##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-K
 FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission file number 0-21059
 ACE*COMM CORPORATION
  Maryland
(State or other jurisdiction of incorporation or organization)
704 Quince Orchard Road
    
    52-1283030
(I.R.S. Employer I.D. No.)Gaithersburg, Maryland 20878
(Address of principal executive offices)
    
    20878
(Zip Code)
    
 þ o
 o
 o þ
 o þ




---



##### 



ACE*COMM Corporation
 Form 10-K
Year Ended June 30, 2005
 TABLE OF CONTENTS
 PAGEPART IItem 1.
    
    BUSINESS
    
    
    4Item 2.
    
    PROPERTIES
    
    
    21Item 3.
    
    LEGAL PROCEEDINGS
    
    
    21Item 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    21PART IIItem 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
    
    
    21Item 6.
    
    SELECTED FINANCIAL DATA
    
    
    23Item 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    23Item 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    33Item 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    
    34Item 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    34Item 9A.
    
    DISCLOSURE OF CONTROLS AND PROCEDURES
    
    
    34Item 9B.
    
    OTHER INFORMATION
    
    
    34PART IIIItem 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    
    34Item 11.
    
    EXECUTIVE COMPENSATION
    
    
    37Item 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
    
    40Item 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    
    41PART IVItem 15.
    
    EXHIBITS, FINANCIAL STATEMENTS, AND SCHEDULES
    
    
    42
 -2-




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##### 



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




---



##### 



PART I
 ITEM 1. BUSINESS
 General
    Advanced OSSWe offer convergent and flexible mediation, rating, provisioning, telemanagement, and switch
adjunct solutions for Tier 1 operators, service providers, and large private networks.Convergent Mediation SDPWe provide real-time subscriber services and control capabilities that are optimized for
Voice-over-IP (VoIP), 3G, and IP data transmission through our Convergent Mediation service
delivery platform or SDP. Our Convergent Mediation SDPsupports the delivery by our
customers of brand-defining and revenue-generating next generation services.Network Business IntelligenceWe offer a suite of integrated network business intelligence solutions, including products
for revenue assurance, network asset assurance, and market visualization.
  
    
    the combined company will be able to compete more effectively in the global marketplace,
targeting both the carrier and enterprise sectors;
    
    the skills, technologies, and product categories of the two companies are quite
complementary, and are expected to enhance both companies product and service offerings
and
    
    the transaction will further our expanding initiative in the European region, and
provide a vehicle for further penetration into the Tier 1 carrier market globally.
 -4-




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##### 



SDP SDP
 ® ®
  ® ®
   -5-




---



##### 



Markets and Applications
  Private Networks (Enterprises)
 ®
 IMS/VoIP
  Cable
 SDP
 Content
 SDP
 Wireless
  Traditional
  MVNO
 SDP
 -6-




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##### 



Products and Services
  Advanced OSS
  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.Data CollectionOur 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.RatingOur rating solution 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 BillingOur 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 gives 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 GatewayOur 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.Enterprise TeleManagement & OSSOur advanced enterprise telemanagement for switched voice, data, IP, and hybrid networks is
installed in hundreds of government, military, and institutional systems in the U.S. and
around the world. ACE*COMMs NetPlus® enterprise operations support system (EOSS)
provides superior usability and interoperability, enabling large-scale enterprises to reduce
communications network operating costs and to optimize network performance.
NetPlus® addresses the complications that result from using a mix of management
systems for cost accounting, inventory, performance management, VoIP integration, and more.
It brings all of these
 -7-




---



##### 



components together into a seamless and fully integrated system that saves money while
boosting the networks reliability and importance within the organization.
 Convergent Mediation SDP
 SDP SDP
 SDP, SDP
  Network Business Intelligence
  Network CollectorThe Network Collector is a switch data management solution, capable of communicating with
switches and other network elements directly, providing a level of automation that requires
little to no human intervention. It reduces the load placed upon switches and other network
elements from various data collection tools.SchedulerThe Scheduler is a user configurable scheduling product providing automation of tasks for
data collection and report processing.TrackerThe Tracker identifies and logs network discrepancies and monitors their status changes over
time. It provides reporting functionality on value of discrepancies identified and
resolved, provides trend analysis on rate of resolution, and can load third-party
discrepancies.Discrepancy InspectorDiscrepancy Inspector is an analysis and reporting tool that allows users to identify and
investigate discrepancies in data between the network, OSS, and upstream business systems.Market MakerThe Market Maker lets service providers optimize network resources to enable more efficient
delivery of services to new and existing customers. Data from multiple sources is
correlated, analyzed, and presented to operators in a composite, map-based graphical
interface. This allows for the rapid review and analysis of information to better support
decision-making for marketing campaigns, direct sales targeting, customer churn management,
and network planning.
 -8-




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##### 



Geographic markets
  Canada & U.S.
  Latin America
  Europe
  Middle East and Africa
  Asia Pacific
  Professional Services and Support
  -9-




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##### 



Quality
  Sales and Marketing
     Customers
  -10-




---



##### 



Strategic Alliances
    OEM
  Cisco Systems, Inc.
 Compagnie Financiere Alcatel Alcatel) 
 Marconi Corporation, PLC  TM ®
 Motorola, Inc.
 Zhone Technologies, Inc. 
 Resellers & Systems Integrators
  -11-




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##### 



General Dynamics Corporation  ®
 Giza Systems
 Huawei Technologies
 MOSECO Jordan
 NetSource America Inc. ®
 Northrop Grumman Corporation
 Science Applications International Corporation, or SAIC
 Siemens AG
 Unisys Corporation ®
 Technology Partners
  Avaya ®
 Business Objects
 Computer Associates
 -12-




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##### 



Halcyon
 Nortel Networks
 Oracle ® ® ®
 Remedy
 Sun Microsystems
 Veritas
 Vertel
 Industry Affiliations
  ACUTA
 AeA
  GSA
 INAAU
 IPDR.org
 -13-




---



##### 



ISO
 Just-US
 NASTD
 SIP
Center
 TIA
 USTA
 Backlog
   Competition
  -14-




---



##### 




    
    large service providers who develop full-system products internally, tailored to their
particular specifications;
    
    other companies, such as Comptel Corporation and Narus, that can provide data
collection, mediation components, and data storage capabilities;
    
    vendors that supply more inclusive products, such as Intec Telecom Systems PLC, and EDB
Telesciences;
    
    telecommunications equipment manufacturers that provide network products, such as Lucent
Technologies Inc., and Ericsson;
    
    companies that provide OSS software applications for carriers, such as MetaSolv Software
Inc.;
    
    companies that supply product components, such as Ericcson Hewlett-Packard
Telecommunications AB and Fujitsu;
    
    companies that provide billing and customer care applications, such as Amdocs Limited,
Convergys, Martin-Dawes, UshaComm, and Portal Software Inc.;
    
    companies that develop custom solutions, such as EDS Inc. and Computer Sciences
Corporation;
    
    companies that provide revenue assurance focused solutions such as Azure, cVidya
Networks Inc., and Elron Telesoft; and
    
    companies that develop service delivery platforms and/or value-added services such as
Boston Communications Group, Inc. (bcgi), Redknee, and Comverse.
  -15-




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##### 



® ®
  SDP SDP
 SDP
 SDP
  Research and Product Development
 .
 Proprietary Rights and Licenses
 ®
 -16-




---



##### 



Employees
  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
  -17-




---



##### 



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
  -18-




---



##### 



Continuing market consolidation may reduce the number of potential customers for our products
  The adverse conditions in the telecommunications industry continue despite improvements in the
economy and may continue to do so
  Unless we continue to maintain existing strategic alliances and develop new ones, our sales
will suffer
  Many of our telecommunications customers involve credit risks for us
  We are increasingly subject to the risks and costs of international sales, and failure to
manage these risks would have an adverse effect on us
  -19-




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##### 



Failure to manage risks of potential acquisitions would have an adverse effect on us
  Failure to estimate accurately the resources necessary to complete fixed-price contracts would
have an adverse effect on our bottom line
  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
  -20-




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##### 



ITEM 2. PROPERTIES
  Square
    
    
    
    CurrentLocation
    
    Footage
    
    Lease Expiration
    
    Annual RentGaithersburg, Maryland
    
    
    24,289
    
    
    November 30, 2008
    
    $583,000 (subject to
annual increases of
approximately $17,000
and allocated
operating costs each
year)Montreal, Quebec, Canada
    
    
    3,415
    
    
    June 30, 2006
    
    $
    91,000Leith Edinburgh, Scotland
    
    
    4,171
    
    
    January 26, 2010
    
    $
    116,000London, England
    
    
    2,104
    
    
    May 31, 2006
    
    $
    347,000Bundall, Queensland, Australia
    
    
    2,119
    
    
    March 31, 2008
    
    $
    36,000
 ITEM 3. LEGAL PROCEEDINGS
  ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  PART II
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 Common Stock Prices
  -21-




---



##### 



Year Ended June 30,2005
    
    
    2004High
    
    
    Low
    
    
    High
    
    
    Low1st Quarter
    
    $
    2.38
    
    
    $
    0.96
    
    
    $
    1.99
    
    
    $
    0.962nd Quarter
    
    
    2.42
    
    
    
    1.10
    
    
    
    2.95
    
    
    
    1.603rd Quarter
    
    
    3.62
    
    
    
    2.26
    
    
    
    3.38
    
    
    
    2.164th Quarter
    
    
    2.77
    
    
    
    2.05
    
    
    
    2.83
    
    
    
    2.16
  Common Stockholders
  Dividends
  Equity Compensation Plan Information
  (c)(a)
    
    
    (b)
    
    
    Number of securities remainingNumber of securities to
    
    
    Weighted-average
    
    
    available for future issuancebe issued upon exercise
    
    
    exercise price of
    
    
    under equity compensation plansof outstanding options,
    
    
    outstanding options,
    
    
    (excluding securitieswarrants and rights
    
    
    warrants and rights
    
    
    reflected in column (a))Equity
compensation plans
approved by
security holders
    
    
    2,152,783
    
    
    $
    3.53
    
    
    
    414,006Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,152,783
    
    
    $
    3.53
    
    
    
    414,006
 -22-




---



##### 



ITEM 6. SELECTED FINANCIAL DATA
  Year Ended June 30,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands except per share data)Statement of Operations Data:Revenue
    
    $
    19,961
    
    
    $
    13,671
    
    
    $
    13,794
    
    
    $
    18,094
    
    
    $
    24,179Gross profit
    
    
    11,012
    
    
    
    5,830
    
    
    
    6,255
    
    
    
    8,982
    
    
    
    10,844Selling, general and administrative
    
    
    9,774
    
    
    
    9,304
    
    
    
    7,861
    
    
    
    12,231
    
    
    
    16,157Research and development
    
    
    2,694
    
    
    
    1,226
    
    
    
    347
    
    
    
    780
    
    
    
    1,650In process research and development acquired
    
    
    5,118
    
    
    
    1,160
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (6,462
    )
    
    $
    (5,898
    )
    
    $
    (1,982
    )
    
    $
    (3,988
    )
    
    $
    (6,927
    )Net loss per share:Basic and diluted
    
    $
    (0.44
    )
    
    $
    (0.49
    )
    
    $
    (0.21
    )
    
    $
    (0.43
    )
    
    $
    (0.75
    )
 June 30,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(in thousands)Balance Sheet Data:Cash and cash equivalents
    
    $
    2,683
    
    
    $
    2,881
    
    
    $
    1,570
    
    
    $
    3,530
    
    
    $
    5,770Working capital
    
    
    653
    
    
    
    3,665
    
    
    
    3,941
    
    
    
    4,702
    
    
    
    7,879Total assets
    
    
    13,567
    
    
    
    10,331
    
    
    
    8,244
    
    
    
    10,402
    
    
    
    14,943Long-term liabilities
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    323Total liabilities
    
    
    8,190
    
    
    
    4,863
    
    
    
    3,419
    
    
    
    4,071
    
    
    
    4,686Stockholders equity
    
    
    5,377
    
    
    
    5,468
    
    
    
    4,825
    
    
    
    6,331
    
    
    
    10,257
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
 Sources of Revenue
 SDP
 -23-




---



##### 



Trends and Strategy
      -24-




---



##### 



Recent Developments
 2helix
  Private Placement
  Department of Defense Contract
  Critical Accounting Policies
  -25-




---



##### 



Revenue Recognition
      Allowance for Bad Debts
  -26-




---



##### 



Impairment of Long-Lived Assets
  -27-




---



##### 



Results of Operations
  Years Ended June 30,2005
    
    2004
    
    2003Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of revenue
    
    
    44.8
    %
    
    
    57.3
    %
    
    
    54.7
    %Selling, general and administrative
    
    
    49.0
    %
    
    
    68.1
    %
    
    
    57.0
    %Research and development
    
    
    13.5
    %
    
    
    9.0
    %
    
    
    2.5
    %In process research and development
    
    
    25.6
    %
    
    
    8.5
    %
    
    
    0.0
    %Loss from operations
    
    
    (32.9
    )%
    
    
    (42.9
    )%
    
    
    (14.2
    )%Net interest expense
    
    
    0.3
    %
    
    
    0.2
    %
    
    
    0.2
    %Gain from settlement of debt obligation
    
    
    1.1
    %
    
    
    (0.0
    )%
    
    
    0.0
    %Loss before income taxes
    
    
    (32.1
    )%
    
    
    (43.1
    )%
    
    
    (14.4
    )%Provision for income taxes
    
    
    0.3
    %
    
    
    0.0
    %
    
    
    0.0
    %Net Loss
    
    
    (32.4
    )%
    
    
    (43.1
    )%
    
    
    (14.4
    )%
  Revenues
  Years Ended June 30,2005
    
    
    2004
    
    
    2003RevenueLicenses and hardware
    
    $
    8,734
    
    
    $
    6,387
    
    
    $
    7,710Services
    
    
    11,227
    
    
    
    7,284
    
    
    
    6,084Total Revenue
    
    $
    19,961
    
    
    $
    13,671
    
    
    $
    13,794
    -28-




---



##### 



Cost of Revenues
    -29-




---



##### 



Selling, General and Administrative Expenses
     -30-




---



##### 



Research and Development Expenses
   TM
 ,
 Liquidity and Capital Resources
 Asset and Cash Flow Analysis
    -31-




---



##### 



Cost Containment Program
  Contractual Obligations and Commitments
  Contractual Obligation
    
    Payments Due by Period(amounts in thousands)Less than 1
    
    
    
    
    
    
    
    
    
    
    After 5Total
    
    
    year
    
    
    1-3 years
    
    
    4-5 years
    
    
    yearsOperating leases
    
    $
    3,218
    
    
    $
    1,207
    
    
    $
    1,548
    
    
    $
    463
    
    
    $
    Other commitments
    
    
    155
    
    
    
    82
    
    
    
    70
    
    
    
    3
    
    
    
    Total commitments
    
    $
    3,373
    
    
    $
    1,289
    
    
    $
    1,618
    
    
    $
    466
    
    
    $
    
  Other Commercial Commitments
    
    Amount of Commitment Expiration Per Period(amounts in thousands)TotalAmounts
    
    
    Less than 1
    
    
    
    
    
    
    
    
    
    
    Over 5Committed
    
    
    year
    
    
    1-3 years
    
    
    4-5 years
    
    
    yearsStandby Letters of Credit
    
    $
    338
    
    
    $
    215
    
    
    $
    123
    
    
    $
    
    
    
    $
    
 -32-




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##### 



Line of Credit
     Liquidity Analysis
   ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  -33-




---



##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
  ITEM 9A. DISCLOSURE OF CONTROLS AND PROCEDURES
   ITEM 9B. OTHER INFORMATION
  PART III
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 Name ofDirector
    
    
    
    
    
    Director
    
    Class ofor Nominee
    
    Age
    
    Since
    
    Director
    
    Recent Business ExperienceGeorge T. Jimenez
    
    
    69
    
    
    
    1983
    
    
    III
    
    Chief Executive Officer
of the Company since
1996, and Treasurer from
1983 to present.
President from 1983 to
September 1999 and July
2001 to June 2005. Mr.
Jimenez has been Chairman
of the Board of Directors
since 1983.Paul G. Casner, Jr.
    
    
    67
    
    
    
    1983
    
    
    II
    
    Business management
consultant. Prior to
retirement in April 2005,
was Executive Vice
President and Chief
Operating Officer of DRS
Technologies, Inc., a
defense electronics
corporation starting in
June 2000. Executive
Vice President,
Operations, DRS, from
December 1998 to May
2000; President of DRS
Electronic Systems Group,
a division of DRS
Technologies, from 1994
to 1998; and Chairman and
Chief Executive Officer
of Technology
Applications & Service
Company from March 1991
to September 1993.
 -34-




---



##### 



Name ofDirector
    
    
    
    
    
    Director
    
    Class ofor Nominee
    
    Age
    
    Since
    
    Director
    
    Recent Business ExperienceGilbert A. Wetzel
    
    
    73
    
    
    
    1992
    
    
    I
    
    Senior Vice President,
Mayer Leadership Group
(formerly Mayer &
Associates), a human
resources consulting
firm, since 2004 and
Managing Director from
1999 to 2004. Executive
Vice President, Right
Management Consultants,
from 1994 to 1999;
retired Chairman and
Chief Executive Officer
of Bell of Pennsylvania
and Diamond State
Telephone and founder and
retired Chief Executive
Officer of Geographic
Business Publishers, Inc.Harry M. Linowes
    
    
    77
    
    
    
    1999
    
    
    I
    
    Business management
consultant. Currently an
associate of Business
Mediation Associates.
Senior Partner (1992 to
retirement in 1996) and a
Managing Partner (1986 to
1992) of BDO Seidman,
Accountants and
Consultants.J. William Grimes
    
    
    64
    
    
    
    2004
    
    
    III
    
    General Partner, BG Media
Investors LLC, a private
equity capital firm
specializing in
investments in media and
telecommunications
companies, since 1996.
President and Interim
Chief Executive Officer
of i3 Mobile, Inc. from
March 2003 to December
2003. Chief Executive
Officer, Zenith Media,
from 1994 to 1996;
President and CEO of
Multimedia, Inc. from
1991 to 1993, and
President and CEO of
Univision Holdings, Inc.
from 1988 to 1991.Matthew J. Stover
    
    
    50
    
    
    
    2004
    
    
    II
    
    Chairman, LKM Ventures,
LLC, an investment and
advisory firm, since
January 2000. President
and then Chief Executive
Officer, edu.com, Inc., a
marketing services
company, from May 2000 to
June 2001. Group
President of Bell
Atlantic Directory
Services, and its
predecessor, NYNEX
Information Services
Group, from January 1994
to December 1999.
  www.acecomm.com
 -35-




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##### 



Executive Officers of the Company
  Name
    
    Age
    
    Current PositionGeorge T. Jimenez
    
    
    69
    
    
    Chairman of the Board, Chief Executive Officer and TreasurerJohn B. Bennett
    
    
    43
    
    
    PresidentChristopher C. Couch
    
    
    35
    
    
    Senior Vice President and Chief Marketing OfficerSteven R. Delmar
    
    
    49
    
    
    Senior Vice President and Chief Financial OfficerMichael E. Tinmouth
    
    
    47
    
    
    Senior Vice PresidentLoretta L. Rivers
    
    
    48
    
    
    Corporate Secretary and Director of Human Resources
       Section 16A Beneficial Ownership Reporting Compliance
  -36-




---



##### 



ITEM 11. EXECUTIVE COMPENSATION
 Cash Compensation
  Summary Compensation Table
 Long-TermCompensationAnnual Compensation(1)
    
    
    AwardsOther
    
    
    Number of
    
    
    AllName
    
    
    
    
    
    
    
    
    
    
    
    Annual
    
    
    Shares
    
    
    OtherAnd
    
    Fiscal
    
    
    
    
    
    
    
    
    
    Compen-
    
    
    Underlying
    
    
    Compen-Principal Position
    
    Year
    
    Salary(2)
    
    
    Bonus
    
    
    sation(3)
    
    
    Options
    
    
    sation(4)George T. Jimenez
    
    2005
    
    $
    200,769
    
    
    $
    0
    
    
    $
    0
    
    
    
    0
    
    
    $
    11,171Chairman of the Board,
    
    2004
    
    
    193,159
    
    
    
    0
    
    
    
    0
    
    
    
    24,000
    
    
    
    11,171Chief Executive Officer
    
    2003
    
    
    173,769
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    11,171and TreasurerJohn B. Bennett
    
    2005
    
    
    14,385
    (5)
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0President
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Christopher C. Couch
    
    2005
    
    
    132,116
    (6)
    
    
    0
    
    
    
    25,505
    
    
    
    125,000
    (7)
    
    
    0Senior Vice President and
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chief Marketing Officer
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Steven R. Delmar
    
    2005
    
    
    175,673
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Senior Vice President and
    
    2004
    
    
    168,143
    
    
    
    0
    
    
    
    0
    
    
    
    36,000
    
    
    
    0Chief Financial Officer
    
    2003
    
    
    152,048
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Michael E. Tinmouth
    
    2005
    
    
    134,015
    
    
    
    64,876
    
    
    
    0
    
    
    
    25,000
    
    
    
    0Senior Vice President
    
    2004
    
    
    46,906
    (8)
    
    
    0
    
    
    
    0
    
    
    
    90,000
    (7)
    
    
    02003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Includes salary deferrals under the Companys 401(k) plan. -37-




---



##### 



(2)
    
    Reflects a voluntary reduction in salary starting in February 2002 and continuing through
November 2003, for each of the named executive officers employed during that period.(3)
    
    Does not include perquisites and personal benefits aggregating less than 10% of the officers
salary and bonus. Comprises as to Mr. Couch relocation expenses of $25,505.(4)
    
    Consists of, as to all years, amounts paid in connection with a life insurance policy and
disability insurance for Mr. Jimenez. For fiscal 2005, $6,975 was paid for life insurance and
$4,196 was paid for disability insurance.(5)
    
    Reflects compensation beginning June 8, 2005, when Mr. Bennett joined the Company.(6)
    
    Reflects compensation beginning August 16, 2004, when Mr. Couch joined the Company.(7)
    
    One-time grants made to Messrs. Couch and Tinmouth, in connection with hiring.(8)
    
    Reflects compensation beginning February 13, 2004, when Mr. Tinmouth joined the Company. Option Grants
  Option Grants in Fiscal Year 2005
 Individual GrantsNumber of
    
    
    Percentage of
    
    
    
    
    
    
    
    
    
    
    Potential Realizable Value atShares
    
    
    Total Options
    
    
    
    
    
    
    
    
    
    
    Assumed Rates of Stock PriceUnderlying
    
    
    Granted to
    
    
    Exercise
    
    
    
    
    
    
    Appreciation for OptionOptions
    
    
    Employees in
    
    
    Price Per
    
    
    Expiration
    
    
    Term(1)Name
    
    Granted
    
    
    Fiscal 2005
    
    
    Share
    
    
    Date
    
    
    0%
    
    
    5%
    
    
    10%George T. Jimenez
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    John B. Bennett
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Christopher C. Couch
    
    
    125,000
    (2)
    
    
    29.90
    
    
    $
    1.76
    
    
    
    8/19/14
    
    
    
    0
    
    
    $
    138,357
    
    
    $
    350,623Steven R. Delmar
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Michael E. Tinmouth
    
    
    25,000
    (3)
    
    
    5.98
    
    
    
    1.75
    
    
    
    10/26/14
    
    
    
    0
    
    
    
    27,514
    
    
    
    69,726
 
 (1)
    
    Amounts are based on the 0%, 5%, and 10% annual compounded rates of appreciation of the
Common Stock price from the date of grant, prescribed by the Securities and Exchange
Commission, and are not intended to forecast future appreciation of the Companys Common
Stock. The prices of the Common Stock, assuming such annual compounded rates of appreciation
over the term of the option, would be as follows: Exercise price
    
    
    Term of Option
    
    
    0%
    
    
    5%
    
    
    10%$
    1.76
    
    
    10 years
    
    $
    0
    
    
    $
    2.867
    
    
    $
    4.565$
    1.75
    
    
    10 years
    
    $
    0
    
    
    $
    2.851
    
    
    $
    4.539
 -38-




---



##### 



(2)
    
    Option granted in connection with hiring, of which one third vests and becomes exercisable on
each of the three anniversaries of the date of grant, provided that the officer is employed by
the Company through each date.(3)
    
    Performance-based option grant, vesting seven (7) years from the date of grant, providing the
executive is still employed with the Company at that time. The vesting and exercisability of
the option shares were subject to accelerated vesting if certain revenue and profit goals were
met for calendar year 2004. Both the revenue and profit targets were met in full and the
vesting and exercisability was accelerated to March 1, 2005. Fiscal 2005 Stock Option Exercises and Year-End Option Values
  Number of SharesShares
    
    
    
    
    
    Underlying Unexercised
    
    
    Value of UnexercisedAcquired
    
    
    
    
    
    Options at Fiscal
    
    
    In-the-Money Options aton
    
    Value
    
    
    Year-End
    
    
    Fiscal Year-End(2)Name
    
    Exercise
    
    Realized(1)
    
    
    Exercisable/Unexercisable
    
    
    Exercisable/UnexercisableGeorge T. Jimenez
    
    0
    
    $
    0
    
    
    
    133,224
    
    
    
    20,000
    
    
    $
    16,772
    
    
    $
    22,800John B. Bennett
    
    0
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Christopher C. Couch
    
    0
    
    
    0
    
    
    
    0
    
    
    
    125,000
    
    
    
    0
    
    
    
    75,000Steven R. Delmar
    
    0
    
    
    0
    
    
    
    136,977
    
    
    
    20,000
    
    
    
    90,836
    
    
    
    22,800Michael E. Tinmouth
    
    0
    
    
    0
    
    
    
    115,000
    
    
    
    0
    
    
    
    24,250
    
    
    
    0
 
 (1)
    
    Value realized represents the positive spread between the respective exercise prices of the
exercised options and the fair market value per share on the respective dates of exercise.(2)
    
    Value for in-the-money options represent the positive spread between the respective
exercise prices of outstanding options and the market price on June 30, 2005. Employment Contracts, Termination of Employment and Change-of-Control Arrangements
  Compensation of Directors
  -39-




---



##### 



Compensation Committee Interlocks and Insider Participation
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 Amounts and Nature of
    
    Percent of OutstandingName and Address(1)
    
    Ownership
    
    SharesDirectors, Nominees and NamedExecutive OfficersGeorge T. Jimenez
    
    
    2,023,108
    (2)
    
    
    12.01
    %Paul G. Casner, Jr.
    
    
    29,000
    (3)
    
    
    *Harry M. Linowes
    
    
    23,000
    (4)
    
    
    *Gilbert A. Wetzel
    
    
    79,000
    (5)
    
    
    *J. William Grimes
    
    
    23,225
    (6) (12)
    
    
    *Matthew J. Stover
    
    
    9,572
    (7)
    
    
    *Steven R. Delmar
    
    
    141,977
    (8)
    
    
    *Michael E. Tinmouth
    
    
    115,000
    (9)
    
    
    *Christopher C. Couch
    
    
    45,001
    (10)
    
    
    *John B. Bennett
    
    
    
    
    
    
    All Directors, Nominees and Executive
    
    
    2,488,696
    (11)
    
    
    14.47Officers as a group (10 persons)Other 5% StockholdersBG Media Investors, L.P.
    
    
    904,295
    (12)
    
    
    5.41c/o Lieber and LieberThe Lincoln Building60 E. 42nd Street, Suite 642New York, NY 10165Noga Confino
    
    
    870,147
    (13)
    
    
    5.21c/o Hill Dickinson
 -40-




---



##### 



Amounts and Nature of
    
    Percent of OutstandingName and Address(1)
    
    Ownership
    
    Shares50 Fountain StreetManchester, England M2 2ASSpringreel Limited
    
    
    870,147
    (13)
    
    
    5.21c/o Wachovia Bank1021 East Cary Street, 3rd
FloorRichmond, VA 23219
 
 *
    
    Less than one percent of stock outstanding.(1)
    
    Unless otherwise indicated, the address is c/o ACE*COMM Corporation, 704 Quince Orchard Road,
Gaithersburg, Maryland 20878 and the designated owner has voting and investment power with
respect to the shares.(2)
    
    Includes 133,224 shares issuable upon the exercise of options. Does not include 950 shares
held by his mother-in-law, as to which his wife has voting and investment power and as to
which Mr. Jimenez disclaims beneficial ownership.(3)
    
    Includes 9,000 shares issuable upon the exercise of options.(4)
    
    Includes 16,000 shares issuable upon the exercise of options. Does not include 100 shares
held by his wife in a retirement account, as to which his wife has sole voting and investment
power and as to which Mr. Linowes disclaims beneficial ownership.(5)
    
    Includes 12,000 shares issuable upon the exercise of options.(6)
    
    Includes 23,038 shares issuable upon the exercise of options. Includes only shares held
individually. Does not include shares held by BG Media Investors L.P. for which Mr. Grimes
shares voting and dispositive power (see note 12).(7)
    
    Includes 9,441 shares issuable upon the exercise of options.(8)
    
    Includes 136,977 shares issuable upon the exercise of options.(9)
    
    Includes 115,000 shares issuable upon the exercise of options.(10)
    
    Includes 41,667 shares issuable upon the exercise of options. Also includes 3,334 shares
acquired under the Companys employee stock purchase plan.(11)
    
    Includes 496,347 shares issuable upon the exercise of options. Includes only shares held
individually or through trusts.(12)
    
    Includes 904,295 shares held by BG Media Investors L.P. (BG LP). Mr. Grimes, Mr. John
Backe and Mr. Ted Carroll are General Partners of BG Media Investors, LLC (BG LLC), the
General Partner of BG LP. Messrs. Grimes, Backe and Carroll disclaim beneficial ownership of
the shares held by BG LP other than to the extent of its or his individual partnership
interest. The Members of BG LLC, as the General Partner of BG LP, exercise shared voting and
dispositive power with respect to the 904,295 shares held by BG LP.
Excludes 187 shares, 37,572 shares
and 112 shares held individually by Messrs. Grimes, Backe and Carroll, respectively.(13)
    
    Information based on corporate records. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  -41-




---



##### 



PART IV
 ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, AND SCHEDULES
   PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Balance Sheets as of June 30, 2005 and 2004
    
    
    F-3Statements
of Operations for the years ended June 30,2005, 2004 and 2003
    
    
    F-4Statements
of Stockholders Equity for the yearsended June 30, 2005, 2004 and 2003
    
    
    F-5Statements
of Cash Flows for the years ended June 30,2005, 2004 and 2003
    
    
    F-6Notes to Financial Statements
    
    
    F-7
 -42-




---



##### 



3.5
    
    (A)
    
    Articles of Amendment and Restatement dated August 19, 1996.4.1
    
    (A)
    
    Form of Specimen of Common Stock Certificate.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)10.22
    
    (C)
    
    Amended and Restated omnibus Stock Plan(D)*
    
    2000 Stock Option Plan for Directors3
    
    (E)
    
    Bylaws of ACE*COMM as amended and restated dated October 23, 200310.1
    
    (F)
    
    Lease Between New Boston Fund and ACE*COMM as Tenant dated December 30, 200223.1
    
    (G)
    
    Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm31.1
    
    (G)
    
    Certification of Chief Executive Officer31.2
    
    (G)
    
    Certification of Chief Financial Officer32
    
    (G)
    
    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 18, 1999.(D)
    
    Incorporated by reference to our Proxy Statement, dated October 17, 2000(E)
    
    Incorporated by reference to the identically numbered exhibit filed as an
exhibit to our Form 10-Q, filed November 14, 2003.(F)
    
    Incorporated by reference to the identically numbered exhibit filed as an
exhibit to our Form 10-K, filed September 29, 2003.(G)
    
    Filed herewith
 
 *
    
    Identifies exhibit that consists of or includes a management contract or compensatory plan
or arrangement. -43-




---



##### 



SIGNATURES
  ACE*COMM CORPORATIONBy:
    /s/George T. JimenezGeorge T. JimenezChief Executive Officer
Date: August 31, 2005  Name
    
    Title
    
    Date/s/George T. Jimenez

(George T. Jimenez)
    
    Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
    
    August 31, 2005/s/Steven R. Delmar

(Steven R. Delmar)
    
    Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
    
    August 31, 2005/s/Paul G. Casner, Jr.

(Paul G. Casner, Jr.)
    
    Director
    
    August 31, 2005/s/Gilbert A. Wetzel)

(Gilbert A. Wetzel)
    
    Director
    
    August 31, 2005/s/Harry M. Linowes

(Harry M. Linowes)
    
    Director
    
    August 31, 2005/s/Matthew J. Stover

(Matthew J. Stover)
    
    Director
    
    August 31, 2005/s/J. William Grimes

(J. William Grimes)
    
    Director
    
    August 31, 2005
 -44-




---



##### 



ACE*COMM CORPORATION
 INDEX TO FINANCIAL STATEMENTS
  PageReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets as of June 30, 2005 and 2004
    
    
    F-3Consolidated
Statements of Operations for the years ended June 30,2005, 2004 and 2003
    
    
    F-4Consolidated
Statements of Stockholders Equity for the years endedJune 30, 2005, 2004 and 2003
    
    
    F-5Consolidated
Statements of Cash Flows for the years ended June 30,2005, 2004 and 2003
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
 F-1




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 F-2




---



##### 



ACE*COMM CORPORATION
 CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share amounts)
 June 30,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,683
    
    
    $
    2,881Accounts receivable, net
    
    
    4,870
    
    
    
    4,246Inventories, net
    
    
    532
    
    
    
    573Deferred contract costs
    
    
    85
    
    
    
    571Prepaid expenses and other
    
    
    601
    
    
    
    257Total current assets
    
    
    8,771
    
    
    
    8,528Property and equipment, net
    
    
    636
    
    
    
    592Goodwill
    
    
    1,681
    
    
    
    Acquired intangibles, net
    
    
    2,001
    
    
    
    907Other non-current assets
    
    
    478
    
    
    
    304Total assets
    
    $
    13,567
    
    
    $
    10,331Liabilities and Stockholders EquityCurrent liabilities:Borrowings
    
    $
    2,332
    
    
    $
    545Accounts payable
    
    
    1,379
    
    
    
    591Accrued expenses
    
    
    1,940
    
    
    
    1,484Accrued compensation
    
    
    1,013
    
    
    
    724Deferred revenue
    
    
    1,454
    
    
    
    1,519Total current liabilities
    
    
    8,118
    
    
    
    4,863Long-term notes payable
    
    
    72
    
    
    
    Total liabilities
    
    
    8,190
    
    
    
    4,863Commitments and contingencies (Note 13 )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,
16,694,330 and 13,761,182 shares issued and outstanding
    
    
    167
    
    
    
    138Additional paid-in capital
    
    
    34,808
    
    
    
    28,475Other comprehensive loss
    
    
    (32
    )
    
    
    (41
    )Accumulated deficit
    
    
    (29,566
    )
    
    
    (23,104
    )Total stockholders equity
    
    
    5,377
    
    
    
    5,468Total liabilities and stockholders equity
    
    $
    13,567
    
    
    $
    10,331
  F-3




---



##### 



ACE*COMM CORPORATION
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 Years Ended June 30,2005
    
    
    2004
    
    
    2003RevenueLicenses and hardware
    
    $
    8,734
    
    
    $
    6,387
    
    
    $
    7,710Services
    
    
    11,227
    
    
    
    7,284
    
    
    
    6,084Total revenue
    
    
    19,961
    
    
    
    13,671
    
    
    
    13,794Cost of licenses and hardware revenue
    
    
    3,276
    
    
    
    2,976
    
    
    
    2,848Cost of services revenue
    
    
    5,673
    
    
    
    4,865
    
    
    
    4,691Total cost of revenue
    
    
    8,949
    
    
    
    7,841
    
    
    
    7,539Gross profit
    
    
    11,012
    
    
    
    5,830
    
    
    
    6,255Selling, general and administrative
    
    
    9,774
    
    
    
    9,304
    
    
    
    7,861Research and development
    
    
    2,694
    
    
    
    1,226
    
    
    
    347In process research and development acquired
    
    
    5,118
    
    
    
    1,160
    
    
    
    Loss from operations
    
    
    (6,574
    )
    
    
    (5,860
    )
    
    
    (1,953
    )Interest expense
    
    
    53
    
    
    
    32
    
    
    
    29Gain from settlement of debt obligation
    
    
    228
    
    
    
    
    
    
    
    Loss before income tax provision
    
    
    (6,399
    )
    
    
    (5,892
    )
    
    
    (1,982
    )Income tax provision
    
    
    63
    
    
    
    6
    
    
    
    Net loss
    
    $
    (6,462
    )
    
    $
    (5,898
    )
    
    $
    (1,982
    )Basic and diluted net loss per share
    
    $
    (0.44
    )
    
    $
    (0.49
    )
    
    $
    (0.21
    )Shares used in computing net loss per share:Basic and diluted
    
    
    14,555
    
    
    
    12,068
    
    
    
    9,557
  F-4




---



##### 



ACE*COMM CORPORATION
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
 Common StockAdditional
    
    
    OtherPaid-In
    
    
    Comprehensive
    
    
    AccumulatedShares
    
    
    Par Value
    
    
    Capital
    
    
    Loss
    
    
    Deficit
    
    
    TotalBalance, July 1, 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
    
    
    140
    
    
    
    1
    
    
    
    191
    
    
    
    
    
    
    
    
    
    
    
    192Employee stock purchase plan
    
    
    42
    
    
    
    1
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    51Stock repurchases and warrants
    
    
    (2
    )
    
    
    
    
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    (48
    )Issuance of warrants to
consultant
    
    
    
    
    
    
    
    
    
    
    164
    
    
    
    
    
    
    
    
    
    
    
    164Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41
    )
    
    
    
    
    
    
    (41
    )i3 Mobile merger
    
    
    3,774
    
    
    
    38
    
    
    
    6,185
    
    
    
    
    
    
    
    
    
    
    
    6,223Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,898
    )
    
    
    (5,898
    )Balance, June 30, 2004
    
    
    13,761
    
    
    
    138
    
    
    
    28,475
    
    
    
    (41
    )
    
    
    (23,104
    )
    
    
    5,468Exercise of common stock
    
    
    29
    
    
    
    
    
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    33Employee stock purchase plan
    
    
    41
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    53Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    9Issuance of warrants to
consultant
    
    
    123
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    Private financing
    
    
    1,000
    
    
    
    10
    
    
    
    2,120
    
    
    
    
    
    
    
    
    
    
    
    2,1302helix transaction
    
    
    1,740
    
    
    
    18
    
    
    
    4,128
    
    
    
    
    
    
    
    
    
    
    
    4,146Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,462
    )
    
    
    (6,462
    )Balance, June 30, 2005
    
    
    16,694
    
    
    $
    167
    
    
    $
    34,808
    
    
    $
    (32
    )
    
    $
    (29,566
    )
    
    $
    5,377
  F-5




---



##### 



ACE*COMM CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Years ended June 30,2005
    
    
    2004
    
    
    2003Cash flows from operating activities:Net loss
    
    $
    (6,462
    )
    
    $
    (5,898
    )
    
    $
    (1,982
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    732
    
    
    
    707
    
    
    
    876Provision for doubtful accounts
    
    
    126
    
    
    
    538
    
    
    
    120Loss on disposal of property and equipment
    
    
    
    
    
    
    
    
    
    
    22Gain from settlement of debt obligation
    
    
    (228
    )
    
    
    
    
    
    
    In process research and development costs acquired
    
    
    5,118
    
    
    
    1,160
    
    
    
    Non cash compensation  issuance of stock warrants to consultant
    
    
    
    
    
    
    164
    
    
    
    Changes in operating assets and liabilities, net of effects of merger:Accounts receivable
    
    
    (545
    )
    
    
    41
    
    
    
    (1,079
    )Inventories, net
    
    
    51
    
    
    
    127
    
    
    
    422Prepaid expenses and other assets
    
    
    (270
    )
    
    
    (294
    )
    
    
    (49
    )Deferred contract costs
    
    
    486
    
    
    
    (571
    )
    
    
    Accounts payable
    
    
    31
    
    
    
    (1,582
    )
    
    
    (27
    )Accrued liabilities
    
    
    (102
    )
    
    
    367
    
    
    
    (919
    )Deferred revenue
    
    
    (254
    )
    
    
    216
    
    
    
    70Net cash used in operating activities
    
    
    (1,317
    )
    
    
    (5,025
    )
    
    
    (2,546
    )Cash flows from investing activities:Proceeds from sale of equipment
    
    
    
    
    
    
    
    
    
    
    8Cash acquired in 2helix acquisition
    
    
    392
    
    
    
    
    
    
    
    Purchases of property and equipment
    
    
    (183
    )
    
    
    (351
    )
    
    
    (122
    )Purchases of other non-current assets
    
    
    (226
    )
    
    
    
    
    
    
    Contract rights acquired from Intasys
    
    
    (100
    )
    
    
    (2,132
    )
    
    
    Net cash used in investing activities
    
    
    (117
    )
    
    
    (2,483
    )
    
    
    (114
    )Cash flows from financing activities:Net borrowings on line of credit
    
    
    1,060
    
    
    
    112
    
    
    
    224Payment on 2helix notes related to acquisition
    
    
    (2,076
    )
    
    
    
    
    
    
    Other notes payable
    
    
    72
    
    
    
    
    
    
    
    Proceeds from employee stock purchase plan and exercise of stock
options
    
    
    87
    
    
    
    243
    
    
    
    37Net proceeds from private financing transactions
    
    
    2,131
    
    
    
    
    
    
    
    475Repurchase of common stock
    
    
    
    
    
    
    (48
    )
    
    
    (36
    )Net proceeds from common stock issued in i3 Mobile transaction
    
    
    
    
    
    
    8,553
    
    
    
    Net cash provided by financing activities
    
    
    1,274
    
    
    
    8,860
    
    
    
    700Net increase (decrease) in cash and cash equivalents
    
    
    (160
    )
    
    
    1,352
    
    
    
    (1,960
    )Effect of exchange rate change on cash
    
    
    (38
    )
    
    
    (41
    )
    
    
    Cash and cash equivalents at beginning of year
    
    
    2,881
    
    
    
    1,570
    
    
    
    3,530Cash and cash equivalents at end of year
    
    $
    2,683
    
    
    $
    2,881
    
    
    $
    1,570Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    57
    
    
    $
    38
    
    
    $
    44Income taxes
    
    $
    63
    
    
    $
    6
    
    
    $
    
   F-6




---



##### 



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




---



##### 



Software Revenue Recognition,
     Cash and cash equivalents
  Impairment of Long-Lived Assets
   F-8




---



##### 



Inventories
  Property and equipment
  Earnings per share
  Income taxes
 Accounting for Income Taxes
 Reclassifications
  Fair value of financial instruments
   Foreign Currency
  F-9




---



##### 



Years ended June 30,2005
    
    
    2004
    
    
    2003Net loss
    
    $
    (6,462
    )
    
    $
    (5,898
    )
    
    $
    (1,982
    )Other
comprehensive income (loss) 
Foreign Currency Translation
    
    
    9
    
    
    
    (41
    )
    
    
    Total other comprehensive loss
    
    $
    (6,453
    )
    
    $
    (5,939
    )
    
    $
    (1,982
    )
 Stock Based Compensation
 ,
   Year ended June 30,(in thousands, except per share amounts)2005
    
    
    2004
    
    
    2003Net loss
    
    $
    (6,462
    )
    
    $
    (5,898
    )
    
    $
    (1,982
    )Add: Total stock-based compensation expense
reported in net loss
    
    
    
    
    
    
    
    
    
    
    Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards*
    
    
    (1,227
    )
    
    
    (755
    )
    
    
    (890
    )Pro forma net loss
    
    $
    (7,689
    )
    
    $
    (6,653
    )
    
    $
    (2,872
    )Earnings per share:Basic and
diluted  as reported
    
    $
    (0.44
    )
    
    $
    (0.49
    )
    
    $
    (0.21
    )Basic and
diluted  pro forma
    
    $
    (0.53
    )
    
    $
    (0.55
    )
    
    $
    (0.30
    )Weighted average shares:Weighted
average common shares outstanding  Basic
    
    
    14,555
    
    
    
    12,068
    
    
    
    9,557Weighted average common shares outstanding   Diluted
    
    
    14,555
    
    
    
    12,068
    
    
    
    9,557
 
 *
    
    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.  F-10




---



##### 



2005
    
    2004
    
    2003Expected life (years)
    
    
    3
    
    
    
    3
    
    
    
    3Risk-free interest rate
    
    
    3.1
    %
    
    
    2.63.2
    %
    
    
    2.0
    %Expected volatility
    
    
    109.5
    %
    
    
    109.0119.0
    %
    
    
    120.9
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
  Recently Issued Accounting Pronouncements
   NOTE 3
 ACCOUNTS RECEIVABLE
  June 30,2005
    
    
    2004Billed receivables
    
    $
    4,246
    
    
    $
    3,692Unbilled and other receivables
    
    
    713
    
    
    
    1,089Allowance for doubtful accounts
    
    
    (89
    )
    
    
    (535
    )$
    4,870
    
    
    $
    4,246
 F-11




---



##### 



Billed
  Unbilled
  Allowance for doubtful accounts
   NOTE 4
 INVENTORIES
  June 30,2005
    
    
    2004Inventories
    
    $
    857
    
    
    $
    772Allowance for obsolescence
    
    
    (325
    )
    
    
    (199
    )$
    532
    
    
    $
    573
  NOTE 5
 DEFERRED CONTRACT COSTS
    F-12




---



##### 



NOTE 6  PROPERTY AND EQUIPMENT
  June 30,2005
    
    
    2004Computer equipment
    
    $
    4,913
    
    
    $
    5,424Lab test equipment
    
    
    137
    
    
    
    137Office equipment
    
    
    729
    
    
    
    728Leasehold improvements
    
    
    560
    
    
    
    535Vehicles
    
    
    49
    
    
    
    216,388
    
    
    
    6,845Less accumulated depreciation
    
    
    (5,752
    )
    
    
    (6,253
    )$
    636
    
    
    $
    592
  NOTE 7  BORROWINGS
 Lines of Credit
     F-13




---



##### 



2helix Notes Payable
  NOTE 8  RETIREMENT PLANS
   NOTE 9  INCOME TAXES
  June 30,2005
    
    
    2004Tax assets:Allowance for doubtful accounts
    
    $
    34
    
    
    $
    203Inventories
    
    
    279
    
    
    
    244Accrued expenses
    
    
    144
    
    
    
    123Amortization
    
    
    2,407
    
    
    
    447Stock warrants
    
    
    
    
    
    
    62Net operating loss carryforwards
    
    
    13,392
    
    
    
    13,076Tax credit carryforwards
    
    
    26
    
    
    
    26Other
    
    
    3
    
    
    
    2Gross deferred tax assets
    
    
    16,285
    
    
    
    14,183Tax liabilities:Income on contracts
    
    
    (270
    )
    
    
    (253
    )Depreciation
    
    
    (88
    )
    
    
    (104
    )Gross deferred tax liabilities
    
    
    (358
    )
    
    
    (357
    )Net deferred tax asset
    
    
    15,927
    
    
    
    13,826Valuation allowance
    
    
    (15,927
    )
    
    
    (13,826
    )Net deferred tax
    
    $
    
    
    
    $
    
    F-14




---



##### 



Years ended June 30,2005
    
    
    2004
    
    
    2003Income tax benefit at statutory rate
    
    $
    (2,197
    )
    
    $
    (2,005
    )
    
    $
    (674
    )State income taxes net of Federal benefit
    
    
    (236
    )
    
    
    (233
    )
    
    
    (78
    )Nondeductible expenses
    
    
    56
    
    
    
    28
    
    
    
    30Foreign taxes paid
    
    
    1
    
    
    
    5
    
    
    
    Other
    
    
    43
    
    
    
    
    
    
    
    Valuation allowance
    
    
    2,396
    
    
    
    2,211
    
    
    
    722Actual (benefit) provision
    
    $
    63
    
    
    $
    6
    
    
    $
    
 NOTE 10  STOCKHOLDERS EQUITY
 Employee Stock Purchase Plan
  Stock Repurchases
  Issuance of Common Stock
  F-15




---



##### 



Stock Options
 Amended and Restated Omnibus Stock Plan (Omnibus Plan)
     2000 Stock Option Plan for Directors (Directors Plan)
   F-16




---



##### 



Omnibus Plan
    
    
    Directors Plan
    
    
    i3 MobileWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Avg.
    
    
    Number
    
    
    Avg.
    
    
    Number
    
    
    Avg.of
    
    
    Share
    
    
    of
    
    
    Share
    
    
    of
    
    
    ShareShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding Options at
June 30, 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
    
    
    
    
    
    
    
    Exercised
    
    
    (139,905
    )
    
    
    1.37
    
    
    
    
    
    
    
    
    
    
    
    80,997
    
    
    
    24.76Expired
    
    
    (146,289
    )
    
    
    4.27
    
    
    
    (12,000
    )
    
    
    4.61
    
    
    
    (25,007
    )
    
    
    5.60Outstanding Options at
June 30, 2004
    
    
    1,708,900
    
    
    
    2.88
    
    
    
    90,000
    
    
    
    5.41
    
    
    
    55,990
    
    
    
    33.32Granted
    
    
    397,000
    
    
    
    1.99
    
    
    
    21,000
    
    
    
    2.08
    
    
    
    
    
    
    
    Exercised
    
    
    (29,352
    )
    
    
    1.12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Expired
    
    
    (57,755
    )
    
    
    2.78
    
    
    
    (33,000
    )
    
    
    9.75Outstanding Options
at June 30, 2005
    
    
    2,018,793
    
    
    
    2.73
    
    
    
    78,000
    
    
    
    2.68
    
    
    
    55,990
    
    
    
    33.32Options exercisable at
June 30, 2003
    
    
    803,265
    
    
    $
    3.64
    
    
    
    62,000
    
    
    $
    7.01
    
    
    
    
    
    
    $
    June 30, 2004
    
    
    825,036
    
    
    $
    3.40
    
    
    
    60,000
    
    
    $
    6.83
    
    
    
    55,990
    
    
    $
    33.32June 30, 2005
    
    
    1,777,639
    
    
    $
    2.92
    
    
    
    39,000
    
    
    $
    2.98
    
    
    
    55,990
    
    
    $
    33.32Options available for granting
    
    
    292,006
    
    
    
    
    
    
    
    122,000
    
    
    
    
    
    
    
    
  Options Outstanding
    
    
    Options ExercisableWeighted-AverageNumber
    
    
    Remaining
    
    
    Weighted-
    
    
    Number
    
    
    Weighted-Range of
    
    Outstanding
    
    
    Contractual
    
    
    Average
    
    
    Exercisable
    
    
    AverageExercise Prices
    
    at June 30, 2005
    
    
    Life (yrs)
    
    
    Exercise Price
    
    
    at June 30, 2005
    
    
    Exercise Price$0.00 - $2.00
    
    
    894,030
    
    
    
    6.6
    
    
    $
    1.43
    
    
    
    652,876
    
    
    $
    1.45$2.01 - $4.00
    
    
    897,009
    
    
    
    7.8
    
    
    
    2.63
    
    
    
    858,009
    
    
    
    2.64$4.01 - $6.00
    
    
    71,526
    
    
    
    2.5
    
    
    
    5.00
    
    
    
    71,526
    
    
    
    5.00$6.01 - $8.00
    
    
    208,470
    
    
    
    3.5
    
    
    
    6.51
    
    
    
    208,470
    
    
    
    6.51$8.01 - $10.00
    
    
    2,500
    
    
    
    4.6
    
    
    
    8.50
    
    
    
    2,500
    
    
    
    8.50$10.01 - $15.00
    
    
    46,706
    
    
    
    3.1
    
    
    
    12.04
    
    
    
    46,706
    
    
    
    12.04$15.01 - $100.00
    
    
    32,542
    
    
    
    5.8
    
    
    
    50.81
    
    
    
    32,542
    
    
    
    50.812,152,783
    
    
    
    
    
    
    
    
    
    
    
    1,872,629
  F-17




---



##### 



Financial Accounting Standards No. 123
 Accounting for Stock Issued to Employees.
 NOTE 11
 MERGERS AND ACQUISITIONS
 Fiscal 2005
 Double Helix Solutions Limited
    In process research and development
    
    $
    5,118Contract rights and related technology
    
    
    1,322Note receivable from 2helix
    
    
    1,015Goodwill
    
    
    1,681$
    9,136
      F-18




---



##### 



Fiscal 2004
 Intasys
   In process research and development
    
    $
    1,160Contract rights and related technology
    
    
    972Property and equipment
    
    
    130$
    2,262
  F-19




---



##### 



i3 Mobile
 Business Combinations, Determining Whether a Non-monetary Transaction Involves Receipt of Productive Assets of a
Business.
  F-20




---



##### 



NOTE
12  EARNINGS PER SHARE (in thousands, except per share amounts)
  Years ended June 30,2005
    
    
    2004
    
    
    2003Basic EPS:(Loss) income (numerator):Net (loss) income available to common shareholders
    
    $
    (6,462
    )
    
    $
    (5,898
    )
    
    $
    (1,982
    )Shares (denominator):Weighted average common shares
    
    
    14,555
    
    
    
    12,068
    
    
    
    9,557Basic EPS
    
    $
    (0.44
    )
    
    $
    (0.49
    )
    
    $
    (0.21
    )Diluted EPS:(Loss) income (numerator):Net (loss) income available to common stockholders
    
    $
    (6,462
    )
    
    $
    (5,898
    )
    
    $
    (1,982
    )Shares (denominator):Weighted average common shares
    
    
    14,555
    
    
    
    12,068
    
    
    
    9,557Stock options*
    
    
    
    
    
    
    
    
    
    
    Total weighted shares and equivalents
    
    
    14,555
    
    
    
    12,068
    
    
    
    9,557Diluted EPS
    
    $
    (0.44
    )
    
    $
    (0.49
    )
    
    $
    (0.21
    )
 
 *
    
    Due to the loss incurred during the years ended June 30, 2005, 2004,
and 2003 zero incremental shares related to stock options are included in the
calculation of Diluted EPS because the effect would be anti-dilutive. The total
number of potentially dilutive shares not included in the EPS calculation at
June 30, 2005 due to anti-dilution was 307,283. NOTE
13  COMMITMENTS AND CONTINGENCIES
    Year ending June 30,
    
    Amount2006
    
    $
    1,2072007
    
    
    7782008
    
    
    7702009
    
    
    3892010
    
    
    74$
    3,218
  F-21




---



##### 



NOTE
14  SEGMENT INFORMATION AND BUSINESS CONCENTRATION
  2005
    
    
    2004
    
    
    2003Revenue by TypeEnterprise
    
    $
    6,656
    
    
    $
    4,187
    
    
    $
    6,500Network Service Provider (NSP)
    
    
    7,554
    
    
    
    7,092
    
    
    
    7,271Operations Support Systems (OSS)
    
    
    5,732
    
    
    
    2,358
    
    
    
    IT and Other
    
    
    19
    
    
    
    34
    
    
    
    23Total Revenue
    
    $
    19,961
    
    
    $
    13,671
    
    
    $
    13,794Revenue by LocationU.S.
    
    $
    6,241
    
    
    $
    5,572
    
    
    $
    6,049Canada and Mexico
    
    
    734
    
    
    
    501
    
    
    
    947Asia
    
    
    3,049
    
    
    
    1,392
    
    
    
    2,280Europe
    
    
    7,418
    
    
    
    3,217
    
    
    
    3,098South America
    
    
    38
    
    
    
    118
    
    
    
    425Africa and Middle East
    
    
    2,481
    
    
    
    2,871
    
    
    
    995Total revenue
    
    $
    19,961
    
    
    $
    13,671
    
    
    $
    13,794
    F-22




---



##### 



June 30,2005
    
    
    2004
    
    
    2003North America:Total revenue
    
    $
    14,353
    
    
    $
    11,363
    
    
    $
    13,794Identifiable assets
    
    $
    10,733
    
    
    $
    8,256
    
    
    $
    8,244United Kingdom:Total Revenue
    
    $
    4,694
    
    
    $
    1,724
    
    
    $
    Identifiable assets
    
    $
    2,283
    
    
    $
    1,493
    
    
    $
    Australia:Total revenue
    
    $
    914
    
    
    $
    584
    
    
    $
    Identifiable assets
    
    $
    515
    
    
    $
    582
    
    
    $
    
 NOTE 15: SELECTED QUARTERLY FINANCIAL DATA
  Fiscal Three Months Ended2005
    
    
    2004June 30,
    
    
    March 31,
    
    
    Dec. 31,
    
    
    Sept. 30,
    
    
    June 30,
    
    
    March 31,
    
    
    Dec. 31,
    
    
    Sept. 30,2005
    
    
    2005
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    2003
    
    
    2003(in thousands except per share data)Statement of Operations Data:Revenue
    
    $
    6,765
    
    
    $
    3,760
    
    
    $
    4,778
    
    
    $
    4,661
    
    
    $
    3,951
    
    
    $
    4,842
    
    
    $
    2,414
    
    
    $
    2,464Gross profit
    
    
    3,926
    
    
    
    1,764
    
    
    
    2,806
    
    
    
    2,516
    
    
    
    1,502
    
    
    
    2,707
    
    
    
    696
    
    
    
    925Net income (loss)
    
    
    337
    
    
    
    (6,592
    )
    
    
    176
    
    
    
    (383
    )
    
    
    (2,002
    )
    
    
    (1,399
    )
    
    
    (1,517
    )
    
    
    (980
    )Net income (loss) per share:Basic
    
    $
    0.02
    
    
    $
    (0.47
    )
    
    $
    0.01
    
    
    $
    (0.03
    )
    
    $
    (0.15
    )
    
    $
    (0.10
    )
    
    $
    (0.14
    )
    
    $
    (0.10
    )Diluted
    
    $
    0.02
    
    
    $
    (0.47
    )
    
    $
    0.01
    
    
    $
    (0.03
    )
    
    $
    (0.15
    )
    
    $
    (0.10
    )
    
    $
    (0.14
    )
    
    $
    (0.10
    )
    F-23




---



##### 



SCHEDULE
II  VALUATION AND QUALIFYING ACCOUNTS (in thousands):
 RecoveriesBeginning
    
    
    Charged to
    
    
    of Prior
    
    
    
    
    
    
    EndingDescription
    
    Balance
    
    
    Expenses
    
    
    Write-offs
    
    
    Write-offs
    
    
    BalanceYear ended June 30, 2005:Allowance for doubtful accounts
    
    $
    535
    
    
    $
    126
    
    
    $
    32
    
    
    $
    604
    
    
    $
    89Reserve for obsolete inventory
    
    $
    199
    
    
    $
    126
    
    
    $
    
    
    
    $
    
    
    
    $
    325Year ended June 30, 2004:Allowance for doubtful accounts
    
    $
    218
    
    
    $
    538
    
    
    $
    28
    
    
    $
    249
    
    
    $
    535Reserve for obsolete inventory
    
    $
    194
    
    
    $
    155
    
    
    $
    
    
    
    $
    150
    
    
    $
    199Year ended June 30, 2003:Allowance for doubtful accounts
    
    $
    605
    
    
    $
    120
    
    
    $
    13
    
    
    $
    521
    
    
    $
    217Reserve for obsolete inventory
    
    $
    194
    
    
    $
    120
    
    
    $
    
    
    
    $
    120
    
    
    $
    194
 F-24