telecom Egypt. The Giza Systems project spans all of Egypt, includes data collection hardware,
software and services for over 400 network elements, and could result in
revenues in the millions of US dollars over its lifespan. Management believes
this to be the largest mediation contract awarded in the telecom sector in the
past two years. In the enterprise arena, despite continuing poor demand, we expanded our
vertical market capabilities with a NetPlus® EOSS installation contract for the
Chicago Board of Trade to manage elements of the Chicago exchanges voice
digital and analog telecommunications network. We added new government agency
customers, including the State of Nevada Department of Information Technology;
the Federal Aviation Administration (FAA), and Fairfax County in Virginia,
which purchased our NetPlus® solutions products. Products and Services Solutions for telecommunications carriers and Internet service providers We offer a robust and award-winning suite of OSS solutions backed by
significant technological expertise. For voice, data, fixed and mobile
networks, we provide an interoperable suite of offerings that can help
customers lower their operating costs, expedite time-to-market for new
services, assure revenues, provide optimized billing, and improve performance
metrics. These include: Convergent Mediation For telecommunications and Internet service providers worldwide, we offer
product-based solutions for the collection, management, and distribution of
network usage data. These solutions enable service providers to collect,
manage, and process call data from a wide range of sources, including
next-generation and other data networks, wireless and radio networks, and
traditional voice switches. IP Mediation Our mediation software plays a key role in IP networks. It accepts data from
various network elements (e.g., softswitches, media servers, signaling
gateways, service development platforms), and transforms it into
industry-standard billing data structures that can be used by virtually any
billing system, including a service providers legacy voice billing system. -5-




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Billing Mediation As part of our line of Convergent Mediation solutions, our billing mediation
products encompass a full range of functions and technologies from capture and
collection, through to data management and presentation. These solutions
provide complete OSS vendor independence by creating a layer of abstraction
between the network elements and the billing system. Revenue Assurance Real-time and near real-time data analysis capabilities enable immediate
detection, notification, and correction of identified problems. This provides
customers with the capability of generating a reliable and immediate audit
trail. The rapid data analysis also enables our customers to perform service
pricing and costing, and provides other revenue assurance benefits related to
data repair and correction, inter-carrier accounting and performance
management. Performance Management Performance management with our solutions includes both the technical
functioning of the network and its commercial performance, provides key
information on the level of revenue generated, how it is generated, how much is
lost to leaks, and the value added (or lost) through partner agreements. Churn-risk Management The ACE*COMM N*Score product enables service providers to rank their customers
according to a user-specified scoring system. N*Score cross-references known
customer turnover-risk (churn) factors against customers actual usage patterns
and uses that information to identify and rank high-risk customers. The
information generated by N*Score gives service providers and other customers
more information about the risk of losing particular customers, permitting
them to correct customer services or others issues before their client decides
to terminate service. Data Collection Our data collection solutions support usage-sensitive billing with flexible,
configurable, efficient, and reliable collection from virtually any type of
network element. They include several inter-related technologies that can be
used together or as stand-alone installations, depending on a customers
network and data collection needs. Rating N*Rate is the rating module for our Convergent Mediation solutions. It applies
either a cost or a price to each record being processed, based on rate/cost
tables. Rating can be by origin, destination or other parameters, and can
enable functions such as wholesale billing, while costing enables functions
such as least-cost-routing analysis or intercarrier invoice reconciliation and
validation. Wireless / Subscriber Billing Our billing solution, JBill, is specifically designed to meet the billing and
customer care business needs of the fast-growing wireless Tier 2 and Tier 3
network operator and service provider markets. JBill integrates all the billing
and accounting functions required to effectively manage wireless communications
operations. Electronic Bill Payment & Presentment (EBPP) Our EBPP solution, ViewBill, is a comprehensive multilevel product for managing
billing accounts. It can improve interactive self-care by managing complex
corporate bills, as well as dealers and resellers. ViewBill provides service
providers direct control over a full range of account-related tasks to perform
functions that might otherwise go through a call center, retail outlet or other
distribution channel. Provisioning Gateway Our Provisioning Gateway (APG) is a service activation gateway that activates
and manages subscribers and their services on a network. APG supports multiple
service providers sharing one network, and interfaces can be adapted or created
for any type of network element. IP Centrex and billing system Our TREX*COMM® collection solution creates an IP Centrex and billing system by
processing data from soft switches. -6-




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Geographic markets We market and sell OSS solutions into the geographic regions described below. Canada & U.S. Our corporate headquarters are located in Gaithersburg, Maryland, close to the
District of Columbia, and we operate a development office in Montreal, Canada.
North American customers include Level 3 Communications, Birch Telecom, Nextel,
and TelCove. Latin America We have maintained a strong presence in Latin America for more than ten years
and have completed hundreds of installations throughout the region. Through
partner relationships, support offices in Mexico, Guatemala, and Colombia
provide customers with local support in their native language. Our customers
include Telmex, IUSACELL, CODETEL, and Telefonica Moviles Mexico. Europe We have established a European customer-base through OEM relationships with
industry leading equipment manufacturers such as Siemens AG, Alcatel, and
Marconi. We are working with Northrop Grumman (formerly TRW Inc.) and British
Telecom (BT) to provide the call event-processing component of the UKs Airwave
mmO2 Public Safety Radio Communications project. Most recently, we have added a
development and support office in Edinburgh, Scotland, as a result of our
acquisition of Intasys. Middle East and Africa Since 1995, we have maintained a presence in the Middle East and Africa through
regional partnerships with companies like Giza Systems Engineering, Fujitsu
Siemens, MOSECO Jordan, and ACT. Our systems are installed in various locations
in Morocco, Egypt, Qatar, Kuwait, Saudi Arabia, and the Palestinian
Territories. Asia Pacific With over ten years of experience in the region, we have developed a base of
customer and partner relationships in Asia-Pacific. We are extending our
initial focus on the traditional switching sector to address the needs of
complex IP and next-generation mediation technologies, as well as mobile
customer care and billing technologies. Our systems are installed in Australia,
China, Singapore, the Philippines, Japan, Australia, Taiwan, Indonesia,
Malaysia, Korea, and Bhutan. ACE*COMM maintains an office in Shanghai with a
staff focused on business development activities in China. Most recently, we
have added a sales, support, and development office in Bundall, Australia,
through our Intasys acquisition, to focus on sales and customer maintenance for
the Asia-Pacific region. Solutions for large enterprises We offer network telecommunications management (telemanagement) products and
services to large enterprises, which include government agencies, military
organizations, educational institutions and Fortune 1000 size organizations.
Our principal product for these customers is the NetPlus® Enterprise Operations
Support System (EOSS). It can be used on multi-vendor/multi-protocol voice,
data, and video networks, and is scalable to accommodate numerous network sizes
and locations. NetPlus® enables enterprises to improve service and control
costs by managing various aspects of their networks, including alarm and fault
resolution, cabling and facilities management, convergent billing, charge back
billing, cost control and recovery of lost data. NetPlus® also provides
enterprise customers with the ability to automate maintenance of their networks
by providing automated work orders and trouble tickets, and to manage their
inventory and switching equipment configuration. -7-




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Our newest version of the product, NetPlus® 6 EOSS, features a platform based
on the n-tiered Java 2 Enterprise Edition (J2EE) architecture, which is an
architecture that represents the combined expertise of a collaborative industry
effort and
has wide industry support from key middleware vendors. This version represents
an improvement in flexibility, extensibility, and mobility over present-day
systems. The new versions browser-based interface is expected to eliminate
the need for time-consuming client installation and upgrades, and includes a
configurable Workflow Engine that enables information technology (IT)
departments to further automate labor and paper-intensive processes for
improved network operating efficiency and data accuracy. Target market segments ACE*COMM markets and sells NetPlus® into the following vertical markets: Federal government agencies and military installations We design large scale, secure, high-availability network management systems for
Federal government agencies at installations in the U.S. and abroad. State and local governments ACE*COMMs NetPlus® EOSS provides state governments with the platform required
to monitor and manage all aspects of their networks, enabling them to automate
telecommunications functions, control costs and appropriately allocate those
costs among state agencies. Financial services ACE*COMMs NetPlus® EOSS offers our financial services customers a fully
integrated network communications management system that covers the many
software and services needs of todays financial services institutions for
fault, configuration, accounting, performance, and security management. Airports and transportation Airports and other public transportation authorities must address the
communications service needs of their tenants. ACE*COMMs NetPlus® utilizes a
centralized database that provides our customers comprehensive network
monitoring, carrier bill reconciliation, and subscriber billing that are fast,
accurate, and automatic. Educational institutions Colleges and universities face challenges when addressing the diverse
communications needs of a large academic organization. ACE*COMMs NetPlus®
provides educational institutions with the tools necessary to effectively
manage network performance while customizing services and information provided
to individual departments and organizations. Public utilities The recent changes in the regulatory environment have forced public
utilities to focus on cost management and to be more competitive with other
suppliers. Public utilities now have a requirement to reduce overall network
communications management costs and improve service levels to customers.
ACE*COMMs NetPlus® provides these tools, including traffic engineering and
analysis tools for ACD trunks. Large enterprises (Fortune 1000) The business of enterprise network communications management continues to
evolve rapidly. Not only has the technology advanced, but the scope of this set
of management functions has also expanded. As a result, todays large
enterprise network and IT managers face many complex challenges in defining the
role of network communications and -8-




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IT management, and in establishing systems
that work together to realize their full potential. NetPlus® provides these
organizations with the ability to manage communications and IT systems from an
enterprise-wide OSS. Core capabilities ACE*COMMs NetPlus® has the capability to resolve problems associated with
technology convergence, implementing new types of network services, managing
mergers and acquisitions, and the increasing demand for more equitable and
accurate methods for chargeback of IT and communications. Our network communications management products provide enterprise customers
with the following range of capabilities: Fault management A software product that allows network managers on a near real-time basis to
detect faults, determine their origins and perform fault correction. Configuration management A software product that provides subscriber, connectivity, and equipment
administration functions to track and report information on a network-wide
basis. Accounting management System functions that collect, store, process, rate and verify billing and
accounting data. Performance management System functions that aggregate and analyze network performance, call data and
configuration data to provide network managers an overall performance model of
their network and operations. Security management A multi-level, layered system that provides security functions at various
levels within the network, including those within the operating system and
database. Directory management An application that provides personnel, departmental and classified directory
listings in organizational or alphabetical formats. Product BackplaneTM A software system that essentially provides the common backbone to all NetPlus®
applications. Product Backplane is based on an Oracle® database, client/server
distributed processing, Web-based User Interface (WUI), and Graphical User
Interface (GUI) presentation, which operates for a single module or multiple
functional system and allows users to implement only the modules they need. Network management applications Infrastructure software that provides high-performance, low-cost,
small-footprint applications for managing network element performance. -9-




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Workflow engine A task-based management and advanced work order processing tool with business
rule and process definition for improved productivity and data accuracy. Invoice Management NetPlus® offers detail, summary, and historical reports for all account
transactions and saves invoice, payment and charge information for transfer to
a general ledger system. Flex-eBill Invoicing An applications that allows for the specifying of different invoice
configurations and arrangements for different customers. It provides a simple
interface for customizing the look of invoices and creating carrier-grade
graphic invoices. SLA Engine A flexible Service Level Agreement (SLA) Engine used to define, monitor, and
enforce specific models and policies for service levels between the enterprise,
its telecommunications service providers, and its customers. Automated Switch/Server Interface (ASI) Automated switch and server provisioning is provided through the NetPlus®
Automated Switch/Server Interface (ASI). ASI updates network device records as
work orders are processed by talking to the device and configuring it
according to the work order request. Cost Management A suite of functions aimed at controlling costs, which includes automatic
validation and reconciliation of communications vendor billing, the virtual
elimination of lost billing data, the elimination of recovery expenses from bad
or missing data, and the optimization of usage of bandwidth and facilities. Professional Services and Support Our services are generally delivered in conjunction with our network management
products. Our professional service team assists customers in implementing its
products, educates users, and provides maintenance and technical support.
Implementation services include identification of technical requirements,
solution design, product testing, and installation and integration. Our systems
integration partners often provide additional expertise on international
contracts and orders. We provide comprehensive educational courses to its
customers, alliance partners, and employees so they can acquire the knowledge
and skills necessary to deploy, use and maintain our solutions. ACE*COMM also
offers train-the-trainer programs that enable its customers to conduct their
own internal end-user training. Our maintenance and technical support services
include help desk support, problem resolution, software maintenance and
scheduled software upgrades. We provide technical support for its products
from its Gaithersburg, Maryland headquarters and utilizes the Web, telephone,
electronic mail and, if necessary, on-site assistance to respond to and resolve
our customers technical questions. International customers are supported
either directly by ACE*COMM or by third-party vendors trained by ACE*COMM. We believe that a high level of customer support is critical to our continuing
success in developing relationships with end users and its strategic partners. Quality -10-




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ACE*COMM maintains an ISO 9001 standard Quality Management Program to monitor
the quality of its products and has an internal Quality Management Committee
to set quality objectives for ACE*COMM and a Quality Assurance Department to
implement and monitor compliance with the applicable procedures. Sales and Marketing We market and sell productbased network communications and data management
solutions directly through our sales force. ACE*COMM concentrates its sales
efforts on a range of service providers, from small start-ups to large
established communication providers that offer voice and data services,
including Internet-based services. We complement our direct sales with
indirect sales through our strategic alliances with operators, original
equipment manufacturers (OEMs), and resellers. These alliance partners give our
direct sales force a global reach and provide significant leads and referrals.
We believe that alliances with companies that are well known in the industry
lend credibility and help to gain additional market acceptance for ACE*COMM
products. We also team with or serve as the prime contractor on larger opportunities that
require fully integrated solutions from more than one provider. All forms of
sales generally require the efforts of an ACE*COMM sales representative.
During 2004, we increased our sales personnel and geographic coverage by hiring
additional sales personnel and through the acquisition of Intasys customers and
sales personnel. Over the past two years, we have derived greater than one half of its revenues
from products delivered or services performed outside of the United States
consistent with our focus on sales opportunities outside of North America.
Products delivered or services performed outside of the United States
represented approximately 59 percent, 56 percent and 45 percent of total
revenues in fiscal years 2004, 2003, and 2002, respectively. See Note 15 of
the Notes to Financial Statements for a summary of our revenue by geographic
area. Revenue for a given period typically reflects products delivered or services
performed during the period with respect to relatively large financial
commitments from a small number of customers. During 2004, we had 12 major
customers, which we define as customers generating $250,000 or more in revenues
during the period; and together the major customers represented approximately
64% of total revenues. Giza/Telecom Egypt Project represented approximately
20% of total revenues, Siemens AG represented approximately 8% of our total
revenues, and Northrop Grumman contributed approximately 6% of total revenues.
During 2003, we had 12 major customers representing 76% of total revenues.
Siemens AG represented approximately 20% of our total revenues and Northrop
Grumman contributed 10% of total revenues earned during 2003. During 2002, we
had 20 major customers representing 86% of total revenues. The average revenues
earned per major customer were $0.7 million in 2004, $0.9 million in 2003 and
$0.8 million in 2002. The sales process for new contracts or orders generally requires a significant
investment of time and money and takes from several months to several years.
This process involves senior executives, sales representatives and support
personnel, and typically requires presentations, demonstrations, field trials,
and lengthy negotiations. We spend significant time consulting with strategic
partners and end users to adapt our products to meet end user requirements and
to determine their evolving requirements for updates and enhancements. Strategic Alliances To assist in developing, marketing, and distributing its products effectively
and as part of our marketing efforts, we have established strategic alliances
with several large organizations: telecommunication and Internet equipment
manufacturers, computer equipment manufacturers, telecom systems integrators,
and other organizations. Each alliance is designed to accomplish one or more
of the following: develop products designed to meet the needs of the alliance
partner or its customers, establish a joint marketing relationship to include
our products in systems sold by the partner, create a reseller channel for our
products, or jointly provide customer support to end users. These strategic
alliances enable us to leverage relationships within the industry to enhance
our market development. -11-




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Each alliance typically involves a formal agreement between ACE*COMM and a
strategic alliance partner, pursuant to which the parties agree that ACE*COMM
will develop and sell products for use by the partner, or by its customers who
are in such cases the end users of our products. Each agreement specifies the
terms of the alliance, which may include off-the-shelf products and/or
parameters for product development and product specifications, product pricing,
the terms of intellectual property ownership, and the responsibilities of each
partner for system integration, proposal drafting, sales and marketing. Once
the products are developed, the strategic alliance partner will issue specific
orders to us from time to time to purchase products, subject to the terms of
the overall agreement. The products are generally purchased and
paid for by the partner for resale to its customers directly or as part of a
larger system installation. Sales to a strategic alliance partner may vary
from period to period, depending on the timing of orders, which in turn may
depend on a number of factors, including the completion of our product
development, the partners marketing and sales efforts to its customers, the
timing of orders from the partners customers, and various internal financial,
strategic and other factors specific to a partner or any of its customers.
Accordingly, sales to a partner in one period are not necessarily predictive of
sales to the partner in future periods. We classify our alliances into OEM and Reseller/SI (systems integrator)
categories. The following is a list of our current significant strategic
alliances: OEM Strategic alliance partners in this category encompass original equipment
manufacturers that embed our technologies into their solutions for end-users. Compagnie Financiere Alcatel(Alcatel) Our Convergent Mediation
solutions collect usage information from specific Alcatel switches owned and
operated by carriers, providing the billing information carriers need. In 2003,
ACE*COMM became an Alcatel Connected Partner for the provision of mediation
technology to enable usage-sensitive billing for service providers who operate
X.25, frame relay, ATM, and VoIP networks. Cisco Systems, Inc. we have developed the Cisco Billing and Measurement
Server, or BAMS, based on its Convergent Mediation products. BAMS is a
software application platform designed to co-exist within the framework of the
Cisco products VSC3000, SC2200, and other applications where the VSC core
software application is utilized. Zhone Technologies, Inc. (formerly Gluon Networks, Inc). We provide our
Convergent Mediation technology for embedding into Zhones CLX local switching
solution for telecom service providers. Marconi
Corporation, PLC We provide Convergent
MediationTM solutions
that work in conjunction with Marconis ServiceOn Management® suite of
products. Motorola, Inc. We provide Convergent Mediation solutions, integrated
into the Mobile Data Gateway switch, that collect and format call detail
records for electronic transmission to a billing center. Resellers & Systems Integrators Strategic alliance partners in this category encompass leading hardware and
software vendors or integrators who are resellers for our products. General Dynamics Corporation As a General Dynamics subcontractor for
network management products, we install and support NetPlus® at multiple
military facilities. Giza Systems We provide our mediation and OSS solutions to Gizas
customers such as Telecom Egypt. Giza Systems is a leading integrator in the
Middle East region representing world leaders in areas such as: networking,
telecommunications, telemedicine, and video conferencing. Huawei Technologies- We provide our solutions to Huawei to address
customers OSS requirements. Huawei Technologies is a Chinese high-tech
enterprise which specializes in research and development (R&D), production and -12-




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##### 



marketing of communications equipment, providing customized network solutions
for telecom carriers in optical, fixed, mobile and data communications
networks. MOSECO Jordan Our alliance agreement with MOSECO Jordan covers sales and
support activities to address the operations support systems requirements of
the Middle East regions communications service providers. NetSource America Inc. we have signed NetSource as a reseller to offer
NetPlus® as part of its suite of software solutions and outsourced services
focused on managing communications and IT infrastructures to large enterprises
in the Midwest. Northrop Grumman Corporation (formerly TRW, Inc). We provide subcontract
services for its Convergent Mediation platform to Northrop Grumman for the
real-time usage data management, warehousing and analysis requirements of a
digital radio service in the United Kingdom. Science Applications International Corporation, or SAIC We provide
mediation expertise to SAICs broad consulting experience to supply
comprehensive mediation solutions to large carriers  particularly in the
wireless sector. Siemens AG We sell our Enterprise telemanagement operations support and
Convergent Mediation solutions outside the United States through Siemens AG,
who serves as a prime contractor. Unisys Corporation We have an arrangement with Unisys to collectively
design and deploy NetPlus® as part of an overall Unisys offering to state
government customers. Zoom Networks- We provide Convergent Mediation solutions for bundling
into comprehensive offerings for Zooms customers, who are primarily in the
Chinese wireless and next-generation networks market sectors. ZTE Corporation- We provide our solutions to ZTE to address customers
OSS requirements. ZTE Corporation is Chinas largest listed telecommunications
equipment provider specializing in offering customized network solutions for
telecom carriers worldwide. Technology Partners Alliances in this category encompass leading hardware or software vendors whose
products may either be integrated with ACE*COMM solutions to provide additional
value to our customers, or for whom We provide a third party solution to
enhance and extend the functionality of their products to address customer
requirements. Avaya- We are a DeveloperConnection (DevConnect) Program member. Our
NetPlus® EOSS communications management system is interoperable with Avayas
platforms. Business Objects- ACE*COMM solutions work with Business Objects. Business
Objects solutions transform corporate data into a valuable resource that
employees, partners, and customer can access, report, and share. The result is
enhanced productivity and improved decision-making capabilities. Computer Associates- ACE*COMM solutions work with CleverPath Forest &
Trees (formerly known as Forest & Trees)  a rapid and visual application
development environment for creating dynamic, web-based business intelligence
applications. Halcyon- ACE*COMM solutions work with the Halcyon Sun Management Center.
The Sun Management Center agent comes directly from Sun Microsystems, and is a
superior agent for monitoring and managing Sun hardware, from the Ultra-5 to
the Sun Fire 15K. Nortel Networks- We are a Nortel Networks Developer Program member. The
Nortel Networks Developer program is designed to meet the needs of Nortel
Networks customers worldwide by creating relationships with innovative
companies whose products and solutions complement Nortel Networks
communications platforms. -13-




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Oracle ®- We are an Oracle® Partner Program (OPP) member and provides
proprietary solutions for integration with Oracle ® software. Remedy- We are a Remedy Alliance Advantage partner and provides
third-party solutions that can be integrated with Remedy products to enhance
and extend their capabilities. Sun Microsystems- We are a Sun Microsystems iForce Partner. Suns iForce
Initiative brings together Sun and its best of breed partners worldwide to
deliver proven solutions that reduce cost and time to market. Veritas- ACE*COMM solutions work with Veritas Data Protection and High
Availability products. Vertel- ACE*COMM
solutions work with Vertels M*Ware(TM) development
platform. M*Ware is a standards-based product specialized to enable rapid
development of multi-protocol network applications. Industry Affiliations: We seek to stay at the forefront of rapidly evolving technologies, and to
better serve our customers by participating in the collective efforts of
influential industry associations and forums, and the markets they support.
Our industry affiliations include: ACUTA - the Association for Telecommunications Professionals in
Higher Education, is an international non-profit educational association
serving colleges and universities. ACUTAs Corporate Affiliate members
represent all categories of telecommunications vendors who serve the
college/university market. AeA- (formerly the American Electronics Association), the nations
largest high-tech trade association, is the accepted voice of the U.S.
high-tech industry that offers solutions for improving members competitiveness
and bottom-line results by offering management development programs, executive
networking, public policy leadership and other valuable services. AFCEA  we are a corporate associate member of the Armed Forces
Communications and Electronics Association (AFCEA). AFCEA is a non-profit
international association that serves as a bridge between government
requirements and industry capabilities, representing the top government,
industry, and military professionals in the fields of information technology,
communications, and intelligence. GSA - is a centralized federal procurement and property management
agency created by Congress to improve government efficiency and help federal
agencies better serve the public. It acquires, on behalf of federal agencies,
office space, equipment, telecommunications, information technology, supplies,
and services. INAAU- The International Alliance of Avaya Users mission is the
user group for customers of Avaya, Inc. products and services. ACE*COMM
influences product, service, and policy direction for the benefit of the
membership, and shares value-added global business communications solutions
with the membership through open communications forums. IPDR.org - is an open consortium of leading service providers,
equipment vendors, system integrators, and billing and mediation vendors
collaborating to facilitate the exchange of usage and control data between
network and hosting elements and operations and business support systems by
deployment of IPDR standards. ISO- The International Organization for Standardization (ISO) is a
worldwide federation of national standards bodies from some 130 countries whose
mission is to promote the development of standardization and related activities
in the world with a view to facilitating the international exchange of goods
and services, and to developing cooperation in the spheres of intellectual,
scientific, technological and economic activity. -14-




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Just-US - is an independent, not-for-profit association of Siemens
Enterprise Networks Users established to assist telecommunications and data
networking professionals navigate the maze of new technologies through access
to a users network of experience and influence. NASTD - the Association for Telecommunications Professionals in
State Government, is a member-driven organization whose purpose is to advance
and promote the effective use of telecommunications technology and services to
improve the operation of state government. SIP Center - is a portal for the commercial development of SIP
software. The Session Initiation Protocol (SIP) is a signaling protocol used
for establishing sessions in an IP network. TIA - is a full-service national trade organization with membership
of 900 large and small companies that provide communications and information
technology products, materials, systems, distribution services and professional
services in the United States and around the world. USTA - is the premier trade association representing service
providers and suppliers for the telecom industry. USTAs 1,200 member companies
offer a wide range of services, including local exchange, long distance,
wireless, Internet and cable television service. Backlog We define backlog as signed contracts or purchase orders for delivery of our
products generally within the next year. Our backlog at June 30, 2004, 2003,
and 2002 equaled approximately $12.1 million, $4.3 million and $4.9 million,
respectively. We have experienced fluctuations in our backlog at various
times. We anticipate that $9.3 million of the backlog at June 30, 2004, will
be shipped during fiscal 2005. Although we believe that our entire backlog
consists of firm orders, our backlog as of any particular date may not be
indicative of actual revenue for any future period because of the possibility
of customer changes in delivery schedules and delays inherent in the delivery
of complex systems. Backlog, as defined, does not include contracts that
require the further issuance of purchase orders. Our contracts are large and technically complicated and require a significant
commitment of management and financial resources from its customers. The
development of a contract is typically a lengthy process because it must
address a customers specific technical requirements and often requires
internal approvals that involve substantial lead-time. Accordingly, we may
experience significant variations in revenue from quarter to quarter, as a
result of delays in contract signing or contract order deliveries. In
addition, contracts that involve software deliveries may involve customization
of the product to specific customer requirements, which can delay final
delivery of the order. No assurance can be given that current backlog will
necessarily lead to revenue in any specific future period. Competition Competition in the markets for ACE*COMM products is driven by rapidly changing
technologies, evolving industry standards, frequent product introductions and
enhancements, and rapid changes in customer requirements. To maintain and
improve our competitive position, we must continue to develop and introduce
value-added, timely and cost-effective new products, features and services that
keep pace with technological developments and emerging industry standards. In
addition, we must consistently address the increasingly sophisticated needs of
our customers. We expect continued intense competition in the
telecommunications, Internet service provider and enterprise network markets. We believe that the principal competitive factors in these markets include:
product performance that meets customer expectations, specialized project
management capabilities, in-house technical expertise, compliance with industry
quality standards, in-house customer support, product features that include
adaptability, scalability and flexibility, the ability to integrate with other
products, adjustable functionality and ease-of-use, product reputation,
responsiveness to customer needs, and timeliness of implementation. To remain
competitive, we will have to respond promptly and effectively to the challenges
of each technological change within our industry, as well as to our
competitors innovations. In the telecommunications and Internet service provider markets, our current
and prospective competitors include: -15-




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
    
    large service providers who develop full-system products internally,
tailored to their particular specifications,  
    
    other companies, such as Comptel Corporation and Narus, Inc., that
can provide data collection, mediation components, and data storage
capabilities,  
    
    vendors that supply more inclusive products, such as Intec, 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 supply product components, such as Ericcson-Hewlett-Packard and Fujitsu,  
    
    companies that provide billing and customer care applications, such
as Amdocs Limited, Convergys, Martin-Dawes, UshaComm and Portal
Software, Inc., and  
    
    companies that develop custom solutions, such as EDS Inc. and
Computer Sciences Corporation. ACE*COMM generally ranks its competition in the overall mediation market into
the following three segments: single system mediation that is IP-focused,
complex mediation that is circuit-switched and packet-capable, and complex
mediation with other OSS functionality. Regarding the first of the three
market segments, single system mediation that is
IP-focused, we believe our
products demonstrate distinct advantages to the single-system, IP-focused
service provider, as our products can expand to fulfill wider system needs.
Regarding the second of the three segments, complex mediation that is
circuit-switched and packet-capable, we believe our advantages are derived
from our considerable experience in and ability to handle multiple protocol
system deployments. We believe it stands up well against other vendors in the
third, complex mediation with other OSS functionalitysegment. The competing
vendors in this segment are those with close ties to large switch or OSS
vendors. We believe that we match these competitors feature-for-feature, and
also offer switch/OSS vendor independence. In terms of the Intasys customer care and billing products, we believe its
competitive advantage is derived from its bundled approach which requires
very little systems integration, its provisioning and serial tracking
capabilities, its longstanding relationship with Vodafone UK, and its focus on
mobile technologies. In the enterprise network market, our current and prospective competitors
include:  
    
    companies that provide products for telephony networks, such as
Paetec Communications, Inc., Peregrine Systems, Inc., Stonehouse
Technologies, Inc., and Veramark Technologies, Inc.,  
    
    companies that provide products for data networks, such as Remedy
Corp. and Computer Associates International, Inc., and  
    
    system integrators such as Accenture, Cap Gemini Ernst & Young and
KPMG. Our NetPlus® EOSS, like all OSS solutions, can be considered high-priced when
compared to conventional element and network management systems. However, we
believe that pricing can be misleading since an effective OSS has the potential
to radically improve IT effectiveness and efficiency. We believe that the
competitive advantages of the NetPlus® solution lie in its ability to improve
IT operations, achieve significant cost savings by identifying excessive usage
patterns or incorrect billing; provide a bridge between older PBX based voice
equipment and newer VoIP based systems, and provide a significant amount of
customization support to enable NetPlus® to interface to existing management
and network infrastructure. We also provide highly integrated capabilities
across the FCAPS (fault, configuration, accounting, performance, and security
management) functionality mapping, but does so from an -16-




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enterprise perspective.
Consequently, we believe that NetPlus® defines what is essentially a new
market: Enterprise OSS. We believe that our ability to compete in our markets depends in part on a
number of competitive factors outside our control, including the ability of
others to develop technology that is competitive with our products, the price
at which competitors offer comparable products and services, the extent of
competitors responsiveness to customer needs, and the ability of our
competitors to hire, retain and motivate key personnel. We compete with a
number of companies that have substantially greater financial, technical, sales
and marketing capabilities in addition to other resources, as well as greater
name recognition. As a result, our competitors may be able to adapt more
quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products than us. There can be no
assurance that our current or potential competitors will not develop products
comparable or superior to those developed by us, or adapt more quickly than we
do to new technologies, evolving industry trends or changing customer
requirements. Research and Product Development Our research and development efforts are focused on developing new products to
meet the growing needs of our customers and on improving existing products by
incorporating new features and technologies. However, we believe that the
timely development of new products and enhancements is essential to maintaining
our competitive position in the marketplace. In our research and development
efforts we work closely with customers, end users and leading technology
vendors, in tailoring new features that are subsequently incorporated into
future versions of products available to all customers. We continually review
opportunities to license technologies from third parties when appropriate based
on timing and cost considerations. Research and development expenses were $1.2
million, $0.3 million, and $0.8 million in 2004, 2003, and 2002, respectively.
As a percent of revenues, research and development expenses were approximately
9% in 2004, 3% in 2003, and 4% in 2002. In addition, we acquired in process
research and development projects from Intasys in fiscal 2004 valued at
approximately $1.2 million. Proprietary Rights and Licenses We currently hold a patent on our N*USAGE® technology and also rely on a
combination of copyright, trademark, contract and trade secret laws and
statutory and/or common law to maintain our proprietary rights to our other
products. We believe that patent protection is effective for some product
technologies, but because of the rapid pace of technological change in the
telecommunication and software industries, patent protection for other products
is a less significant factor in our success than the knowledge, ability and
experience of our employees, the frequency of product enhancements and the
timeliness and quality of support services provided by us. We generally enter into confidentiality agreements with our employees,
consultants, customers and potential customers and limits access to, and
distribution of, our proprietary information. Use of our software products is
usually restricted to specified locations and is subject to terms and
conditions prohibiting unauthorized reproduction or transfer of the software
products. We also seek to protect our software, including the source code, as
a trade secret and as copyrighted work. We cannot guarantee that the steps taken to protect our proprietary rights will
be adequate to deter misappropriation of our intellectual property, and we may
not be able to detect unauthorized use and take appropriate steps to enforce
our intellectual property rights. If third parties infringe upon or
misappropriate our copyrights, trademarks, trade secrets or other proprietary
information, we could be seriously harmed. In addition, although we believe
that our proprietary rights do not infringe on the intellectual property rights
of others, other parties may assert infringement claims against us or claim
that we have violated their intellectual property rights. Claims against us,
either successful or unsuccessful, could result in significant legal and other
costs that may be a distraction to management. We have primarily focused on
intellectual property protection within the United States but have expanded
that scope to selected international markets. Protection of intellectual
property outside the United States will sometimes require additional filings
with local patent, trademark, or copyright offices, as well as the
implementation of contractual or license terms different from those used in the
United States. Protection of intellectual property in many foreign countries
is weaker and less reliable than in the United States. If our business expands
into foreign countries, costs and risks associated with protecting our
intellectual property abroad will increase. -17-




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Employees At June 30, 2004, ACE*COMM employed 142 full and part-time employees. None of
our employees are represented by a labor union. We have experienced no work
stoppages and believe that our employee relations are good. 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
 A significant portion of our revenue comes from large financial commitments by
a small number of customers, including both telecommunications carriers and
large enterprises. We expect to continue to depend on a limited number of
customers in any given period for a significant portion of our revenue and, in
turn, to be dependent on their continuing success and positive financial
results and condition. These large customers may result from one-time
competitive procurements or from repeat purchases from distributors, OEMs or
other strategic partners. We may not prevail in one or more of the
procurements, and our distributors may increase or suspend purchases of our
products and services at any time. If we fail to continue to receive orders
from such customers, or if any one or more of these customers suffers a
downturn, our financial results will suffer.  Unless economic conditions improve, our results of operations may not
return to prior levels The current economic environment remains volatile. If the current uncertainty
and negativity in the economic climate in the U.S. and the rest of the world
continues, our customers  and our business and financial results  will
continue to be adversely affected.  The adverse conditions in the telecommunications industry are materially
and adversely affecting us Our business and financial results are highly dependent on the
telecommunications industry and the capital spending of our customers. Over
the past three or four years capital spending by telecommunication companies
has been at reduced levels and may continue to be at such levels or even
decrease further. Various commentators have attributed the decrease in
spending to the decline in the telecommunications industry in particular and
economic conditions in general. Telecommunications products and services are
increasingly becoming commodities that cannot easily be distinguished with
intense competition in the development of new technology or other features and
increasing competition from smaller but rapidly developing alternative
carriers. The reduction of spending by companies in the telecommunication
industries has caused, and may continue to cause, a significant reduction in
our revenues. Although we recently noted an increase in demand from certain
types of customers, other areas of our business have experienced continued
weakness in demand and unwillingness of customers to spend significant sums on
procuring new software on OSS solutions products or services.  Continuing market consolidation may reduce the number of potential
customers for our products The North American communications industry has experienced significant
consolidation. In the future, there may be fewer potential customers requiring
operations support systems and related services, increasing the level of
competition in the industry. In addition, larger, consolidated communication
companies have strengthened their purchasing power, which could create a
decline in our pricing structure and a decrease of the margins we can realize.
These larger consolidated companies are also striving to streamline their
operations by combining different communications systems and the related
operations support systems into one system, reducing the number of vendors
needed. The continuing industry consolidation may cause us to lose more
customers, which would have a material adverse effect on our business,
financial condition and results of operations.  Unless we continue to maintain existing strategic alliances and develop new
ones, our sales will suffer -18-




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Our results could suffer further if we are unable to maintain existing and
develop additional strategic alliances with leading companies that provide
telecommunications services or that manufacture and market network equipment.
If we are not able to maintain or develop these strategic alliances, we will
not be able to expand our distribution channels and provide additional exposure
for our product offerings. These relationships can take significant periods of
time and work to develop, and may require the development of additional
products or features or the offering of support services we do not presently
offer. Failure to maintain particular relationships may limit our access to
certain countries or geographic areas unless and until we are able to enter
into new relationships with companies that can offer improved access.  Many of our telecommunications customers involve credit risks for us Many of our customers present potential credit risks, and we are dependent on a
small number of major customers. The majority of our customers are in the
telecommunication services industry and government sector, or are in the early
stages of development when financial resources may be limited. Five customers
represented 57% of our gross trade receivables balance as of June 30, 2004,
with one international customer representing 24% of our gross trade receivables
balance as of June 30, 2004. Because we depend on a small number of major
customers, and many of our customers present potential credit risks for
different reasons, our results of operations could be adversely affected by
non-payment or slow-payment of receivables. We have also experienced
significant losses for doubtful accounts. For a more detailed discussion of
doubtful accounts please read the section labeled Managements Discussion and
Analysis of Financial Condition and Results of Operations  Allowance for Bad
Debts.  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 Our OSS solutions must be compatible with and add value to our customers
existing systems and networks, and that compatibility and value-add must be
maintained as these systems and networks change over time. To maintain and
improve demand for our products, we must continue to develop and introduce
value-added, timely and cost-effective new products, features and services that
keep pace with technological developments and emerging industry standards. Any
failure to do this will limit the market into which we can sell our products
and services. Further, customers are always looking for the most advanced
technology available, within certain price ranges. To the extent that
competitors can offer more advanced technology within a given price range our
sales would be adversely affected.  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 A substantial portion of our revenues are derived from international sales and
are therefore subject to the risks of conducting business overseas, including
the general economic conditions in each country, the overlap of different tax
structures, the difficulty in managing resources in various countries, changes
in regulatory requirements, compliance with a variety of foreign laws and
regulations, and longer payment cycles. ACE*COMM derived approximately $8.1
million, or about 59% of our total revenue, from customers outside of the
United States for fiscal year 2004. To the extent that we have increased our
international revenue sources over the last three years, the impact of the
risks related to international sales could have an increasing larger effect on
our financial condition as a whole.  Failure to manage risks of potential acquisitions would have an adverse
effect on us We intend to investigate and pursue potential business combinations as one of
the ways of growing our business during a difficult period. However,
acquisitions must be conducted very carefully or there can be adverse
consequences. In particular, failure to identify risks of potential
acquisition targets or inability to correctly evaluate costs of combining
business or technologies could cost us significant resources, dilution to our
stockholders or loss of valuable time. -19-




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Failure to estimate accurately the resources necessary to complete
fixed-price contracts would have an adverse effect on our bottom line  Our failure to accurately estimate the resources required for a project or a
failure to complete contractual obligations in a manner consistent with the
projected plan may result in lower than expected project margins or project
losses, which would negatively impact operating results. Our sales are
typically formalized in agreements that include customization of the underlying
software and services. These agreements require projections related to
allocation of employees and other resources. Additionally, we may fix the
price of an arrangement before the final requirements are finalized. On
occasion, we have and may be required in the future to commit unanticipated
additional resources to complete projects, and the estimated fixed price may
not include this unanticipated increase of resources. If our original
projections are not met, project losses may occur that would have a negative
impact on our operating results.  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 not be able to accurately forecast the timing of our revenue
recognition due to the difficulty of anticipating compliance with the
accounting requirements for revenue recognition and to the fact that we
historically have generated a disproportionate amount of our operating revenues
toward the end of each quarter. Our operating results historically have varied
from fiscal period to fiscal period. Accordingly, our financial results in any
particular fiscal period are not necessarily indicative of results for future
periods. ITEM 2. PROPERTIES ACE*COMM leases space at four principal office locations: Gaithersburg,
Maryland; Montreal, Canada; Edinburgh, Scotland; and Queensland, Australia. We
believe that our facilities are adequate for our current needs and that
suitable additional space will be available as required. The Gaithersburg
office is our corporate headquarters and is used for product assembly, software
and engineering development, professional services and support, sales, and
administration. The following sets forth information concerning our
significant facilities: Square
    
    
    
    CurrentLocation
    
    Footage
    
    Lease Expiration
    
    Annual RentGaithersburg, Maryland
    
    
    24,289
    
    
    November 30, 2008
    
    $566,000 (subject
to annual increases
of approximately
$17,000 and
allocated operating
costs each year)Montreal, Quebec, Canada
    
    
    3,415
    
    
    June 30, 2006
    
    $
    84,000Leith Edinburgh, Scotland
    
    
    4,171
    
    
    January 27, 2010
    
    $
    113,000Bundall, Queensland, Australia
    
    
    2,119
    
    
    March 31, 2005
    
    $
    27,000
 ITEM 3. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of our security holders during the
fourth quarter of 2004. -20-




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PART II  ITEM 5.
    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCK HOLDER MATTERS Common Stock Prices Our common stock is traded on the Nasdaq Small-Cap Market under the symbol
ACEC. -21-




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The following table sets forth for the periods indicated the highest and lowest
bid prices at the 4:00 close for the shares of common stock reported on the
Nasdaq Small-Cap Market. Year Ended June 30,2004
    
    2003High
    
    Low
    
    High
    
    Low1st Quarter
    
    $
    1.99
    
    
    $
    0.96
    
    
    $
    1.05
    
    
    $
    0.482nd Quarter
    
    
    2.95
    
    
    
    1.60
    
    
    
    1.19
    
    
    
    0.323rd Quarter
    
    
    3.38
    
    
    
    2.16
    
    
    
    1.11
    
    
    
    0.864th Quarter
    
    
    2.83
    
    
    
    2.16
    
    
    
    1.09
    
    
    
    0.55
 As of December 31, 2003 the market price of ACE*COMM common stock was $2.48. Common Stockholders As of September 7, 2004 there were 13,768,380 common shares outstanding and
held by 127 shareholders of record. Dividends We have never declared or paid cash dividends on the Common Stock. ACE*COMM
currently intends to retain earnings, if any, to finance the growth and
development of our business and does not anticipate paying cash dividends in
the foreseeable future. The future payment of cash dividends, if any, is
within the discretion of the Board of Directors and will depend on the future
earnings, capital requirements, financial condition and future prospects of
ACE*COMM and such other factors, as the Board of Directors may deem relevant.
Under the term of our line of credit, ACE*COMM cannot pay or declare dividends
without the approval of our bank. Equity Compensation Plan Information The following table shows information about the securities authorized for
issuance under our equity compensation plans as of June 30, 2004: (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
    
    
    1,854,890
    
    
    $
    3.92
    
    
    
    941,026Equity compensation
plans not approved
by security holders
    
    
    198,205
    
    
    $
    5.83
    
    
    
    0Total
    
    
    2,053,095
    
    
    $
    4.10
    
    
    
    941,026
 Item 6. SELECTED FINANCIAL DATA The selected financial data presented below for each of our fiscal years in the
five-year period ended June 30, 2004 and as of June 30, 2004, 2003, 2002, 2001,
and 2000 are derived from the audited financial statements of ACE*COMM. -22-




---



##### 



Year Ended June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands except per share data)Statement of Operations Data:Revenue
    
    $
    13,671
    
    
    $
    13,794
    
    
    $
    18,094
    
    
    $
    24,179
    
    
    $
    33,766Gross profit
    
    
    5,830
    
    
    
    6,255
    
    
    
    8,982
    
    
    
    10,844
    
    
    
    19,413Net (loss) income
    
    $
    (5,898
    )
    
    $
    (1,982
    )
    
    $
    (3,988
    )
    
    $
    (6,927
    )
    
    $
    2,198Net (loss) income per share:Basic
    
    $
    (0.49
    )
    
    $
    (0.21
    )
    
    $
    (0.43
    )
    
    $
    (0.75
    )
    
    $
    0.24Diluted
    
    $
    (0.49
    )
    
    $
    (0.21
    )
    
    $
    (0.43
    )
    
    $
    (0.75
    )
    
    $
    0.23
 June 30,2004
    
    2003
    
    2002
    
    2001
    
    2000(in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    2,881
    
    
    $
    1,570
    
    
    $
    3,530
    
    
    $
    5,770
    
    
    $
    4,386Working capital
    
    
    3,969
    
    
    
    3,941
    
    
    
    4,702
    
    
    
    7,879
    
    
    
    13,335Total assets
    
    
    10,331
    
    
    
    8,244
    
    
    
    10,402
    
    
    
    14,943
    
    
    
    22,785Long-term liabilities
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    323
    
    
    
    597Total liabilities
    
    
    4,863
    
    
    
    3,419
    
    
    
    4,071
    
    
    
    4,686
    
    
    
    5,866Stockholders equity
    
    
    5,468
    
    
    
    4,825
    
    
    
    6,331
    
    
    
    10,257
    
    
    
    16,919
 Selected Quarterly Financial Data The following table presents certain unaudited statement of operations data for
each quarter of 2004 and 2003. This data has been derived from our unaudited
financial statements and has been prepared on the same basis as our audited
financial statements, which appear in this Annual Report on Form 10-K. In the
opinion of our management, this data includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of such
data. Such quarterly results are not necessarily indicative of future results
of operations. This information is qualified by reference to, and should be
read in conjunction with, our financial statements and notes thereto included
elsewhere in this Annual Report on Form 10-K. Fiscal Three Months Ended2004
    
    2003Sept. 30,
    
    Dec. 31,
    
    March 31,
    
    June 30,
    
    Sept. 30,
    
    Dec. 31,
    
    March 31,
    
    June 30,2003
    
    2003
    
    2004
    
    2004
    
    2002
    
    2002
    
    2003
    
    2003(in thousands except per share data)Statement of
Operations Data:Revenue
    
    $
    2,464
    
    
    $
    2,414
    
    
    $
    4,842
    
    
    $
    3,951
    
    
    $
    4,091
    
    
    $
    4,071
    
    
    $
    2,369
    
    
    $
    3,263Gross profit
    
    
    925
    
    
    
    696
    
    
    
    2,707
    
    
    
    1,502
    
    
    
    2,318
    
    
    
    2,200
    
    
    
    260
    
    
    
    1,477Net income (loss)
    
    
    (980
    )
    
    
    (1,517
    )
    
    
    (1,399
    )
    
    
    (2,002
    )
    
    
    91
    
    
    
    81
    
    
    
    (1,853
    )
    
    
    (301
    )Net income (loss)
per share:Basic
    
    $
    (0.10
    )
    
    $
    (0.14
    )
    
    $
    (0.10
    )
    
    $
    (0.15
    )
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    (0.19
    )
    
    $
    (0.03
    )Diluted
    
    $
    (0.10
    )
    
    $
    (0.14
    )
    
    $
    (0.10
    )
    
    $
    (0.15
    )
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    (0.19
    )
    
    $
    (0.03
    )
 Our quarterly operating results have in the past and will in the future vary
significantly as a result of the timing of contract execution, receipt of
purchase orders, and performance of the work or completion of delivery. Large
contracts -23-




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##### 



or orders are typically preceded by long sales cycles and,
accordingly, the timing of such a contract or order has been and will continue
to be difficult to predict. Certain contracts or orders require additional
tailoring to customer requirements and, accordingly, vary in timing of
delivery. The failure to obtain or delays in the completion of one or more
large contracts or orders, for any reason, could have a material adverse effect
on our results of operations and financial condition. The timing of large contracts or orders depends on a variety of factors
affecting the capital spending decisions of our customers, which in turn can
affect our quarterly operating results. These factors include changes in
governmental regulation, changes in the customers competitive environment,
changes in industry-specific economic conditions, pricing policies by ACE*COMM
or its competitors, personnel changes, demand for our solutions, the number,
timing and significance of new technologies developed by either ACE*COMM or our
competitors, the ability of ACE*COMM to develop, introduce and market new and
enhanced versions of our products on a timely basis, and the mix of direct and
indirect sales and general economic factors. Our sales cycle, from initial contact to contract execution, order and
delivery, also varies substantially from customer-to-customer and from
project-to-project. The purchase of our products generally involves a
significant commitment of customer capital and management time. The sales
cycle associated with the purchases of our products is subject to a number of
additional significant risks, including customers budgetary constraints and
internal acceptance reviews, over which we have little or no control. The
delivery cycle varies depending on the extent to which the contract or order
requires tailoring to a customers requirements and the extent to which such
requirements are fixed in advance or developed over time. Our revenues in any quarter are substantially dependent on orders booked,
products delivered, and services performed. Because our operating expenses are
based, in part, on anticipated revenue levels and because a high percentage of
our expenses are relatively fixed, a delay in the recognition of revenue from
even a limited number of contracts, or the absence of anticipated orders, or a
delay in adjusting operating expenses to lower actual or anticipated revenues
could cause significant variation in operating results from quarter-to-quarter
and could cause net income to fall significantly short of anticipated levels. Based upon all of the foregoing, we believe that quarterly revenue and
operating results are likely to continue to vary significantly in the future
and that period-to-period comparisons of our results of operations are not
necessarily meaningful and should not be relied upon as indications of future
performance. Further, it is likely that in some future quarter our revenue or
operating results will be below the expectation of public market analysts and
investors. In such event, the price of the Common Stock could be materially
adversely affected.  ITEM 7.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS Overview ACE*COMM delivers enterprise telemanagement applications and advanced
Convergent Mediation and Operations Support Systems solutions to wired and
wireless voice, data, and Internet communications providers. Our solutions are
tailored to each customers needs and consist of hardware, software and related
services that enable the capture, security, validation, correlation,
augmentation, and warehousing of data from network elements and the
distribution of this data in appropriate formats to OSS (Operations Support
Systems) and BSS (Business Support Systems) operations. Our solutions also
provide for centralized management and security of enterprise networks. After
completing the acquisition of technology and other assets of Intasys Billing
Technologies in the quarter ending March 31, 2004, ACE*COMM now offers Intasys
line of wireless OSS products and has commenced integrating the Intasys
technologies into our convergent mediation products. ACE*COMM derives revenues primarily from the sale of our products, including
hardware and software, and related services. ACE*COMM enters into formal
arrangements that provide for single or multiple deliverables of hardware,
software and services. These arrangements are formalized by either a simple
purchase order or by more complex
contracts such as development, reseller or master agreements. These
arrangements are generally U.S. dollar denominated and typically have an
aggregate value of several thousand to several million dollars and vary in
length -24-




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##### 



from 30 days to several years, as in the case of master agreements.
Agreements spanning several years are normally implemented in smaller
statements of work or orders that are typically deliverable within three to
twelve months. Our customers, including resellers, do not possess the right of
return or exchange. More frequently, we are entering into multiple element arrangements that do not
involve significant modification or customization of the related software. In
these instances, ACE*COMM allocates revenue to each element of the arrangement
based on objective evidence of the elements fair value. When an agreement provides for significant modification or customization of
software, or when our system integration and product development are essential
to the functionality of the software, revenues related to the software licenses
and services are aggregated and the combined revenues are recognized on a
percentage-of-completion basis. Revenue recognized using the
percentage-of-completion method is based on the estimated stage of completion
of individual contracts determined on a cost or level of efforts basis. Any
hardware or post-contract customer support provided for under the terms of the
agreement is unbundled. Hardware revenue is recognized upon delivery, which
usually occurs upon transfer of title, and post-contract customer support is
recognized ratably over the term of the arrangement. Most of our professional services are delivered in conjunction with our
solutions and are sometimes essential to the functionality of other elements of
the arrangement. However, ACE*COMM does sell unbundled services; and, in these
instances, ACE*COMM generally recognizes revenue as the services are performed. Revenue for a given period typically reflects products delivered or services
performed during the period with respect to relatively large financial
commitments from a small number of customers. During 2004, ACE*COMM had 12
major customers, which ACE*COMM defines as generating $250,000 or more in
revenues, that together represented approximately 64% of total revenues. Giza
Systems, our largest customer in fiscal year 2004, represented approximately
20% of total revenues, and Siemens AG contributed approximately 8% of total
revenues. During 2003, ACE*COMM had 12 major customers representing 76% of
total revenues. Siemens AG represented approximately 20% of total revenues and
Northrop Grumman contributed 10% of total revenues earned during 2003. During
2002, ACE*COMM had 20 major customers representing 86% of total revenues.
Siemens AG represented approximately 17% of total revenues and Northrop Grumman
contributed 11% of total revenues earned during 2002. The average revenues
earned per major customer were $0.7 million in 2004, $0.9 million in 2003, and
$0.8 million in 2002. To counteract the pressure on revenues from the prolonged downturn in demand in
the telecommunications industry, we have been pursuing a growth strategy
designed to expand our product line and areas of distribution. The recent
acquisition of i3 Mobile and the purchase of assets from Intasys are results of
this strategy. During the past three fiscal years, we have experienced
significant net losses from operations, primarily due to reduced demand from
our North American telecommunications customers. To offset the effects of the
current lower North American demand, we continue to target sales efforts toward
what we believe to be a growing market for our Convergent Mediation solutions
outside of North America and to acquire revenues by expanding our customer base
and product offerings through acquisition. During the year, we increased our
revenues from outside of North America, in particular from the Middle East and
Europe as a result of a previously announced order from Telecom Egypt and the
purchase of the assets of Intasys. Results for the year showed significant
revenue and results of operations improvement in these areas excluding the one
time charge for in process research and development. On December 5, 2003, to improve our liquidity position, we consummated the
acquisition of i3 Mobile, Inc. under a merger agreement executed in September
2003. The acquisition was effected through the issuance of approximately 3.8
million of shares of our common stock. We accounted for the merger as a
financing transaction and recorded the issuance of our common stock at the
negotiated value and i3 Mobiles cash on hand and liabilities assumed. Because
i3 Mobile ceased all revenue producing operations in March 2003 and we have no
intention to revive i3 Mobiles business subsequent to the Merger, the Merger
does not possess the characteristics of a business combination found in both
Regulation S-X and Financial Accounting Standard No. 141, Business
Combinations,and EITF Issue 98-3 Determining Whether a Non-monetary
Transaction Involves Receipt of Productive Assets of a Business.As such, no
goodwill resulted from this transaction as we did not employ purchase
accounting. On February 12, 2004, we completed our previously announced acquisition of OSS
solutions assets of Intasys from Mamma.com, Inc. We paid $2.0 million for the
purchase of the intellectual property, customers, fixed assets and transaction
related expenses. There is up to an additional $250 thousand of consideration
that may be paid based upon -25-




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##### 



certain earn-out provisions of the asset purchase
agreement to be determined during our next fiscal year. Due to the uncertainty
surrounding this earn-out, we intend to account for additional consideration
which might be paid, if any, when it becomes known and probable. In accordance with FAS 142, we have allocated the purchase price based on an
economic valuation of the purchased assets. Based upon this valuation, we
recorded an intangible asset of $845 thousand which is being amortized over
sixty months related to the purchased customers and technology of Intasys.
Additionally, we recorded a charge of $1.2 million in the third quarter
associated with the purchase of in process research and development. The acquisition of i3 Mobile and the purchase of certain assets from Intasys
are expected to help us expand our revenues, product line and geographic
presence. We plan to pursue additional acquisitions or other strategic
arrangements as well as the expansion of our sales and marketing efforts to
increase revenues outside the North American market. We also expect to focus
for the next several months on integrating the acquired companies, training
sales personnel on new products, contacting existing customers about cross
selling opportunities and finding new customers for our expanded product line. We have also focused our sales resources on opportunities for our NetPlus EOSS
products. During 2004 two large customers substantially completed their
purchases under existing contracts and were evaluating next generation
solutions. As a result, these customers purchased significantly less from us
in 2004. Critical Accounting Policies Our significant accounting policies are more fully described in Note 2 to our
consolidated financial statements. However, certain of our accounting policies
are particularly important to the portrayal of our financial position and
results of operations or require the application of significant judgment by our
management. The following is a brief discussion of these critical accounting
policies: Revenue Recognition ACE*COMM derives revenues primarily from products, where a combination of
hardware, proprietary licensed software, and services are offered to customers.
These products are typically formalized in a multiple element arrangement
involving application of existing software capabilities or modification of the
underlying software and implementation services. Our software licenses to
end-users generally provide for an initial license fee to use the product in
perpetuity. Operational Support Systems revenue is recognized on a monthly
basis based upon the number of telephone subscribers of our customers. More frequently, we are entering into multiple element arrangements that do not
involve significant modification or customization of the related software. In
these instances, ACE*COMM recognizes revenue in accordance with AICPA Statement
of Position 97-2, Software Revenue Recognition,and allocates revenue to each
element of the arrangement based on objective evidence of the elements fair
value based on internal price listings developed by ACE*COMM. Revenue for
software licenses in these instances is recognized upon delivery (i.e.,
transfer of title), when a signed agreement exists, the fee is fixed and
determinable, and collection of the resulting receivable is probable. The
amount allocated to our maintenance contracts is recognized ratably over the
term of the respective maintenance period. In situations when our products involve significant modification or
customization of software, or when our systems integration and product
development are essential to the functionality of the software, revenues
relating to the software licenses and services are aggregated and the combined
revenues are recognized on a percentage-of-completion basis. The hardware
revenue on these contracts is recognized upon transfer of title, which
generally occurs at the same time the licensed software is delivered. Revenue
recognized using the percentage-of-completion method is based on the estimated
stage of completion of individual contracts determined on a cost or level of
efforts basis. When our contracts contain extended payment terms, we defer recognition of
revenue until amounts become due pursuant to payment schedules and no other
uncertainties regarding collectibility exist. We correspondingly defer a
proportionate amount of contract cost which will be matched against the
deferred revenue when recognized. Should -26-




---



##### 



management make the determination
that previously deferred revenue will not be recognized, the corresponding
amount of deferred contract cost will be charged to expense at that time. Our revenue recognition policy takes into consideration the creditworthiness of
the customer in determining the probability of collection as a criterion for
revenue recognition. The determination of creditworthiness requires the
exercise of judgment, which affects our revenue recognition. If a customer is
deemed to be not creditworthy, all revenue under arrangements with that
customer is recognized only upon receipt of cash. The creditworthiness of such
customers is re-assessed on a regular basis and revenue is deferred until cash
is received. Allowance for Bad Debts The allowance for doubtful accounts is established through a charge to general
and administrative expenses. This allowance is for estimated losses resulting
from the inability of our customers to make required payments. It is an
estimate and is regularly evaluated by us for adequacy by taking into
consideration factors such as past experience, credit quality of the customer,
age of the receivable balance, individually and in aggregate, and current
economic conditions that may affect a customers ability to pay. The use of
different estimates or assumptions could produce different allowance balances.
Our customer base is highly concentrated in the telecommunications and Internet
service provider industries. Several of the leading companies in these
industries have filed for bankruptcy. If collection is not probable at the time
the transaction is consummated, we do not recognize revenue until cash
collection. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required. Results of Operations The following sets forth selected consolidated data as a percentage of revenue
for each of the following years ended June 30: Years Ended June 30,2004
    
    2003
    
    2002Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of revenue
    
    
    57.3
    %
    
    
    54.7
    %
    
    
    50.4
    %Selling, general and administrative
    
    
    68.1
    %
    
    
    57.0
    %
    
    
    67.5
    %Research and development
    
    
    17.5
    %
    
    
    2.5
    %
    
    
    4.3
    %Loss from operations
    
    
    (42.9
    )%
    
    
    (14.2
    )%
    
    
    (22.2
    )%Net interest expense
    
    
    (0.2
    )%
    
    
    (0.2
    )%
    
    
    0.2
    %Loss before income taxes
    
    
    (43.1
    )%
    
    
    (14.4
    )%
    
    
    (22.0
    )%Provision (Benefit) for income taxes
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Net Loss
    
    
    (43.1
    )%
    
    
    (14.4
    )%
    
    
    (22.0
    )%
 Revenues Total revenues in 2004 were $13.7 million compared to $13.8 million in 2003 and
$18.1 million in 2002. Total revenues decreased $0.1 million or 0.7% in 2004
and $4.3 million or 24% in 2003, in each case as compared to the prior year. Revenue growth depends, in part, on the overall demand for our product-based
solutions and on sales to large customers. Because our sales are primarily to
telecommunication and Internet service providers and enterprises, our ability
to generate revenue also depends on specific conditions affecting those
providers and on general economic conditions.
The decrease in revenues over the past three years reflects the continuing weak
industry-specific and general economic conditions negatively impacting demand
for our products and services, primarily in North America. -27-




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##### 



Additionally, our
largest customer completed its purchases under our existing contract and
initiated a procurement for a next generation solution. Revenue from sales to network service providers decreased 2.5% from $7.3
million to $7.1 million for fiscal year 2004 and represented approximately 52%
of total revenue. This decrease was primarily the result of a decline in
revenues in China offset by an increase in revenues in the Middle East. Revenue from sales to enterprises decreased 35.6% from $6.5 million to $4.2
million during fiscal year 2004, and represented approximately 31% of total
revenue. Revenues declined primarily as a result of a continued decline in
purchases from two of our primary customers (U.S. Army and Air Force) and
reduced demand, reflecting continuing weak conditions in the telecommunications
sector. Revenue from sales of Operations Support Systems solutions was $2.4 million
during fiscal year 2004 and represents 17% of total revenue. These revenues
are derived principally from our new product line purchased from Intasys in
February 2004. Backlog was $12.1 million, as of June 30, 2004, compared to $4.3 million as of
June 30, 2003. This amount includes $4.7 million related to a new product line
based in large part on assets purchased from Intasys in February 2004, an
increase of $1.9 million related to Network Service Providers and an increase
of $1.2 million related to Enterprise sales. We define backlog as future
revenue from signed contracts or purchase orders for delivery of hardware and
software products and services to be provided to customers generally within one
year. We have experienced fluctuations in our backlog at various times. It
anticipates that $9.3 million of the backlog at June 30, 2004, will be
recognized during fiscal year 2005. Although we believe that our entire
backlog consists of firm orders, our backlog as of any particular date may not
be indicative of actual revenue for any future period because of the
possibility of customer changes in delivery schedules and delays inherent in
the contracting process. Revenues in 2004 were at approximately the same level as 2003 and significantly
less than 2002. Revenues increased from the inclusion of five months of the
revenues from a new product line based in large part on assets purchased from
Intasys in February 2004, offset by a decline in revenues from enterprise
customers who had nearly completed their purchases under existing contracts.
We believe that as a result of the inclusion of the revenues from the asset
purchase of Intasys for a full year and the revenues generated from our backlog, revenues
will increase in 2005. At this time, we cannot predict whether the increase in
revenues will enable us to make a profit during 2005. Cost of Revenues Our cost of revenue consists primarily of direct labor costs, direct material
costs, and allocable indirect costs. The expenses for services provided by
certain alliance partners in connection with the installation and integration
of our products may also be included. Cost of revenue was $7.8 million in 2004, $7.5 million in 2003, and $9.1
million in 2002, representing 57.3%, 55%, and 50% of total revenues in each
year, respectively. Cost of revenues increased $0.3 million or 4% in 2004
primarily as the result of the inclusion of the costs associated with the
operations of the recently acquired Intasys assets offset by a decrease in
other costs and decreased $1.6 million or 17% in 2003, as compared to the prior
year, reflecting a decrease in labor and labor related costs, as we further
decreased staffing levels in response to the continuing decline in demand for
our products within the telecommunications sector. Selling, General and Administrative Expenses Selling, general and administrative expenses consist of costs to support our
sales and administrative functions. Sales expenses consist primarily of
salary, commission, travel, trade show, bid and proposal, and other related
selling and marketing expenses required to sell our products to target markets.
General and administrative expenses consist of provision for doubtful accounts
and unallocated costs related to our information systems infrastructure,
facilities, finance and accounting, legal, human resources and corporate
management. -28-




---



##### 



Selling, general and administrative expenses were $9.3 million in 2004, $7.9
million in 2003, and $12.2 million in 2002, representing 68%, 57%, and 68% of
total revenues in each year, respectively. Selling, general and administrative
expenses increased $1.4 million or 18% in 2004, decreased $4.4 million or 36%
in 2003 and decreased $3.9 million or 24% in 2002, as compared to each prior
corresponding period. The increase in 2004 results from the additional
selling, general and administrative costs associated with the acquisition of
assets from Intasys, and increase in the allowance for doubtful accounts and an
increase in selling expenses for our existing product lines. The decrease in
2002 and 2003 is primarily the result of a continuing effort to reduce
expenses, which includes company and employee initiated reductions in
personnel, and reductions in rent, travel, consulting and professional fees. We recognized a net provision for doubtful accounts of $0.5 million in 2004,
compared to a net provision for doubtful accounts of $0.1 million in 2003 and
$0.7 million in 2002, representing an increase of $0.4 million in 2004 and a
decrease of $0.6 million in 2003 in each case as compared to the corresponding
period of the prior year. During 2004, one of our customers experienced
negative financial conditions to the extent which required us to provide
extensively for its respective receivable, as compared to 2003 in which very
few of our customers experienced negative financial conditions. We believe that these difficulties will not continue to be encountered with our
current customers. However, existing or future customers ability to pay us
may be adversely impacted by unfavorable economic conditions or by other
factors. Research and Development Expenses Research and development expenses consist of personnel costs and the associated
infrastructure costs required to support the design and development of our
products such as JBill Global and NetPlus. Research and development expenses were $1.2 million in 2004, compared to $0.3
million in 2003 and $0.8 million in 2002. Research and development expenses
increased $0.9 million or 253% in 2004 and decreased $.4 million or 56% in 2003
and $0.9 million or 53% in 2002, as compared to each prior corresponding
period. Research and development expenses represented 9% of revenues in 2004,
3% of revenues in 2003, and 4% of revenues in 2002. The increase in research
and development in 2004 is primarily due to the inclusion of the research and
development expenses associated with the acquisition of assets of Intasys. The
decrease in research and development in 2002 and 2003, over the prior
corresponding periods, reflects a decrease in resources applied to research and
development. We were selective in approving new projects and in some instances discontinued
projects that were not related to the development of Convergent
Mediation TM
solutions. In some instances we charge our customers for development which we
include in cost of revenues. Based upon the uncertain North American market,
we decided to explore opportunities to license or acquire new technology from
third parties as a strategy for expanding our product offerings. The purchase
of the assets of Intasys is an example of this strategy. During 2004, we
accelerated the development efforts for certain of our products to meet
customer demands. We did not capitalize software development costs in 2004,
2003 or in 2002 because our product development methodology generally
establishes technological feasibility near the end of the development process. Liquidity and Capital Resources Asset and Cash Flow Analysis At June 30, 2004 our primary source of liquidity were cash and cash equivalents
of $2.9 million, and also a $3.5 million working capital line of credit. Cash
and cash equivalents were $1.6 million at June 30, 2003, and $3.5 million at
June 30, 2002. The cash and cash equivalents balance increased by $1.3
million, or 81%, in 2004 and decreased by $1.9 million, or 54%, in 2003, in
each case as compared to the corresponding period of the prior year. The
increase in 2004 was primarily the result of the inclusion of cash acquired
from i3 Mobile offset by the operating loss for the year and the purchase of
assets of Intasys. The decrease in 2003 was primarily the result of funding
operating losses offset by non- cash items such as depreciation and
amortization expenses. Cash and cash equivalents were 28% of total assets at
June 30, 2004 compared to 19% at June 30, 2003. -29-




---



##### 



Working capital was $4.0 million at June 2004, $3.9 million at June 30, 2003,
and $4.7 million at June 30, 2002. Working capital increased $0.1 million, or
2%, in 2004, decreased $0.8 million, or 16% in 2003 and decreased $3.2 million,
or 41%, in 2002, in each case as compared to the corresponding period of the
prior year. The decrease in working capital in 2003 was primarily the result
of operating losses, net of depreciation and amortization in excess of
purchased assets offset by the net increase in working capital acquired in the
i3 Mobile transaction. Accounts receivables decreased $262,000, or 5% at June 30, 2004, and increased
$1.0 million, or 25% to $4.8 million at June 30, 2003. Five customers
represented 57% of our gross trade receivables balance as of June 30, 2004,
with one international customer representing 24% of our gross trade receivables
balance as of June 30, 2004. The decrease in accounts receivable at June 30,
2004 is primarily the result of the receipt of payments from some aged
receivables and a decrease in revenues in the fourth quarter of 2004 offset by
the inclusion of receivables from the purchased assets of Intasys. The increase
in accounts receivable at June 30, 2003 is primarily the result of an increase
in international customers who traditionally have taken longer to pay and to an
increase in instances where payments are scheduled over an extended period of
time, in no case greater than one year. Our operating activities used $5.0 million in cash during 2004, $2.5 million in
cash during 2003, and used $1.7 million in cash during 2002. The changes
between years in cash flows from operating activities are principally due to
changes in net income (loss) after adjustments for non-cash charges such as
depreciation and changes in working capital amounts. Changes in accounts
receivable balances are typically the most significant component of working
capital and fluctuate as a result of the timing and volume of our revenues and
other factors. Net cash used for investing activities was $2.5 million in 2004 due to the
contract rights purchased from Intasys and cash used for investing activities
was $0.1 million, and $0.3 million, in 2003, 2002, respectively, representing
capital purchases of computer equipment. Our financing activities generated cash of $8.9 million in 2004, primarily
resulting from the common stock issued associated with the i3 Mobile
transaction and generated $0.7 million in 2003 and used cash of $0.2 million
in 2002. We had positive cash flows from financing activities in 2003 as a
result of additional borrowings and net cash generated from a strategic partner
acquiring 475,000 shares of our common stock. No significant financings took
place during 2002. Additionally, borrowings and other financial obligations
resulted in a net cash inflow of $0.1 million in 2004, $0.2 million in 2003,
and an outflow of $0.3 million in 2002. Cost Containment Program As a result of declining revenues during the past three fiscal years, we have
initiated numerous cost reduction measures which have significantly lowered
operating expenses. During the past three fiscal years the number of full time
employees, excluding assets purchased from Intasys, have been reduced. This
reduction was designed to reduce costs without materially impacting our ability
to maintain our historical levels of customer involvement and technological
innovation, especially in areas of focus such as China. Additionally, we have
developed contingency plans to reduce expenses further, should revenues levels
warrant such action. Contractual Obligations and Commitments The following table summarizes our contractual obligations and commitments as
of June 30, 2004 and the effect such commitments could have on our liquidity
and cash flows in future periods. Payments Due by Period(amounts in thousands)Contractual Obligation
    
    Total
    
    Less than 1 year
    
    1-3 years
    
    4-5 years
    
    After 5 yearsOperating Leases
    
    $
    3,530
    
    
    $
    828
    
    
    $
    1,528
    
    
    $
    1,108
    
    
    $
    66
 We have commercial commitments of an accounts receivable backed line of credit
that expired on August 10, 2004. The outstanding balance at June 30, 2004 was
$0.55 million. We also have issued standby letters of credit for security -30-




---



##### 



deposits for office space and to guarantee service contracts and is summarized
in the following table. The standby letters of credit have a one-year term and
renew annually. Amount of Commitment Expiration Per PeriodTotal AmountsOther Commercial Commitments
    
    Committed
    
    Less than 1 year
    
    1-3 years
    
    4-5 years
    
    Over 5 yearsStandby Letters of Credit
    
    $
    222,611
    
    
    $
    222,611
    
    
    $
    
    
    
    $
    
    
    
    $
    
 Line of Credit We have a loan and security agreement with Silicon Valley Bank, renewed
effective July 31, 2003 which expired on August 10, 2004. The bank has
extended our current agreement until October 15, 2004, while we negotiate a new
loan agreement. Under this agreement, we may borrow based upon the amount of
its approved borrowing base of eligible accounts receivable, up to a maximum of
$3.5 million. The line of credit has sub limits of $500,000 for letters of
credit and $1.25 million for U.S. Export Import Bank usage. We can draw up to
80% of our eligible accounts receivable under the master line, and up to 90% of
our eligible foreign accounts receivable under the U.S. Export Import Bank sub
limit line. Amounts borrowed bear interest at a rate equal to the banks prime
rate plus 200 basis points per annum, with a minimum rate of 4.75% per annum,
charged on the average daily balance of advances outstanding, payable monthly
and calculated on a 360-day year basis. We also pay certain costs and expenses
of the bank in administering the line, and paid non-refundable fees of $31,250
in 2002 and $41,250 in 2003. The receivables comprising the borrowing base must
not be more than 90 days aged, must not be in dispute, and must conform to
other eligibility requirements. As of June 30, 2004 $2,556 was available under
the line of credit. Our obligations under the Agreement are secured by a
security interest in all of our assets and intellectual property. Advances made
to us are payable in full upon demand in the event of default under the
agreement. Financial covenants under the loan and security agreement require
us to maintain certain net income figures on a monthly basis and also to
maintain a $0.75 million unrestricted cash requirement per month. As of June
30, 2004, we were not in compliance with the net income covenant. This non
compliance was waived by the bank with our most recent extension. Under the terms of our corporate headquarters office lease, we maintain a
letter of credit under our line of credit with our bank, which names the
landlord as the sole beneficiary and which may be drawn on by the landlord in
the event of a monetary default by us under the lease. The letter of credit
required under the lease for fiscal year 2004 is $135,000. The letter of
credit will decrease in fiscal year 2005 to $124,333 and will continue to
decrease annually thereafter through fiscal year 2008. As of the date of this
filing, we were not subject to any draw against this letter of credit by the
landlord. We also maintain other customer related letters of credit issued by
the Bank to support specific terms and conditions of customer orders. The
aggregate of these customer related letters of credit total approximately
$222,611 at June 30, 2004 and they, too, are secured under our line of credit
with our bank. Liquidity Position We have incurred significant net losses from operations during fiscal years
2002, 2003, and 2004 primarily due to decreased demand for its products from
the North American telecommunications market. As a result of declining
revenues, ACE*COMM has initiated numerous cost reduction measures which have
significantly lowered operating expenses. Additionally, ACE*COMM has developed
contingency plans to reduce expenses further, should revenues decline below
projected levels.  ITEM 7A.
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to interest rate risk related to any borrowings under
our line of credit. As of June 30, 2004, borrowings outstanding
under our line of credit was approximately $545,000. Our market
risk sensitive instruments do not expose us to material market risk
exposures. -31-




---



##### 



ITEM 8.
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Financial Statements, together with the independent accountants
reports thereon, appear at pages F-1 through F-19 of this Form 10-K.  ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 30, 2003, we filed on Form 8-K, announcing that we had
engaged the services of Grant Thornton, LLP as our new independent
auditors, replacing Ernst & Young LLP. We had no disagreements with
Ernst & Young LLP on matters related to accounting and financial
disclosure.  ITEM 9A.
    DISCLOSURE OF CONTROLS AND PROCEDURES Our management, including the Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) (the Exchange Act) as
of the end of the period covered by this report. Based upon that evaluation,
our management, including the Chief Executive Officer and Chief Financial
Officer, concluded that, our disclosure controls and procedures are effective
in timely alerting them to any material information relating to us and our
subsidiaries required to be included in our Exchange Act filings. There were no significant changes made in our internal controls over financial
reporting that occurred during our fourth fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. ITEM 9B. OTHER INFORMATION None PART III  ITEM 10.
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTDirectors
The information concerning Directors of the Company required by Item
10 is incorporated by reference to our Proxy Statement for the 2004
Annual Meeting of Stockholders, to be filed pursuant to Regulation
14A not later than 120 days after the end of the year covered by
this report, and will be contained therein under the heading
Election of Directors.Executive Officers
The information concerning executive officers of the Company
required by Item 10 is set forth in Item 1 hereof under the heading
Executive Officers.  ITEM 11.
    EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated by reference
to our Proxy Statement for the 2004 Annual Meeting of Stockholders,
to be filed pursuant to Regulation 14A not later than 120 days after
the end of the year covered by this report. -32-




---



##### 



ITEM 12.
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated by reference
to our Proxy Statement for the 2004 Annual Meeting of Stockholders,
to be filed pursuant to Regulation 14A not later than 120 days after
the end of the year covered by this report.  ITEM 13.
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for the Item 13 is incorporated by reference
to our Proxy Statement for the 2004 Annual Meeting of Stockholders,
to be filed pursuant to Regulation 14A not later than 120 days after
the end of the year covered by this report. PART IV  ITEM 15.
    EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K  (a)(1)
    INDEX TO FINANCIAL STATEMENTS
The following Financial Statements of the Registrant are filed as part of this report: PageReports of Independent Auditors
    
    
    F-2Balance Sheets as of June 30, 2004 and 2003
    
    
    F-4Statements of Operations for the years ended June 30,
2004, 2003 and 2002
    
    
    F-5Statements of Stockholders Equity for the years
ended June 30, 2004, 2003 and 2002
    
    
    F-6Statements of Cash Flows for the years ended June 30,
2004, 2003 and 2002
    
    
    F-7Notes to Financial Statements
    
    
    F-8
 -33-




---



##### 







|       |                                                                                                                                                                                                                                                                                                                     
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a)(2) | FINANCIAL STATEMENT SCHEDULES 
Except 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                                          S-1



|       |         
|------ | --------
|(a)(3) | EXHIBITS



|      |  |      |  |                                                                                                                        
|----- |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------
|3.5   |  | (A)  |  | Articles of Amendment and Restatement dated August 19, 1996.                                                           
|      |  |      |  |                                                                                                                        
|3.6   |  | (A)  |  | By-laws of ACE*COMM as amended to date.                                                                                
|      |  |      |  |                                                                                                                        
|4.1   |  | (A)  |  | Form of Specimen of Common Stock Certificate.
Code of Conduct                                                          
|      |  |      |  |                                                                                                                        
|10.1  |  | (D)  |  | Lease Between New Boston Fund and ACE*COMM as Tenant dated December 30,
2002                                           
|      |  |      |  |                                                                                                                        
|10.13 |  | (B)* |  | Form of Non-Qualified Stock Option Grant Agreement (certain executive
officers  fiscal 1997)                          
|      |  |      |  |                                                                                                                        
|10.14 |  | (B)* |  | Form of Non-Qualified Stock Option Grant Agreement (certain executive
officers  fiscal 1997)                          
|      |  |      |  |                                                                                                                        
|10.35 |  | (D)* |  | 2000 Stock Option Plan for Directors                                                                                   
|      |  |      |  |                                                                                                                        
|23.1  |  | (D)  |  | Consent of Grant Thornton LLP, independent auditors                                                                    
|      |  |      |  |                                                                                                                        
|23.2  |  | (D)  |  | Consent of Ernst & Young LLP, independent auditors                                                                     
|      |  |      |  |                                                                                                                        
|31.1  |  | (D)  |  | Certification of Chief Executive Officer                                                                               
|      |  |      |  |                                                                                                                        
|31.2  |  | (D)  |  | Certification of Chief Financial Officer                                                                               
|      |  |      |  |                                                                                                                        
|32    |  | (D)  |  | Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
|      |  |      |  |                                                                                                                        

---

| |  |     |  |                                                                                                                                                
| |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | (A) |  | Incorporated by reference to the identically numbered exhibit filed as
an exhibit to our Registration Statement on Form S-1, File No. 333-25439
| |  |     |  |                                                                                                                                                
| |  | (B) |  | Incorporated by reference to the identically numbered exhibit filed as
an exhibit to our Form 10-K, filed October 1, 1997.                     
| |  |     |  |                                                                                                                                                
| |  | (C) |  | Incorporated by reference to our Proxy Statement, dated October 17, 2000.                                                                      
| |  |     |  |                                                                                                                                                
| |  | (D) |  | Filed herewith                                                                                                                                 



---

|*   |  | Identifies exhibit that consists of or includes a management contract
or compensatory plan or arrangement.
|--- |  | ----------------------------------------------------------------------------------------------------------
|   
|(b) |  | REPORTS ON FORM 8-K                                                                                       
|   
|    |  | None                                                                                                      

-34-




---



##### 



SIGNATURES Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized. ACE*COMM CORPORATIONBy:
    
    /s/George T. JimenezGeorge T. JimenezChief Executive OfficerDate: September 24, 2004
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated: Name
    
    Title
    
    Date/s/George T. Jimenez
    
    Chief Executive Officer
and Chairman of the Board(Principal Executive Officer)
    
    September 24, 2004(George T. Jimenez)/s/Steven R. Delmar

(Steven R. Delmar)
    
    Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
    
    September 24, 2004/s/Paul G. Casner, Jr.
    
    Director
    
    September 24, 2004(Paul G. Casner, Jr.)/s/Gilbert A. Wetzel
    
    Director
    
    September 24, 2004(Gilbert A. Wetzel)/s/Harry M. Linowes
    
    Director
    
    September 24, 2004(Harry M. Linowes)/s/Matthew J. Stover
    
    Director
    
    September 24, 2004(Matthew J. Stover)/s/J. William Grimes
    
    Director
    
    September 24, 2004(J. William Grimes)
 -35-




---



##### 



ACE*COMM CORPORATION INDEX TO FINANCIAL STATEMENTS The following Financial Statements of the Registrant are filed as part of this
report: PageReports of Independent Auditors
    
    
    F-2Balance Sheets as of June 30, 2004 and 2003
    
    
    F-4Statements of Operations for the years ended June 30,
2004, 2003 and 2002
    
    
    F-5Statements of Stockholders Equity for the years
ended June 30, 2004, 2003 and 2002
    
    
    F-6Statements of Cash Flows for the years ended June 30,
2004, 2003 and 2002
    
    
    F-7Notes to Financial Statements
    
    
    F-8
 F-1




---



##### 



REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders
ACE*COMM Corporation We have audited the accompanying consolidated balance sheets of ACE*COMM
Corporation as of June 30, 2004, and June 30, 2003, and the related
consolidated statements of operations, stockholders equity, and cash flows for
the two years ended June 30, 2004. These financial statements are the
responsibility of ACE*COMMs management. Our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audits in accordance with auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ACE*COMM Corporation as of
June 30, 2004, and June 30, 2003, and the results of its operations and its
cash flows for the two years then ended in conformity with accounting
principles generally accepted in the United States of America. We have also audited Schedule II for the two years ended June 30, 2004, and
June 30, 2003. In our opinion, this schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly, in all
material respects, the information therein. /s/ Grant Thornton, LLP
 Vienna, Virginia
August 6, 2004 F-2




---



##### 



REPORT OF ERNST & YOUNG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders
      of ACE*COMM Corporation We have audited the accompanying ACE*COMM Corporation statements of operations,
stockholders equity, and cash flows for the year ended June 30, 2002. Our
audit also included the financial statement schedule listed in the index at
Item 15(a). These financial statements are the responsibility of ACE*COMMs
management. Our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of its operations and its cash flows for the
year ended June 30, 2002, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related 2002 financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein. /s/ Ernst & Young LLP
 McLean, Virginia
August 12, 2002 F-3




---



##### 



ACE*COMM CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share amounts) June 30,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,881
    
    
    $
    1,570Accounts receivable, net
    
    
    4,246
    
    
    
    4,825Inventories, net
    
    
    573
    
    
    
    700Deferred contract costs
    
    
    571
    
    
    
    Prepaid expenses and other
    
    
    257
    
    
    
    265Other current assets
    
    
    304
    
    
    
    Total current assets
    
    
    8,832
    
    
    
    7,360Property and equipment, net
    
    
    592
    
    
    
    875Other assets, principally acquired intangibles, net
    
    
    907
    
    
    
    9Total assets
    
    $
    10,331
    
    
    $
    8,244Liabilities and Stockholders EquityCurrent liabilities:Borrowings
    
    $
    545
    
    
    $
    433Accounts payable
    
    
    591
    
    
    
    636Accrued expenses
    
    
    1,484
    
    
    
    341Accrued compensation
    
    
    724
    
    
    
    706Deferred revenue
    
    
    1,519
    
    
    
    1,303Total liabilities
    
    
    4,863
    
    
    
    3,419Commitments and contingencies (Note 14 )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,
13,761,182 and 9,807,440 shares issued and outstanding
    
    
    138
    
    
    
    98Additional paid-in capital
    
    
    28,475
    
    
    
    21,933Other comprehensive loss
    
    
    (41
    )
    
    
    Accumulated deficit
    
    
    (23,104
    )
    
    
    (17,206
    )Total stockholders equity
    
    
    5,468
    
    
    
    4,825Total liabilities and stockholders equity
    
    $
    10,331
    
    
    $
    8,244
 The accompanying notes are an integral part of these financial statements. F-4




---



##### 



ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts) Years Ended June 30,2004
    
    2003
    
    2002Revenue
    
    $
    13,671
    
    
    $
    13,794
    
    
    $
    18,094Cost of revenue
    
    
    7,841
    
    
    
    7,539
    
    
    
    9,112Gross profit
    
    
    5,830
    
    
    
    6,255
    
    
    
    8,982Selling, general and administrative
    
    
    9,304
    
    
    
    7,861
    
    
    
    12,231Research and development
    
    
    1,226
    
    
    
    347
    
    
    
    780In process research and development acquired
    
    
    1,160
    
    
    
    
    
    
    
    Loss from operations
    
    
    (5,860
    )
    
    
    (1,953
    )
    
    
    (4,029
    )Interest expense
    
    
    32
    
    
    
    29
    
    
    
    (41
    )Loss before income tax provision
    
    
    (5,892
    )
    
    
    (1,982
    )
    
    
    (3,988
    )Income tax provision
    
    
    (6
    )
    
    
    
    
    
    
    Net loss
    
    $
    (5,898
    )
    
    $
    (1,982
    )
    
    $
    (3,988
    )Basic net loss per share
    
    $
    (0.49
    )
    
    $
    (0.21
    )
    
    $
    (0.43
    )Diluted net loss per share
    
    $
    (0.49
    )
    
    $
    (0.21
    )
    
    $
    (0.43
    )Shares used in computing net loss per share:Basic
    
    
    12,068
    
    
    
    9,557
    
    
    
    9,308Diluted
    
    
    12,068
    
    
    
    9,557
    
    
    
    9,308
 The accompanying notes are an integral part of these financial statements. F-5




---



##### 



ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands) Common StockAdditional
    
    OtherPaid-In
    
    Comprehensive
    
    AccumulatedShares
    
    Par Value
    
    Capital
    
    Loss
    
    Deficit
    
    TotalBalance, June 30, 2001
    
    
    9,264
    
    
    $
    93
    
    
    $
    21,400
    
    
    $
    
    
    
    $
    (11,236
    )
    
    $
    10,257Employee stock purchase plan
    
    
    68
    
    
    
    1
    
    
    
    65
    
    
    
    
    
    
    
    
    
    
    
    66Stock repurchases
    
    
    (4
    )
    
    
    (1
    )
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    (4
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,988
    )
    
    
    (3,988
    )Balance, June 30, 2002
    
    
    9,328
    
    
    
    93
    
    
    
    21,462
    
    
    
    
    
    
    
    (15,224
    )
    
    
    6,331Employee stock purchase plan
    
    
    49
    
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    37Stock repurchases
    
    
    (45
    )
    
    
    
    
    
    
    (36
    )
    
    
    
    
    
    
    
    
    
    
    (36
    )Issuance of Common Stock
    
    
    475
    
    
    
    5
    
    
    
    470
    
    
    
    
    
    
    
    
    
    
    
    475Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,982
    )
    
    
    (1,982
    )Balance, June 30, 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
    )
    
    $
    5,468
 The accompanying notes are an integral part of these financial statements. F-6




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##### 



ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Years ended June 30,2004
    
    2003
    
    2002Cash flows from operating activities:Net loss
    
    $
    (5,898
    )
    
    $
    (1,982
    )
    
    $
    (3,988
    )Adjustments to reconcile net loss to net cash used in operating
activities:Depreciation and amortization
    
    
    707
    
    
    
    876
    
    
    
    1,248Provision for doubtful accounts
    
    
    538
    
    
    
    120
    
    
    
    701Loss on disposal of property and equipment
    
    
    
    
    
    
    22
    
    
    
    34In process research and development costs acquired
    
    
    1,160
    
    
    
    
    
    
    
    Non cash compensation associated with issuance of stock
warrants to consultant
    
    
    164
    
    
    
    
    
    
    
    Changes in operating assets and liabilities, net of effects of merger:Accounts receivable
    
    
    41
    
    
    
    (1,079
    )
    
    
    36Inventories, net
    
    
    127
    
    
    
    422
    
    
    
    238Prepaid expenses and other assets
    
    
    (294
    )
    
    
    (49
    )
    
    
    312Deferred contract costs
    
    
    (571
    )
    
    
    
    
    
    
    Accounts payable
    
    
    (1,582
    )
    
    
    (27
    )
    
    
    424Accrued liabilities
    
    
    367
    
    
    
    (875
    )
    
    
    (402
    )Deferred revenue
    
    
    216
    
    
    
    70
    
    
    
    (268
    )Other liabilities
    
    
    
    
    
    
    (44
    )
    
    
    (69
    )Net cash used in operating activities
    
    
    (5,025
    )
    
    
    (2,546
    )
    
    
    (1,734
    )Cash flows from investing activities:Proceeds from sale of equipment
    
    
    
    
    
    
    8
    
    
    
    Purchases of property and equipment
    
    
    (351
    )
    
    
    (122
    )
    
    
    (268
    )Acquisition of Intasys contract rights and other assets
    
    
    (2,132
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (2,483
    )
    
    
    (114
    )
    
    
    (268
    )Cash flows from financing activities:Net borrowings on line of credit
    
    
    112
    
    
    
    224
    
    
    
    (272
    )Principal payments under capital lease obligation
    
    
    
    
    
    
    
    
    
    
    (28
    )Proceeds from exercise of common stock options
    
    
    192
    
    
    
    
    
    
    
    Proceeds from common stock issued
    
    
    
    
    
    
    475
    
    
    
    Repurchase of common stock
    
    
    (48
    )
    
    
    (36
    )
    
    
    (4
    )Proceeds from employee stock purchase plan
    
    
    51
    
    
    
    37
    
    
    
    66Net proceeds from common stock issued in i3 Mobile transaction
    
    
    8,553
    
    
    
    
    
    
    
    Net cash provided by(used in) financing activities
    
    
    8,860
    
    
    
    700
    
    
    
    (238
    )Net decrease in cash and cash equivalents
    
    
    1,352
    
    
    
    (1,960
    )
    
    
    (2,240
    )Effect of exchange rate change on cash
    
    
    (41
    )
    
    
    
    
    
    
    Cash and cash equivalents at beginning of year
    
    
    1,570
    
    
    
    3,530
    
    
    
    5,770Cash and cash equivalents at end of year
    
    $
    2,881
    
    
    $
    1,570
    
    
    $
    3,530Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    38
    
    
    $
    44
    
    
    $
    50Income taxes
    
    $
    5
    
    
    $
    
    
    
    $
    
 The accompanying notes are an integral part of these financial statements. F-7




---



##### 



ACE*COMM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1  ORGANIZATION ACE*COMM Corporation (the Company), incorporated in Maryland in 1983,
delivers enterprise telemanagement applications and advanced Convergent
Mediation solutions to wired and wireless voice, data, and Internet
communications providers. ACE*COMMs technology enables the capture, security,
validation, correlation, augmentation, and warehousing of data from network
elements and distributes it in appropriate formats to OSS (Operations Support
Systems) and BSS (Business Support Systems) operations. ACE*COMMs products
are tailored to each customers needs, providing the capabilities to extract
knowledge from their networksknowledge they use to reduce costs, accelerate
time-to-market for new products and services, generate new sources of revenue,
and push forward with next-generation initiatives. ACE*COMM Corporation, incorporated in Maryland in 1983, and its wholly owned
subsidiaries, Solutions ACE*COMM Corporation, incorporated in Quebec in 1996,
ACE*COMM Solutions UK Limited, incorporated in the United Kingdom in 2003 and
ACE*COMM Solutions Australia Pty Limited, incorporated in Australia in 2004,
and i3 Mobile acquired in December 2003 are referred to in this document
collectively as ACE*COMM, unless otherwise noted or the context indicates
otherwise. All inter-company transactions have been eliminated. We have incurred significant net losses from operations during fiscal years
2002, 2003, and 2004 primarily due to decreased demand for our products from
the North American telecommunications market. Losses in 2004 were funded in
part by cash acquired in our merger with i3 Mobile (see Note 12). As a result
of declining revenues, ACE*COMM has initiated numerous cost reduction measures
which have significantly lowered operating expenses. Additionally, ACE*COMM has
developed contingency plans to reduce expenses further, should revenues decline
below projected levels. Management believes that its current liquidity
position (including availability under our line of credit) will be sufficient
to fund operations in fiscal 2005. NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Use of estimates The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the amounts reported
in the financial statements. Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the accompanying
financial statements include: managements forecasts of contract costs and
progress toward completion, which are used to determine revenue recognition
under the percentage-of-completion method; estimates of allowances for doubtful
accounts receivable and inventory obsolescence; and tax valuation allowances. Loss per Share The basic net loss per share presented in the accompanying financial statements
is computed using weighted average common shares outstanding. Diluted net loss
per share generally includes the effect, if dilutive, of potential dilution
that could occur if securities or other contracts to issue common stock (e.g.
stock options) were exercised and converted to common stock. Because of the
reported net losses, the effect of including potentially dilutive securities is
anti-dilutive and therefore they have been excluded. If stock options had been
included, shares used in the diluted loss per share calculation would have
increased by 320,380 shares. Revenue recognition ACE*COMM derives revenues primarily from products, where a combination of
hardware, proprietary software, and services are offered to customers. These
products are typically formalized in a multiple element arrangement involving
significant modification or customization of the underlying software and F-8




---



##### 



implementation services. ACE*COMMs software licenses to end-users generally
provide for an initial license fee to use the product in perpetuity. Under
certain contracts, ACE*COMM licenses its software to resellers for subsequent
modification and resale. Our customers, including resellers, do not possess the
right to return or exchange products. Operational Support Systems revenue is
recognized on a monthly basis based upon the number of telephone subscribers of
our customers. More frequently, ACE*COMM enters into a multiple element arrangement that does
not involve significant modification or customization of the related software.
In these instances, ACE*COMM recognizes revenue in accordance with AICPA
Statement of Position 97-2, Software Revenue Recognition,and allocates
revenue to each element of the arrangement based on objective evidence of the
elements fair value based on internal price listings developed by ACE*COMM.
Revenue is recognized upon delivery (i.e., transfer of title), when a signed
agreement exists, the fee is fixed and determinable, and collection of the
resulting receivable is probable. The amount allocated to our maintenance
contracts is recognized ratably over the term of the respective maintenance
period. In situations when our products involve significant modification or
customization of the related software, or when our systems integration and
product development are essential to the functionality of the software,
revenues relating to the software licenses and services are aggregated and the
combined revenues are recognized on a percentage-of-completion basis. The
hardware revenue on these contracts is recognized upon transfer of title, which
generally occurs at the same time the licensed software is delivered. Revenue
recognized using the percentage-of-completion method is based on the estimated
stage of completion of individual contracts determined on a cost or level of
efforts basis. While ACE*COMM occasionally sells unbundled services, most of ACE*COMMs
services are delivered in conjunction with ACE*COMMs products. Revenue from
technical customer support and maintenance services is recognized ratably over
the term of the related agreement, generally one year. Revenue from consulting
services is recognized on a time and material basis, as the services are
performed. Revenue from outsourcing or service bureau services is recognized
on a per-unit-of-volume basis as the services are performed. Revenue related to obligations to provide post contract customer support is
unbundled from the license and recognized ratably over the term of the
agreement. When our contracts contain extended payment terms, we defer recognition of
revenue until amounts become due pursuant to payment schedules in accordance
with AICPA Statement of Position 97-2, Software Revenue Recognition. We
correspondingly defer a proportionate amount of contract cost which will be
matched against the deferred revenue when recognized. Should management make
the determination that previously deferred revenue will not be recognized, the
corresponding amount of deferred contract cost will be charged to expense at
that time. Our revenue recognition policy takes into consideration the creditworthiness of
the customer in determining the probability of collection as a criterion for
revenue recognition. The determination of creditworthiness requires the
exercise of judgment, which affects our revenue recognition. If a customer is
deemed to be not creditworthy, all revenue under arrangements with that
customer is recognized only upon receipt of cash. The creditworthiness of such
customers is re-assessed on a regular basis and revenue is deferred until cash
is received. Cash and cash equivalents ACE*COMM considers all investments with an original maturity of three months or
less to be cash equivalents. Cash held in foreign bank accounts was $363,000
and $38,000 at June 30, 2004 and June 30, 2003. Inventories Inventories consist principally of purchased materials to be used in the
production of finished goods and are stated at the lower of cost, determined on
the first-in, first-out (FIFO) method, or market. We F-9




---



##### 



periodically review our inventories against future estimated demand and usage and either
write down or reserve against inventory carrying values. Property and equipment Property and equipment are recorded at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets as
follows: equipment and vehicles  7 years; computer equipment -3 to 10 years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the improvements estimated useful lives or related remaining lease terms.
Maintenance and repair costs are charged to current earnings. Long-lived
assets held and used by ACE*COMM are reviewed for impairment whenever changes
in circumstances indicate the carrying value of an asset may not be
recoverable. Earnings per share Basic earnings per share exclude dilution and is computed by dividing net
(loss) income by the weighted average common shares outstanding for the period.
Diluted earnings per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Income taxes ACE*COMM accounts for income taxes under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. Deferred income tax assets and
liabilities are determined based upon differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse. A valuation allowance reduces deferred tax assets when it
is more likely than not that some portion or all of the deferred tax assets
will not be realized. Reclassifications Certain prior year information has been reclassified to conform to the current
years presentation. Fair value of financial instruments The carrying amounts of cash and cash equivalents, accounts receivable,
accounts payable, and accrued expenses approximate fair value because of the
short maturity of these items. The carrying amounts of debt issued pursuant to our bank credit agreements
approximate fair value because the interest rates on these instruments change
with market interest rates. Foreign Currency The Companys functional currency for all operations and foreign transaction is
the local currency. Gains and losses from the translation of foreign currency
into U.S. dollars are included in equity. Gains and losses resulting from
foreign currency transactions are included in current results of operations. Stock Based Compensation The Company generally applies Accounting Principles Board (APB) Opinion No. 25,
''Accounting for Stock Issued to Employees, and related interpretations in
accounting for stock options and presents pro forma net income and earnings per
share data as if the accounting prescribed by Statement of Financial Accounting
Standards No. 123, ''Accounting for Stock Based Compensation had been
applied. The Company also applies the provisions of FIN 44, Accounting for
Certain Transactions Involving Stock Compensation, as required when
modifications and other provisions cause the application of variable accounting
which calls for the periodic measurement of compensation expense based on the
difference in the exercise price and the underlying value of the related stock. F-10




---



##### 



Transactions for which non-employees are issued equity instruments for goods or
services received are recorded by the Company based upon the fair value of the
goods or services received or the fair value of the equity instruments issued,
whichever is more readily measured. Had compensation cost been recognized based on the fair values of options at
the grant dates consistent with the provisions of SFAS No. 123, the Companys
net loss and basic and diluted net
loss per common share would have been changed to the following pro forma
amounts: Year ended June 30,(in thousands, except per share amounts)2004
    
    2003
    
    2002Net loss
    
    $
    (5,898
    )
    
    $
    (1,982
    )
    
    $
    (3,988
    )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*
    
    
    (755
    )
    
    
    (890
    )
    
    
    (1,489
    )Pro forma net loss
    
    $
    (6,653
    )
    
    $
    (2,872
    )
    
    $
    (5,477
    )Earnings per share:Basic and diluted  as reported
    
    $
    (0.49
    )
    
    $
    (0.21
    )
    
    $
    (0.43
    )Basic and diluted  pro forma
    
    $
    (0.55
    )
    
    $
    (0.30
    )
    
    $
    (0.59
    )Weighted average shares:Weighted average common
shares outstanding  Basic
    
    
    12,068
    
    
    
    9,557
    
    
    
    9,308Weighted average common
shares outstanding -
Diluted
    
    
    12,068
    
    
    
    9,557
    
    
    
    9,308
 *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. For the purposes of the pro forma amounts shown in Note 2, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
model. The weighted-average assumptions included in our fair value
calculations are as follows: 2004
    
    2003
    
    2002Expected life (years)
    
    
    3
    
    
    
    3
    
    
    
    3-8Risk-free interest rate
    
    
    2-3
    %
    
    
    2
    %
    
    
    5-6
    %Expected volatility
    
    
    109-119
    %
    

    
    121
    %
    
    
    106
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 The weighted average fair value of stock options granted under the stock option
plans during the years ended June 30, 2004, 2003 and 2002 was $1.74, $0.41, and
$0.73, respectively. NOTE 3  ACCOUNTS RECEIVABLE Accounts receivable consist of the following (in thousands): June 30,2004
    
    2003Billed
    
    $
    3,913
    
    
    $
    3,268Unbilled
    
    
    664
    
    
    
    1,775Other receivables
    
    
    204
    
    
    
    -0-Allowance for doubtful accounts
    
    
    (535
    )
    
    
    (218
    )$
    4,246
    
    
    $
    4,825
 F-11




---



##### 



Unbilled receivables include costs and estimated profit on contracts in
progress that have been recognized as revenue but not yet billed to customers
under the provisions of specific contracts; substantially all unbilled
receivables are expected to be billed and collected within one year. ACE*COMM
recorded a provision for doubtful accounts of $538,000, credited the allowance
for recoveries of $28,000 and wrote-off $249,000 in uncollected accounts during
the year ended June 30, 2004. During the year ended June 30, 2003, ACE*COMM
recorded a provision for doubtful accounts of $120,000 and wrote-off $521,000
in uncollected accounts receivables. At June 30, 2004, approximately 32% of
our total billed accounts receivable was older than ninety days and was
comprised primarily of international customers who have traditionally taken
longer to pay and also customers whose agreed upon invoice terms extended
beyond the traditional invoice cycle. In the quarter ended March 31, 2004, we delivered products pursuant to a
contract with a customer in the Middle East. The contract provides for
aggregate installment payments totaling $4.2 million to be made over 5
quarters; installments totaling $2.6 million were due on or before June 30,
2004. As of June 30, 2004, $1.5 million of these amounts had been collected
and the remainder was included in accounts receivable. In accordance with
Statement of Position 97-2, Software Revenue Recognition, we will recognize
revenue only as amounts become due. Future installments due in each of the
next 3 quarters will be recognized as they become due, assuming no issues
related to their collectibility are present. NOTE 4  INVENTORIES Inventories consist of the following (in thousands): June 30,2004
    
    2003Inventories
    
    $
    772
    
    
    $
    894Allowance for obsolescence
    
    
    (199
    )
    
    
    (194
    )$
    573
    
    
    $
    700
 Provisions for obsolescence totaled $155,000; $120,000 and $160,000 in 2004,
2003 and 2002, respectively, and are included in cost or revenue. Inventory
write-offs during the years ended June 30, 2004, 2003 and 2002 were $150,000,
$120,000 and, $170,000, respectively. NOTE 5  DEFERRED CONTRACT COSTS As discussed in Note 3, during the third quarter we delivered to a customer in
the Middle East a large order that has payment terms that extend beyond one
year. We are deferring the recognition of revenue until the due date of the
installment payments in accordance with Statement of Position 97-2.
Accordingly we have deferred the related costs associated with the future
installment payments ($531,000 at June 30, 2004) and we will recognize revenue
and the related costs on the due date of the payment. It is anticipated that
all the revenue and expense will be recognized over the next three quarters. NOTE 6  PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands): June 30,2004
    
    2003Lab test equipment
    
    $
    137
    
    
    $
    137Computer equipment
    
    
    5,424
    
    
    
    5,852Office equipment
    
    
    749
    
    
    
    822Leasehold improvements
    
    
    535
    
    
    
    4666,845
    
    
    
    7,277Less accumulated depreciation
    
    
    (6,253
    )
    
    
    (6,402
    )$
    592
    
    
    $
    875
 F-12




---



##### 



Depreciation expense of property and equipment amounted to $634,000, $876,000
and $1,064,000 during the years ended June 30, 2004, 2003 and 2002,
respectively. NOTE 7  CAPITALIZED SOFTWARE DEVELOPMENT COSTS Capitalized software development costs are fully amortized as of June 30, 2004
and 2003. Amortization expense of capitalized software amounted to $0, $0, and
$184,000 during the years ended June 30, 2004, 2003 and 2002, respectively. NOTE 8  BORROWINGS Lines of Credit ACE*COMM renewed a Loan and Security Agreement (the Agreement or original
Agreement) with Silicon Valley Bank (the Bank) effective August 11, 2003,
thereby extending the original agreement secured on July 2, 2002. Per the
Agreement, ACE*COMM may borrow up to $3.5 million through the Banks approved
borrowing base of eligible accounts receivables. The $3.5 million line has sub
limits of $0.5 million for Letters of Credit and $1.25 million for Export
Import Bank usage. The Bank will pay an advance rate of 80% of the eligible
accounts receivables under the master line, and an advance rate of 90% of the
eligible foreign accounts receivables under the Export Import Bank sub limit
line. As of June 30, 2004 $2,556 was available under the line of credit. The costs of this Agreement include an interest rate equal to the Banks prime
rate plus 200 basis points per annum (with a minimum rate of 4.75% per annum)
charged on the average daily balance of advances outstanding, payable monthly
and calculated on a 360-day year basis; additionally we are required to pay
certain costs and expenses of the Bank in administering the line. The
applicable interest rate on the borrowings as of June 30, 2004 was 6.75%. The
Agreement had a minimum tangible net worth covenant which must be complied with
on a monthly basis. The Agreement also subjects the Company to non-financial
covenants, including restrictions over dividends. In March 2004, the Bank and ACE*COMM entered in a Waiver Agreement whereby the
covenant was changed to reflect minimum monthly income from operations
(exclusive of the one-time charge in connection with the purchase of certain
assets of Intasys), the requirements for which are $0.9 million, ($0.75)
million, ($0.5) million and $0.75 million respectively for the months March
2004 through June 2004. Additionally, the new covenant requires ACE*COMM to maintain unrestricted
minimum cash of $0.75 million on a weekly basis and $2.5 million on a
quarter-end basis. As of June 30, 2004, ACE*COMM was in compliance with the
unrestricted minimum cash covenant. However, as of June 30, 2004, we were not
in compliance with the minimum monthly income from operations covenant. This
non compliance was waived by the bank with our most recent extension. The bank
has extended our current agreement until October 15, 2004 while we negotiate a
new loan agreement. ACE*COMMs obligation under the Agreement are secured by a security interest in
all of our assets and intellectual property. Advances made to ACE*COMM are
payable in full upon demand in the event of default under the agreement. As of
June 30, 2004, there were outstanding borrowings of $545,000 under this
Agreement. The Agreement had a maturity date of August 10, 2004, and the bank
has extended our current agreement until October 15, 2004, while we negotiate a
new loan agreement. NOTE 9  RETIREMENT PLAN ACE*COMM has a 401(k) plan available to employees the first full month after
commencement of their employment, provided they are at least 21 years of age.
ACE*COMM may make contributions to the plan at its discretion. There were no
contributions expensed by ACE*COMM during the years ended June 30, 2004, 2003,
and 2002. F-13




---



##### 



NOTE 10  INCOME TAXES The primary components of our net deferred tax assets and liabilities are as
follows (in thousands): June 30,2004
    
    2003Tax assets:Allowance for doubtful accounts
    
    $
    203
    
    
    $
    83Inventories
    
    
    244
    
    
    
    305Accrued expenses
    
    
    123
    
    
    
    169Amortization
    
    
    447
    
    
    
    Stock warrants
    
    
    62
    
    
    
    Net operating loss carryforwards
    
    
    13,076
    
    
    
    10,109Tax credit carryforwards
    
    
    26
    
    
    
    26Other
    
    
    2
    
    
    
    44Gross deferred tax assets
    
    
    14,183
    
    
    
    10,736Tax liabilities:Income on contracts
    
    
    (253
    )
    
    
    (808
    )Depreciation
    
    
    (104
    )
    
    
    (30
    )Other
    
    
    
    
    
    
    Gross deferred tax liabilities
    
    
    (357
    )
    
    
    (838
    )Net deferred tax asset
    
    
    13,826
    
    
    
    9,898Valuation allowance
    
    
    (13,826
    )
    
    
    (9,898
    )Net deferred tax
    
    $
    
    
    
    $
    
 At June 30, 2004, ACE*COMM had net operating loss carryforwards available to
offset future taxable income of approximately $26.1 million federal and $4.5
million in Canada, which will expire from 2006 through 2023. As of June 30,
2004, ACE*COMM also had a alternative minimum tax credit carryforward of
approximately $26,000 available to reduce future tax liabilities. These tax
credits do not expire. Realization of the net deferred tax asset is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. Based on
historical net operating losses and no assurance that ACE*COMM will generate
any earnings or any specific level of earnings in future years, ACE*COMM
established a valuation allowance on the net deferred assets at June 30, 2004
and 2003. Approximately $5.4 million of the valuation allowance as of June 30,
2004 and $5.2 million of the valuation allowance as of June 30, 2003, resulted
from the tax benefit of non-qualified stock options that is included within the
deferred tax benefit related to net operating loss carryforwards. If the
related valuation allowance is released, this portion of the tax benefit will
be credited directly to equity. In 2004, ACE*COMM paid income taxes of $5,000. There were no income taxes
paid during 2003 or 2002. The differences between the tax provision calculated at the statutory federal
income tax rate and the actual tax provision recorded for each year are as
follows (in thousands): Years ended June 30,2004
    
    2003
    
    2002Income tax benefit at statutory rate
    
    $
    (2,005
    )
    
    $
    (674
    )
    
    $
    (1,247
    )State income taxes net of Federal benefit
    
    
    (233
    )
    
    
    (78
    )
    
    
    (228
    )Nondeductible expenses
    
    
    27
    
    
    
    30
    
    
    
    33Change in valuation allowance
    
    
    2,211
    
    
    
    722
    
    
    
    1,442Actual (benefit) provision
    
    $
    
    
    
    $
    
    
    
    $
    
 F-14




---



##### 



NOTE 11  STOCKHOLDERS EQUITY Employee Stock Purchase Plan In 1999, ACE*COMM adopted an Employee Stock Purchase Plan (the Plan) to
provide a method whereby all employees have an opportunity to acquire a
proprietary interest in ACE*COMM through the purchase of shares of common
stock. The Plan is implemented through common stock offerings in consecutive
offering periods, each constituting a calendar quarter. The option price of
the common stock, purchased with payroll deductions made during an offering
period, is the lower of 85% of the closing price of the common stock on the
first eligible trading day of an offering period or 85% of the closing price of
the common stock on the last eligible trading day of an offering period. The
maximum number of shares of common stock, which may be issued under the Plan,
is 480,000 shares. We issued 42,048, 49,268, and 67,932, shares of common
stock under the plan in 2004, 2003, and 2002, respectively. Stock Repurchases During fiscal 2004, we repurchased 20,000 shares of common stock from a former
executive officer at $2.40 per share. During fiscal 2002 and 2003, ACE*COMM
repurchased a total of 48,872 shares of common stock at an average per share
price of $0.84. During the year ended June 30, 2003, ACE*COMM repurchased
44,872 shares of common stock at an average share price of $0.82. The stock
repurchase program expired on September 11, 2002. Issuance of Common Stock During fiscal year 2004, we issued 17,383 shares of common stock from the
exercise of stock warrants, 139,905 shares of common stock through the exercise
of common stock options issued under the Omnibus Stock Plan and 3,774,406 share
in conjunction the merger with i3 Mobile, Inc. Stock Options Amended and Restated Omnibus Stock Plan (Omnibus Plan) In connection with the Shareholder-approved Omnibus Plan, ACE*COMM may grant
nonqualified and incentive stock options to officers and employees. The
exercise price of each option granted under the Omnibus Plan is determined by
the Compensation Committee, and is limited to a minimum of the fair market
value of our Common Stock on the date of grant. The Omnibus Plan also provides
for the issuance of restricted or unrestricted stock, stock appreciation rights
and phantom stock options. ACE*COMM may grant options under the Omnibus Plan
until September 2009. The terms of option grants and issuances of restricted stock, stock
appreciation rights and phantom stock options, including vesting and
exerciseability, are determined by the Compensation Committee of the Board of
Directors. Options and phantom stock options granted to date vest either
immediately or over a period of one to eight years from the date of grant,
subject to accelerated vesting in certain events such as a change of control,
and expire upon the earlier of the employees termination or five or ten years
from the date of grant. During the years ended June 30, 2004 and 2003,
ACE*COMM did not grant any performance-based options. Certain options and
phantom stock options granted in 2002 were further subject to accelerated
vesting based on achievement of certain pre-determined performance goals. The
pre-determined performance goals were not met for the year ended June 30, 2002.
Vested options and phantom stock options become exercisable immediately upon
vesting or within three years from the date of grant. As of June 30, 2004,
2003 and 2002, there were outstanding phantom stock options totaling 6,800,
6,800, and 27,800, respectively, and no restricted stock or stock appreciation
rights had been granted. Compensation cost associated with the 2004, 2003, and
2002 phantom stock options was immaterial. F-15




---



##### 



Amended and Restated Stock Option Plan for Directors and 2000 Stock Option Plan
for Directors (Directors Plan) The Shareholder-approved Directors Plan provides for ACE*COMM to grant
nonqualified stock options to non-employee members of our Board of Directors.
The exercise price of each option granted under the Directors Plan is limited
to a minimum of the fair market value of our Common Stock on the date of grant. Options granted to Directors subsequent to June 30, 1997, vest 3,000 shares
each year from the date of grant. Options granted starting November 2000, vest
3,000 shares each year (4,000 shares in the case of the Chairman of the Audit
Committee) from the date of grant. Options become exercisable immediately upon
vesting. Options granted under the Directors Plan generally expire five years
from date of grant. Information relating to all the plans is summarized as follows: Omnibus Plan
    
    Directors Plan
    
    i3 MobileWeighted
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedAvg.
    
    
    
    
    
    Weighted
    
    
    
    
    
    Avg.Number
    
    Share
    
    Number
    
    Avg. Share
    
    Number
    
    Shareof Shares
    
    Price
    
    of Shares
    
    Price
    
    of Shares
    
    PriceOutstanding Options at
June 30, 2001
    
    
    1,701,092
    
    
    $
    4.79
    
    
    
    110,500
    
    
    $
    8.19
    
    
    
    
    
    
    $
    Granted
    
    
    707,169
    
    
    
    1.33
    
    
    
    9,000
    
    
    
    1.22
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    (864,682
    )
    
    
    4.78
    
    
    
    (35,500
    )
    
    
    8.18
    
    
    
    
    
    
    
    Outstanding Options at
June 30, 2002
    
    
    1,543,579
    
    
    
    3.21
    
    
    
    84,000
    
    
    
    7.46
    
    
    
    
    
    
    
    Granted
    
    
    281,000
    
    
    
    0.86
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    (300,485
    )
    
    
    2.29
    
    
    
    (9,000
    )
    
    
    17.50
    
    
    
    
    
    
    
    Outstanding Options at
June 30, 2003
    
    
    1,524,094
    
    
    
    2.96
    
    
    
    75,000
    
    
    
    6.25
    
    
    
    
    
    
    
    Granted
    
    
    471,000
    
    
    
    2.60
    
    
    
    27,000
    
    
    
    2.72
    
    
    
    80,997
    
    
    
    24.76Exercised
    
    
    (139,905
    )
    
    
    1.37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    (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
    
    
    
    33.32Options exercisable at
June 30, 2002
    
    
    627,297
    
    
    $
    4.06
    
    
    
    50,001
    
    
    $
    9.08
    
    
    
    June 30, 2003
    
    
    803,265
    
    
    $
    3.64
    
    
    
    62,000
    
    
    $
    7.01
    
    
    
    June 30, 2004
    
    
    825,036
    
    
    $
    3.40
    
    
    
    60,000
    
    
    $
    6.83
    
    
    
    55,990
    
    
    $
    33.32Options available for
granting
    
    
    631,251
    
    
    
    
    
    
    
    143,000
    
    
    
    
    
    
    
    0
 F-16




---



##### 



The following table summarizes information about stock options outstanding at
June 30, 2004: Options Outstanding
    
    Options ExercisableWeighted-AverageNumber
    
    Remaining
    
    Weighted-
    
    Number
    
    Weighted-Range of
    
    Outstanding
    
    Contractual
    
    Average
    
    Exercisable
    
    AverageExercise Prices
    
    at June 30, 2004
    
    Life (yrs)
    
    Exercise Price
    
    at June 30, 2004
    
    Exercise Price$0.00 - $2.00
    
    
    796,889
    
    
    
    7.2
    
    
    $
    1.35
    
    
    
    502,571
    
    
    $
    1.54$2.01 - $4.00
    
    
    651,509
    
    
    
    8.3
    
    
    
    2.84
    
    
    
    82,542
    
    
    
    3.42$4.01 - $6.00
    
    
    77,295
    
    
    
    3.5
    
    
    
    5.00
    
    
    
    58,107
    
    
    
    5.00$6.01 - $8.00
    
    
    214,449
    
    
    
    4.5
    
    
    
    6.51
    
    
    
    187,259
    
    
    
    6.53$8.01 - $10.00
    
    
    35,500
    
    
    
    0.8
    
    
    
    9.66
    
    
    
    34,125
    
    
    
    9.71$10.01 - $15.00
    
    
    46,706
    
    
    
    4.1
    
    
    
    12.04
    
    
    
    43,880
    
    
    
    12.49$15.01 - $100.00
    
    
    32,542
    
    
    
    6.7
    
    
    
    49.96
    
    
    
    32,542
    
    
    
    50.811,854,890
    
    
    
    
    
    
    
    
    
    
    
    941,026
 At June 30, 2004, warrants were outstanding with the option to purchase up to
198,000 common shares. Financial Accounting Standards No. 123 ACE*COMM measures compensation expense for its stock option plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees.ACE*COMM recorded no
compensation cost associated with stock options in 2004, 2003 and 2002. NOTE 12  MERGERS AND ACQUISITIONS On December 5, 2003, ACE*COMM consummated its acquisition of i3 Mobile, Inc.
under a merger agreement executed in September 2003. The acquisition was
effected through the issuance of approximately 3.8 million of shares of our
common stock. ACE*COMM accounted for the Merger as a financing transaction and
recorded the issuance of its common stock at the negotiated value and i3
Mobiles cash on hand net of liabilities assumed. Because i3 Mobile ceased all
revenue producing operations in March 2003 and we have no intention to revive
i3 Mobiles business subsequent to the Merger, the Merger does not possess the
characteristics of a business combination found in Regulation S-X and Financial
Accounting Standard No. 141, Business Combinations,and EITF Issue 98-3
Determining Whether a Non-monetary Transaction Involves Receipt of Productive
Assets of a Business.As such, no goodwill resulted from this transaction. On February 12, 2004, ACE*COMM completed its previously announced purchase of
certain operations support systems solutions assets of Intasys from Mamma.com,
Inc. This purchase was accounted for as a purchase and, as such, the
accompanying financial statements include the results of operating the acquired
assets from the purchase date forward. We paid cash of $2.0 million for the
purchase of the intellectual property (including in process research and
development), customers, fixed assets and transaction related expenses for
Intasys. There is an additional $250 thousand of consideration to be paid
based upon certain earn out provisions to be determined during the next fiscal
year. Due to the uncertainty as to whether this contingent consideration will
be paid, we intend to record it when it becomes known and probable. In accordance with FAS 141, the Company allocated the purchase price of the
Intasys assets as follows (in thousands): In process research and development
    
    $
    1,160Contract rights and related technology
    
    
    972Property and equipment
    
    
    130$
    2,262
 F-17




---



##### 



Contract rights and technology will be amortized over sixty months. Through
June 30, 2004, amortization totaled $74,000. The tax benefits associated with the future tax deductions associated with this
acquisition have been fully reserved due to doubt as to whether they will be
realized. Upon release of the valuation allowance associated with these tax
benefits in the future, the related tax benefit will be applied first against
recorded intangible assets. NOTE 13  EARNINGS PER SHARE (in thousands, except per share amounts) The following is a reconciliation of the numerators and denominators of basic
net (loss) income per common share (Basic EPS) and diluted net (loss) income
per common share (Diluted EPS): Years ended June 30,2004
    
    2003
    
    2002Basic EPS:(Loss) income (numerator):Net (loss) income available to common shareholders
    
    $
    (5,898
    )
    
    $
    (1,982
    )
    
    $
    (3,988
    )Shares (denominator):Weighted average common shares
    
    
    12,068
    
    
    
    9,557
    
    
    
    9,308Basic EPS
    
    $
    (0.49
    )
    
    $
    (0.21
    )
    
    $
    (0.43
    )Diluted EPS:(Loss) income (numerator):Net (loss) income available to common stockholders
    
    $
    (5,898
    )
    
    $
    (1,982
    )
    
    $
    (3,988
    )Shares (denominator):Weighted average common shares
    
    
    12,068
    
    
    
    9,557
    
    
    
    9,308Stock options*
    
    
    
    
    
    
    
    
    
    
    Total weighted shares and equivalents
    
    
    12,068
    
    
    
    9,557
    
    
    
    9,308Diluted EPS
    
    $
    (0.49
    )
    
    $
    (0.21
    )
    
    $
    (0.43
    )
  *
    
    Due to the loss incurred during the years ended June 30,
2004, 2003, and 2002 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, 2004 due to anti-dilution was 320,380. NOTE 14  COMMITMENTS AND CONTINGENCIES ACE*COMM has a $135,000 letter of credit arrangement with the Bank which
guarantees ACE*COMMs performance to its landlord. The letter of credit is
secured by the Loan and Security Agreement with the Bank; the requirement will
decrease annually beginning in November 2004 and continue to decrease annually
through November 2007 to the amount of $91,932. ACE*COMM leases office space under non-cancelable operating leases. Lease
terms range from four to seven years and include renewal options for additional
periods. Management expects that in the normal course of business, leases will
be renewed or replaced by other leases. Additionally, ACE*COMM leases
equipment under operating leases that, in the aggregate, are not significant. We are committed for the payment of minimum rentals under operating lease
agreements through the year 2009 in the following amounts (in thousands): F-18




---



##### 



Year ending June 30,
    
    Amount2004
    
    $
    8282005
    
    
    7992006
    
    
    7292007
    
    
    7312008
    
    
    3772009
    
    
    66$
    3,530
 The total rental expense under operating leases was $796,000, $629,000, and
$941,000 for the years ended June 30, 2004, 2003 and 2002, respectively. NOTE 15  BUSINESS AND CREDIT CONCENTRATIONS The following is a breakdown of ACE*COMMs revenue by geographic area (in
thousands): 2004
    
    2003
    
    2002U.S.
    
    $
    5,572
    
    
    $
    6,049
    
    
    $
    9,933Canada and Mexico
    
    
    501
    
    
    
    947
    
    
    
    1,594Asia
    
    
    1,392
    
    
    
    2,280
    
    
    
    1,563Europe: Germany
    
    
    1,099
    
    
    
    2,728
    
    
    
    3,001Europe: Other
    
    
    2,118
    
    
    
    370
    
    
    
    416South America
    
    
    118
    
    
    
    425
    
    
    
    64Africa and Middle East
    
    
    2,871
    
    
    
    995
    
    
    
    1,523Total revenue
    
    $
    13,671
    
    
    $
    13,794
    
    
    $
    18,094
 During the years ended June 30, 2004 and 2003, one customer comprised 20% and
5% of total revenue. Another customer comprised 8%, 20% and 17%, respectively,
of ACE*COMMs total revenues during the years ended June 30, 2004, 2003, and
2002. Total revenues earned outside of the US represents 59% of total revenue
earned for the year ended June 30, 2004. In addition, five customers represented approximately 57% of ACE*COMMs gross
accounts receivable balances as of June 30, 2004. A single customer accounted
for 24% of the gross accounts receivable balance at June 30, 2004. To reduce
credit risk, ACE*COMM conducts ongoing credit evaluations of its customers and,
based upon the results of those evaluations, requires letters of credit or
other pre-payment arrangements. ACE*COMM maintains accounts receivable
allowances to provide for potential credit losses. NOTE 16  SEGMENT INFORMATION The Company is managed as one segment and results are measured based on revenue
type and not business unit. However, we do not measure operating profit by
revenue source. The following table reflects revenues by type: 2004
    
    2003
    
    2002Revenue by TypeEnterprise
    
    $
    4,187
    
    
    $
    6,500
    
    
    $
    8,414Network Service Provider (NSP)
    
    
    7,092
    
    
    
    7,271
    
    
    
    9,650Operations Support Systems (OSS)
    
    
    2,358
    
    
    
    
    
    
    
    IT and Other
    
    
    34
    
    
    
    23
    
    
    
    30Total Revenue
    
    $
    13,671
    
    
    $
    13,794
    
    
    $
    18,094
 We purchased the OSS assets of Intasys in February 2004, accordingly, the
results of Intasyss OSS revenues have been included for the first time in our
results of operations. F-19




---



##### 



Operations in various geographical areas are summarized as follows: June 30,
    
    June 30,
    
    June 30,2004
    
    2003
    
    2002North America:Total revenue
    
    $
    11,363
    
    
    $
    13,794
    
    
    $
    18,094Identifiable assets
    
    $
    9,140
    
    
    $
    8,244
    
    
    $
    10,402United Kingdom:Total Revenue
    
    $
    1,724
    
    
    $
    
    
    
    $
    Identifiable assets
    
    $
    846
    
    
    $
    
    
    
    $
    Australia:Total revenue
    
    $
    584
    
    
    $
    
    
    
    $
    Identifiable assets
    
    $
    345
    
    
    $
    
    
    
    $
    
 Schedule II  Valuation and Qualifying Accounts Balance at
    
    Charged to
    
    Recoveries
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    of Prior
    
    
    
    
    
    End ofDescription
    
    of Period
    
    Expenses
    
    Write-offs
    
    Write-offs
    
    PeriodYear ended June 30, 2004:Allowance for doubtful accounts
    
    $
    218,060
    
    
    $
    538,157
    
    
    $
    27,862
    
    
    $
    248,988
    
    
    $
    535,091Reserve for obsolete inventory
    
    $
    193,717
    
    
    $
    155,413
    
    
    $
    
    
    
    $
    149,988
    
    
    $
    199,142Year ended June 30, 2003:Allowance for doubtful accounts
    
    $
    605,000
    
    
    $
    120,000
    
    
    $
    13,491
    
    
    $
    520,781
    
    
    $
    218,060Reserve for obsolete inventory
    
    $
    194,154
    
    
    $
    120,000
    
    
    $
    
    
    
    $
    120,437
    
    
    $
    193,717Year ended June 30, 2002:Allowance for doubtful accounts
    
    $
    497,000
    
    
    $
    701,000
    
    
    $
    
    
    
    $
    593,000
    
    
    $
    605,000Reserve for obsolete inventory
    
    $
    204,183
    
    
    $
    160,000
    
    
    $
    
    
    
    $
    170,029
    
    
    $
    194,154
 F-20