ACE COMM CORP, 424B1, 1996-08-14

ACE COMM CORP
424B1, 1996-08-14
COMMUNICATIONS EQUIPMENT, NEC

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<PAGE>
2,500,000 SHARES

[LOGO]
COMMON STOCK
------------------

Of the 2,500,000 shares of Common Stock, $.01 par value per share ("Common
Stock"), of ACE*COMM Corporation ("ACE*COMM" or the "Company"), offered hereby,
2,270,000 shares are being offered by the Company and 230,000 shares are being
offered by a stockholder of the Company (the "Selling Stockholder"). See
"Principal and Selling Stockholders." The Company will not receive any of the
proceeds from the sale of shares by the Selling Stockholder.

Prior to this offering, there has been no public market for the Common Stock
of the Company. For factors which were considered in determining the initial
public offering price, see "Underwriting." The Company has been approved to list
the Common Stock on the Nasdaq National Market under the symbol "ACEC."

At the request of the Company, the Underwriters have reserved up to 100,000
shares of Common Stock for sale at the initial public offering price to certain
employees of the Company and certain other non-affiliated persons. The number of
shares of Common Stock available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any such reserved
shares which are not so purchased will be offered to the general public on the
same basis as other shares offered hereby. See "Underwriting."
------------------------

FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SECURITIES OFFERED HEREBY, SEE "RISK FACTORS" BEGINNING AT
PAGE 8.
---------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO THE
DISCOUNTS AND PROCEEDS TO THE SELLING
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER
<S> <C> <C> <C> <C>
Per Share................................. $7.00 $.49 $6.51 $6.51
Total (3)................................. $17,500,000 $1,225,000 $14,777,700 $1,497,300
</TABLE>

(1) The Company and the Selling Stockholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deduction of expenses payable by the Company estimated at $835,000.

(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 additional shares of Common Stock, on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, Proceeds to the Company and Proceeds to the
Selling Stockholder will be $20,125,000, $1,408,750, $17,218,950 and
$1,497,300, respectively. See "Underwriting."

The shares are being offered by the several Underwriters, subject to prior
sale, when, as, and if delivered to and accepted by the Underwriters, and
subject to various prior conditions, including the right to reject orders in
whole or in part. It is expected that delivery of share certificates will be
made against payment therefor at the offices of Furman Selz LLC in New York, New
York, on or about August 19, 1996.

FURMAN SELZ

OPPENHEIMER & CO., INC.

RODMAN & RENSHAW, INC.
---------------

The date of this Prospectus is August 13, 1996.
<PAGE>
The inside front cover page contains a map of the world indicating the
number of installations of the Company's products and the countries in which the
Company's products have been installed.

In addition, the inside front cover folds open to reveal two pages, which
contain brief descriptions of the Company's carrier network products and network
management products and depict where such products fit within an end user's
network.

------------------------

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
RELATED NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS
OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES (I) NO EXERCISE
OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, (II) THE EFFECT OF A 4.5-FOR-ONE
STOCK SPLIT OF THE COMPANY'S COMMON STOCK EFFECTED IN THE FORM OF A STOCK
DIVIDEND PRIOR TO THE DATE OF THIS PROSPECTUS, (III) THE REDEMPTION OF ALL
OUTSTANDING SHARES OF THE COMPANY'S CLASS B PREFERRED STOCK AND (IV) THE
CONVERSION OF ALL OUTSTANDING SHARES OF THE COMPANY'S CLASS C CONVERTIBLE
PREFERRED STOCK (THE "CLASS C PREFERRED STOCK") INTO 1,530,950 SHARES OF COMMON
STOCK, WHICH WILL OCCUR AUTOMATICALLY UPON THE COMPLETION OF THIS OFFERING.
CERTAIN TECHNICAL TERMS AND ACRONYMS USED IN THIS PROSPECTUS ARE DEFINED IN THE
"GLOSSARY OF TERMS" BEGINNING ON PAGE 57. THE COMPANY CONSIDERS
TELECOMMUNICATIONS SERVICE PROVIDERS TO CONSIST GENERALLY OF BOTH CARRIERS
OPERATING VOICE AND DATA NETWORKS FOR THEIR CUSTOMERS AND ENTERPRISES WHICH
OPERATE VOICE AND DATA NETWORKS FOR THEIR OWN USE.

THE COMPANY

ACE*COMM Corporation ("ACE*COMM" or the "Company") develops, markets and
services operations support systems ("OSS") products for networks deployed by
telecommunications service providers, such as telephone companies, other public
carriers and large enterprises operating data and voice networks using intranets
and the Internet. The Company's products perform such functions as billing data
collection, network surveillance, alarm processing and network management for
some of the largest carriers and enterprises in the world.

Increasing worldwide demand for data, voice and video services has created a
need for increased network capacity and new network services. In addition,
telecommunications service providers face an increasingly competitive
environment due to continued deregulation and privatization of the global
telecommunications industry. In response to these developments, interexchange
and local exchange carriers and providers of Internet, personal communications
and cellular services are offering a wide range of network features and options.
As a result of the growth in network usage and new services, large enterprises
require timely, accurate information regarding network performance and system
usage to support the increasing volumes of data and voice communications to and
from employees, customers and suppliers. ACE*COMM's products are designed to
enable carriers and large enterprises to optimize the use of new and existing
communications networks.

The Company's carrier network products connect to existing network
infrastructures and enable carriers to rapidly and accurately collect call
records and performance data which are used for billing, fraud detection,
customer care, marketing research and forecasting, and other operations support
functions. These products are designed to enhance the carriers' competitive
position by allowing them to offer new features and services, minimize network
down-time, increase revenue through more accurate and timely billing and improve
network productivity. The Company believes that it is well positioned to
continue to offer its carrier network products for use by end users located
throughout the world, for example, in Europe, Asia and the Pacific Rim, which
typically operate a wide variety of switches from different manufacturers and
require a data collection system capable of adapting to and integrating with the
billing system and other OSSs.

Leveraging its experience in developing carrier network products, the
Company has also produced network management products that meet the growing
needs of large enterprises in the United States and abroad, including government
agencies, military organizations, educational institutions and "Fortune 1000"
size organizations. As these enterprises have become increasingly dependent on
the Internet and intranets for voice and data communications, their demand for
reliable and flexible network management tools has increased. The Company's
network management products consist of standardized software-based systems that
enable network managers to manage voice and data communications by automating
service administration, tracking network connections, detecting system errors
and malfunctions, controlling network inventory assignments and configuration,
monitoring

3
<PAGE>
traffic and performing billing functions. The Company's network management
products are designed to increase the efficiency of communication operations and
incorporate recent developments in object-oriented development, real-time
response, client server architecture and graphical user interfaces.

The Company is well positioned to develop products to support the
convergence and growth of telephony and data networks within the enterprise, as
a result of its knowledge and experience in data control and network switching
technology, data capture and warehousing, and client server systems. The Company
presently is partnering with Newbridge Networks Corporation ("Newbridge") to
develop software designed to provide billing data collection capabilities for
asynchronous transfer mode ("ATM"), Frame Relay and X.25 switch users. See
"Business -- Strategic Alliances and Other Customers." The Company anticipates
similar opportunities to develop other network edge technologies for equipment
and service providers in the growing market for data services.

The Company has strategic alliances with several significant customers or
potential customers in order to distribute its products effectively and develop
products that can be responsive to the needs of end users. The Company's
strategic alliance partners include AT&T Corporation ("AT&T"), Cincinnati Bell
Information Systems, Inc. ("CBIS"), Teleglobe Canada, Inc. ("Teleglobe"),
International Computers Limited ("ICL"), Lucent Technologies, Inc., GTE
Government Systems Corporation ("GTE Government Systems") and BellSouth
Communication Services, Inc. ("BellSouth"). The Company develops products which
are purchased by these partners for their own use or for resale to their own
customers directly or as part of a larger system. The Company has sold products
to its strategic alliance partners for installation in domestic and overseas
carriers, the U.S. Armed Forces, the U.S. Department of State and major
airports, among others. The alliances have been especially helpful in enabling
the Company to further penetrate, on a cost-effective basis, the international
telecommunications carrier markets, where the Company's alliance partners are
well recognized and have well-developed business relationships. The Company also
sells directly to large customers such as Telefonos de Mexico S.A. de C.V.
("TELMEX"), NYNEX and the University of Iowa. See "Business -- Strategic
Alliances and Other Customers."

The Company's carrier network products have been installed in over 500 end
user sites in 32 countries and its network management products have been
installed in over 100 end user sites in 10 countries. The Company's carrier
network products can be tailored to the needs of operating companies in both the
wireline and wireless sectors, as well as end users, regardless of the
geographical location of the network equipment. The Company's network management
products are compatible with virtually all standard network management
platforms.

The Company was incorporated in the State of Maryland in 1983. Its principal
executive offices are located at 209 Perry Parkway, Gaithersburg, Maryland
20877, and its telephone number is (301) 258-9850. The Company's site on the
World Wide Web is located at http://www.acec.com.

4
<PAGE>
THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by:
The Company................................ 2,270,000 shares
The Selling Stockholder.................... 230,000 shares
Total.................................... 2,500,000 shares
Common Stock to be outstanding after the
offering.................................... 7,391,401 shares(1)
Use of Proceeds to the Company............... For general corporate purposes, including
working capital, the employment of additional
personnel, the repayment of bank
indebtedness, the redemption of Class B
Preferred Stock and the repayment of certain
indebtedness held by the holder of such stock
and by a related party. See "Use of
Proceeds."
Nasdaq National Market symbol................ ACEC
</TABLE>

- ------------------------
(1) Does not include 1,073,704 shares of Common Stock issuable upon the exercise
of stock options outstanding as of June 30, 1996, with exercise prices
ranging from $0.30 to $7.93 per share, and approximately 541,215 additional
shares issuable upon the exercise of stock options expected to be granted
after fiscal 1996, each with an exercise price of $7.00 per share. See
"Management -- Amended and Restated Omnibus Stock Plan," "Description of
Capital Stock -- Common Stock" and Note 10 to the Company's financial
statements.

RISK FACTORS

For a discussion of certain factors that should be considered by prospective
purchasers of the securities offered hereby, see "Risk Factors."

5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- products and services............................... $ 14,523 $ 12,415 $ 19,983
Costs and operating expenses:
Cost of products and services................................ 7,675 6,579 10,294
Selling, general and administrative.......................... 5,473 6,049 7,293
Research and development..................................... 573 1,045 957
--------- --------- ---------
Income (loss) from operations.................................. 802 (1,258) 1,439
Interest expense............................................... 156 335 379
--------- --------- ---------
Income (loss) before income taxes.............................. 646 (1,593) 1,060
Income taxes................................................... -- -- --
--------- --------- ---------
Net income (loss).............................................. $ 646 $ (1,593) $ 1,060
--------- --------- ---------
--------- --------- ---------
Pro forma net income per share (1)............................. $ 0.18
---------
---------
Shares used to compute pro forma net income per share (1)...... 5,894
---------
---------
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1994 1994 1995 1995 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- products and services....... $ 2,879 $ 3,552 $ 2,807 $ 3,177 $ 3,433 $ 4,772 $ 4,906
Costs and operating expenses:
Cost of products and services........ 1,485 2,027 1,246 1,821 1,736 2,736 2,200
Selling, general and
administrative...................... 1,505 1,576 1,594 1,374 1,362 1,610 1,772
Research and development............. 218 268 226 333 132 235 264
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations.......... (329) (319) (259) (351) 203 191 670
Interest expense....................... 53 74 102 106 104 97 84
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes...... (382) (393) (361) (457) 99 94 586
Income taxes........................... -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)...................... $ (382) $ (393) $ (361) $ (457) $ 99 $ 94 $ 586
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------

JUNE 30,
1996
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- products and services....... $ 6,872
Costs and operating expenses:
Cost of products and services........ 3,622
Selling, general and
administrative...................... 2,549
Research and development............. 326
-----------
Income (loss) from operations.......... 375
Interest expense....................... 94
-----------
Income (loss) before income taxes...... 281
Income taxes........................... --
-----------
Net income (loss)...................... $ 281
-----------
-----------
</TABLE>

- ------------------------
(1) For a description of the computation of pro forma net income per share and
shares used in computing pro forma net income per share, see Note 1 to the
Company's financial statements included elsewhere in this Prospectus.

6
<PAGE>

<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------
AS
ACTUAL ADJUSTED(1)
--------- -----------
BALANCE SHEET DATA:
<S> <C> <C>
Cash............................................................. $ 369 $ 8,877
Working capital.................................................. 1,897 12,581
Total assets..................................................... 14,298 22,806
Total liabilities................................................ 12,187 7,060
Mandatorily redeemable preferred stock........................... 2,262 --
Stockholders' equity (deficit)................................... (150) 15,746
</TABLE>

- ------------------------
(1) Adjusted to give effect to (i) the conversion of all outstanding shares of
Class C Preferred Stock into 1,530,950 shares of Common Stock and (ii) the
sale of 2,270,000 shares of Common Stock offered by the Company hereby at
the initial offering price of $7.00 per share after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company, and the application of the estimated net proceeds therefrom,
including the repayment of certain indebtedness and the redemption of shares
of Class B Preferred Stock. See "Use of Proceeds" and "Capitalization."

BACKLOG

The following table sets forth, on the dates indicated, the Company's
backlog by backlog type. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and "Business -- Backlog."

<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Order Backlog...................................................................... $ 5,656 $ 3,606 $ 10,394
Contract Backlog................................................................... 2,600 1,005 37,201
</TABLE>

7
<PAGE>
RISK FACTORS

AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. THE FOLLOWING FACTORS AND CAUTIONARY STATEMENTS SHOULD BE CAREFULLY
CONSIDERED IN EVALUATING THE COMPANY AND ITS BUSINESS.

RELIANCE ON SIGNIFICANT CUSTOMERS AND LARGE ORDERS; LONG SALES CYCLES;
FLUCTUATIONS IN RESULTS. A significant portion of the Company's revenue has
been, and will continue to be, derived from substantial orders placed by large
organizations. For the year ended June 30, 1996, TELMEX and Teleglobe, its
largest carrier network product customers for the period, represented
approximately 28.8% and 10.7% of total revenue, respectively, and ANSTEC, Inc.
("ANSTEC"), its largest network management product customer for the period,
represented approximately 11.3% of total revenue. The Company expects that in
the future it will continue to be dependent upon a limited number of customers
in any given period for a significant portion of its revenue. Furthermore, such
customers are concentrated in the carrier market. The Company's future success
may depend upon the continued demand by such customers for its products and
services. Customer demand can be affected by numerous variables, including
changes in governmental regulation, changes in the customers' competitive
environment, pricing policies by the Company or its competitors, personnel
changes, demand for the Company's products in this market, the number, timing
and significance of new product and product enhancement announcements by the
Company and its competitors, the ability of the Company to develop, introduce
and market new and enhanced versions of its products on a timely basis, and the
mix of direct and indirect sales and general economic factors. There can be no
assurance that revenue from customers that have accounted for significant
revenues in past periods, individually or as a group, will continue, or if
continued will reach or exceed historical levels in any future period. The
Company's results of operations and financial condition could be materially
adversely affected by the failure of anticipated orders to materialize and by
deferrals or cancellation of orders. In fiscal 1995, the Company experienced
simultaneous delays in three large multi-year contract awards due to internal
customer matters unrelated to the Company and beyond its control. The delays
caused an estimated decline of approximately $5.5 million in the Company's
revenue for that year, without any offsetting reduction in certain expenses
because of the need to retain key personnel, maintain fixed overhead costs and
incur substantial sales and marketing expenses associated with trying to obtain
the delayed contracts, resulting in an adverse impact on the Company's net
income and financial condition in fiscal 1995.

The Company's revenue is difficult to forecast as a result of the fact that
the purchase of operations support and network management systems generally
involves a significant commitment of capital and management time. Accordingly,
the sales cycle associated with the purchase of the Company's products -- from
initial contact to contract execution and delivery of product -- typically is
lengthy, varies from customer to customer and from project to project, and is
subject to a number of additional significant risks, including customers'
budgetary constraints and internal acceptance reviews, and the timing of sales
by the Company's customers to their own customers over which the Company has
little or no control.

The Company's results also vary based on the type and quantity of products
shipped, the timing of product shipments, the relative revenue mix in a given
period and the resulting margins. The variations may be material.

As a result of these and other factors, the Company believes that revenue
and operating results, and particularly quarterly results, are likely to vary
significantly in the future and to be difficult to forecast and that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as indications of future performance.
In addition, the Company's expense levels are based, in part, on its
expectations as to future revenue levels. If revenue levels are below
expectations in any given period, operating results are likely to be materially
adversely affected. Further, it is likely that in some future period the
Company's revenue or operating results will be below the expectations of public
market analysts and investors. In such event, the price of the Common Stock will
be materially adversely affected.

8
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See "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "-- Years Ended June 30, 1995 and 1996 -- Provision for Income
Taxes," "-- Selected Quarterly Results" and "Business -- Strategic Alliances and
Other Customers."

RELIANCE ON CARRIER MARKET. The Company derived approximately 63% and 68%
of its revenue from sales to carriers during the years ended June 30, 1995 and
1996, respectively. Sales to the carrier market are expected to provide the
substantial majority of the Company's revenue in the near future. The Company's
business is dependent upon the continued growth of the telecommunications
industry in the United States and internationally, on the continued convergence
of voice and data networks and on the evolution and widespread adoption of
emerging network technologies. Any decline in the growth of the industry, the
failure of these markets to converge or the failure of these network
technologies to evolve or achieve widespread market acceptance could have a
material adverse effect on the Company and its results of operations.

The telecommunications industry is subject to extensive regulation in the
United States and other countries and regulatory approvals generally must be
obtained by most of the Company's customers. The enactment by federal, state or
foreign governments of new laws or regulations or changes in the interpretation
of existing regulations could adversely affect the Company's customers.

Any adverse development in the carrier market, including reregulation, or
reduction in demand for the Company's products by these industry sectors, could
have a material adverse effect on the financial condition and results of
operations of the Company.

RISKS ASSOCIATED WITH SALES TO FOREIGN END USERS. A substantial portion of
the Company's revenue derives from dollar-denominated sales to customers in the
United States for resale to end users in foreign countries. These customers have
been strategic alliance partners of the Company, who purchase products for
incorporation in systems sold to third party end users, or who resell products
directly to the end users. In fiscal 1994, 1995 and 1996, the Company also had
significant sales to two foreign purchasers: TELMEX in Mexico and Teleglobe in
Canada. Sales directly to other foreign purchasers in the aggregate consisted of
less than 10% of total revenue. Sales to Teleglobe, denominated principally in
Canadian dollars, comprised approximately 1%, 16% and 11% of total revenue in
fiscal 1994, 1995 and 1996, respectively. Sales to TELMEX comprised 0%, 0% and
29% of the Company's revenue for fiscal 1994, 1995 and 1996, respectively. Over
80% of the sales to TELMEX were denominated in U.S. dollars.

Sales of products delivered to end users outside of the United States
accounted for approximately 62.9%, 68.6% and 69.0% of the Company's total
revenue for the years ended June 30, 1994, 1995 and 1996, respectively. The
Company expects that sales of products for use outside of the United States will
continue to account for a significant portion of its total revenue in future
periods and expects that revenue from sales directly to foreign customers will
increase. The Company intends to increase the sales of its products to foreign
end users and to expand its operations outside of the United States by expanding
its direct sales force, opening additional in-region customer support and sales
offices, adding licensees and distributors and expanding its existing, and
pursuing additional, strategic relationships. Market acceptance of the Company's
products for emerging markets, such as Asia and the Pacific Rim, is important to
the Company's future success, but these markets are diverse and rapidly
evolving, and it is difficult to predict their potential size, future growth
rate or the timing of their development. In addition, access to international
markets is often difficult due to the established relationships between a
government owned or controlled communications company and its traditional
indigenous suppliers of communications products. Accordingly, there can be no
assurance that the Company's products will be widely accepted by the service
providers in these emerging markets or that the Company, directly or through its
strategic alliance partners, will be able to continue to penetrate these markets
effectively.

The proposed further inroads into international markets will require
significant management attention and expenditure of significant financial
resources and could adversely affect the Company's operating margins. Sales to
foreign customers involve a number of inherent risks, including extensive

9
<PAGE>
field testing and lengthier sales cycles than with domestic customers, longer
receivables collection periods and greater collection difficulty, difficulty in
staffing and managing international operations, currency exchange rate
fluctuations, the impact of possible recessionary environments in economies
outside the United States, unexpected changes in regulatory requirements,
including a slowdown in the rate of privatization of carriers, reduced
protection for intellectual property rights in some countries and tariffs and
other trade barriers. While these factors may not affect the Company directly,
to the extent that it sells products through its strategic alliance partners,
these factors may affect the sales and operations of its partners which in turn
may adversely affect demand by the partners for the Company's products. There
can be no assurance that the Company will be able to sustain or increase revenue
derived from sales to foreign end users or that the foregoing factors will not
have a material adverse effect on the Company's future revenue, and,
consequently, on the Company's results of operations and financial condition.

Currency exchange rate fluctuations in countries in which the Company or its
strategic alliance partners sell the Company's products could have a material
adverse effect on the Company's results of operations and financial condition by
resulting in pricing that is not competitive with products priced in local
currencies. In addition, sales in Europe and certain other parts of the world
typically are adversely affected in the third quarter of each calendar year as
many customers reduce their business activities during the summer months. If the
Company's sales to foreign end users become a greater component of total
revenue, these seasonal factors may have a more pronounced effect on the
Company's operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Sales and
Marketing" and "-- Strategic Alliances and Other Customers."

DEPENDENCE ON THIRD PARTY RELATIONSHIPS. A key element of the Company's
business strategy is to develop strategic alliances with leading companies that
provide telecommunications services or that manufacture and market network
equipment, in order to expand the Company's distribution channels and enter new
markets. There can be no assurance that the Company will be able to continue to
increase the number of, or to expand, these types of relationships, in order to
market its products effectively, particularly internationally. Many of the
Company's strategic alliances are nonexclusive and certain of the companies with
which the Company has such alliances also have agreements with, or are
themselves, competitors or potential competitors of the Company. The Company
believes that these alliances are critical to the Company's ability to expand
its penetration of international markets for its carrier network products and to
increase sales of its network management products in the United States. There
can be no assurance that the Company's strategic partners will not discontinue
one or more of their alliances with the Company or form additional competing
arrangements with competitors of the Company or themselves begin to compete with
the Company. See "Business -- Strategic Alliances and Other Customers."

DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
degree upon the continuing contributions of its key management, sales, customer
support and product development personnel. In particular, the Company would be
materially adversely affected if it were to lose the services of George Jimenez,
Joseph Dorr or Dr. Thomas Russotto, who have provided significant leadership and
direction to the Company since its inception and who have significant knowledge
of the Company's proprietary technology and products. The Company currently does
not have employment agreements with its key personnel, although the Company has
non-competition and non-disclosure agreements with each of them. The Company has
obtained key man life insurance on the life of Mr. Jimenez in the amount of $1.0
million, payable to the Company. The loss of key management or technical
personnel could have a material adverse effect on the Company's results of
operations and financial condition.

INTENSE COMPETITION. The market for carrier network and network management
products is highly competitive. Many providers offer products that are directly
competitive with those offered by the Company in both domestic and international
markets. The Company also experiences competition from in-house systems
developed by existing and potential customers. Many of the Company's current

10
<PAGE>
and potential competitors have significantly greater financial, marketing,
technical, and other competitive resources than the Company. Current and
potential competitors, including providers of software or processing services,
may establish cooperative relationships with one another or with third parties
or consolidate to compete more effectively against the Company. It is also
possible that new competitors may emerge and acquire market share. Any of these
events could have a material adverse effect on the Company's results of
operations and financial condition. See "Business -- Competition."

NEW PRODUCTS AND TECHNOLOGY AND NEED TO RESPOND TO RAPIDLY CHANGING CUSTOMER
NEEDS. The market for the Company's products is characterized by rapid change
and is highly competitive with respect to the need for timely product innovation
and new product introductions. The Company believes that its future success
depends in part upon its ability to enhance its current offerings and develop
new products that address the increasingly complex needs of customers. In
particular, the Company believes that it must respond quickly to customers'
needs for additional functionality and new software technologies. There can be
no assurance that the Company will be able to do so. The Company continually
seeks to develop new products and individual features within a complex hardware
and software system. Development projects can be lengthy and are subject to
changing requirements, programming difficulties, and unforeseen factors which
can result in delays. In addition, new products or features, when first released
by the Company, may contain undetected errors that, despite testing by the
Company, are discovered only after a product has been installed and used by
customers. Delays or undetected errors could have a material adverse effect on
the Company's results of operations and financial condition. See "Business --
Products."

The introduction or announcement by the Company or one or more of its
competitors of products embodying new technologies, or changes in industry
standards or customer requirements, could render the Company's existing products
obsolete or unmarketable. The introduction of new or enhanced versions of its
products also requires the Company to manage the transition from older products
in order to minimize disruption in customer operations. There can be no
assurance that the introduction or announcement by the Company or one or more of
its competitors of new products, or changes in industry standards or customer
requirements, will not cause customers to limit or defer purchases of Company
products. Such actions could have a material adverse effect on the Company's
results of operations and financial condition.

MANAGEMENT OF GROWTH. The Company is expanding into new products, services
and markets. This growth has resulted in new and increased responsibilities for
management personnel and has placed and continues to place a significant strain
upon the Company's management, operating and financial systems and resources.
Although the Company believes that there are currently no existing material
weaknesses, in order to accommodate recent growth and to compete effectively and
manage future growth, if any, the Company will be required to continue to
implement and improve operating, financial and management information systems,
procedures and controls on a timely basis and in such a manner as is necessary
to accommodate the increased number of transactions and customers and the
increased size of the Company's operations. Management of future growth, if any,
will also require that the Company continuously expand, train, motivate and
manage its work force. These demands will require the addition of new management
personnel. The Company's future success will depend to a significant extent on
the ability of its current and future executive officers to operate effectively,
both independently and as a group. There can be no assurance that the Company's
personnel, systems, procedures and controls will be adequate to support the
Company's existing and future operations. Any failure to implement and improve
the Company's operating, financial and management systems or to expand, train,
motivate or manage employees could have a material adverse effect on the
Company's results of operations and financial condition.

DIFFICULTY IN ATTRACTING AND RETAINING NECESSARY PERSONNEL. Certain members
of the senior management team of the Company have been in place for a relatively
short time. Jeffrey Simpson, Vice President, Finance, and James Moore, Vice
President, Marketing, began their employment in July 1996 and May 1996,
respectively. The Company believes that its future success will depend in

11
<PAGE>
large part upon its ability to continue to attract and retain highly skilled
managerial, sales, professional services, customer support and product
development personnel. The Company has at times experienced and continues to
experience difficulty in recruiting qualified personnel. Competition for
qualified personnel with knowledge of the telecommunications industry is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The complex nature of the products
demanded by the Company's customers requires that the Company recruit and hire
personnel with expertise in and a broad understanding of the telecommunications
and other industries in which the Company's customers compete. In addition,
there are only a limited number of qualified development and customer support
engineers, and competition for such individuals is especially intense.
Competitors have in the past and may in the future attempt to recruit the
Company's employees. Failure to attract and retain key personnel could have a
material adverse effect on the Company's results of operations and financial
condition.

DEPENDENCE UPON PROPRIETARY TECHNOLOGY. The Company's success and ability
to compete is dependent in part upon its proprietary technology. The Company
relies on a combination of trade secret, copyright and trademark laws,
nondisclosure and other contractual agreements and technical measures to protect
its proprietary rights. The Company currently has no patents or patent
applications pending. Despite the Company's efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary, or to develop products with functionality or features similar to
the Company's products that are substantially equivalent or superior to the
Company's products. In addition, effective copyright, trademark and trade secret
protection may be unavailable or limited in certain countries. The Company
believes that its products and trademarks do not infringe upon the proprietary
rights of third parties, and the Company has experienced no infringement claims
in the past, but there can be no assurance that third parties will not in the
future assert claims of infringement of their proprietary rights. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require the Company to develop non-
infringing technology or enter into royalty or licensing agreements which, if
available, may not be on terms acceptable to the Company. A claim of product
infringement against the Company and failure or inability of the Company to
develop non-infringing technology, or license the infringed or similar
technology, could have a material adverse effect on the Company's results of
operations and financial condition. The Company relies on certain software that
it licenses from third parties, including software that is integrated with
internally developed software and used in the Company's products to perform key
functions. There can be no assurance that these third party software licenses
will continue to be available to the Company on commercially reasonable terms.
The absence of such software, if the Company is unable to find a substitute,
could have a material adverse effect on the Company's ability to produce
products. See "Business -- Proprietary Rights and Licenses."

NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY
OF STOCK PRICE. Prior to this offering, there has been no public market for the
Common Stock. There can be no assurance that an active trading market will
develop for the Common Stock or that the price at which shares of Common Stock
may trade in the public market from time to time subsequent to this offering
will exceed the initial public offering price. The initial public offering price
was determined by negotiations between the Company and the representatives of
the Underwriters and may not be indicative of future market prices. See
"Underwriting" for a discussion of factors considered in determining the initial
public offering price. The stock market has from time to time experienced
extreme price and volume fluctuations, particularly in the technology sector,
which often have been unrelated to the operating performance of particular
companies. Any announcement with respect to any variance in revenue or earnings
from levels generally expected by securities analysts for a given period could
have an immediate and significant effect on the trading price of the Common
Stock. In addition, factors such as announcements of technological innovations
or new products by the Company, its competitors, or third parties, as well as
changing market conditions in the industry, may have a significant impact on the
market price of the Common Stock.

12
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely affect
prevailing market prices for the Common Stock. Upon the expiration of "lock-up"
agreements, 180 days following the date of this Prospectus, approximately
4,748,211 shares of Common Stock will be eligible for sale under Rule 701 or
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"),
except to the extent owned by affiliates of the Company. On the date 90 days
following the date of this Prospectus and without consideration of the foregoing
contractual restrictions, substantially all of the Common Stock outstanding
prior to this offering would be eligible for sale in the public markets subject
to the provisions of Rule 144. After this offering, holders of 1,300,950 shares
of Common Stock are entitled to certain registration rights (taking into account
the conversion of the Class C Preferred Stock). If such holders, by exercising
their registration rights, cause a large number of shares to be registered and
sold in the public market, such sales may have an adverse effect on the market
price for the Common Stock. In addition, the Company intends to register on one
or more registration statements filed after completion of this offering, up to
2,400,000 shares of Common Stock reserved for issuance under the Company's stock
plans. Shares covered by these registration statements will be eligible for sale
in the public market immediately after the effective dates of such registration
statements. The sale of a substantial number of shares of Common Stock in the
public market following this offering, or the perception that such sales could
occur, could adversely affect the market price of the Common Stock prevailing
from time to time and could impair the Company's future ability to raise capital
through an offering of its equity securities. See "Shares Eligible for Future
Sale" and "Underwriting."

CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS. The Company's
directors and officers and their affiliates will, in the aggregate, own,
directly or indirectly, more than 58.0% of the outstanding Common Stock after
this offering, assuming no exercise of outstanding options. As a result, these
stockholders, if they act together, would be able to control most matters
requiring approval by the Company's stockholders, including the election of
directors. See "Principal and Selling Stockholders" and "Shares Eligible for
Future Sale." In addition, the Company's Charter and By-laws will contain
provisions that may discourage acquisition bids for the Company by persons
unrelated to certain existing stockholders. The effect of this stock ownership
and these provisions may be to limit the price that investors might be willing
to pay in the future for shares of the Common Stock or prevent or delay a
merger, takeover, or other change in control of the Company and thus discourage
attempts to acquire the Company. In addition, the Company's Board of Directors
has the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences and privileges of those shares without
any further vote or action by the stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no present plan to
issue any shares of Preferred Stock. The Company's Charter and By-laws contain
other provisions, such as notice requirements for stockholders, staggered terms
for its Board of Directors, and limitations on the stockholders' ability to
remove directors or to present proposals to the stockholders for a vote, all of
which may have the further effect of making it more difficult for a third party
to gain control or to acquire the Company. See "Description of Capital Stock"
and "Certain Charter and By-Law Provisions."

DILUTION. The initial public offering price was higher than the book value
per share of Common Stock. At the initial public offering price of $7.00 per
share, investors participating in this offering will incur immediate,
substantial dilution of approximately $4.87 per share. To the extent outstanding
options to purchase Common Stock are exercised, there will be further dilution.
See "Dilution."

13
<PAGE>
USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,270,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$13.9 million (approximately $16.4 million if the Underwriters' over-allotment
option is exercised in full), after deducting the underwriting discounts and
commissions and estimated offering expenses and assuming a public offering price
of $7.00 per share.

The Company expects to use the net proceeds for general corporate purposes
including working capital and employment of additional personnel, provided that:
(i) certain amounts will be used for repayment of bank indebtedness of which
approximately $5.0 million was outstanding at June 30, 1996, (ii) approximately
$0.4 million will be used for redemption of all outstanding shares of Class B
Preferred Stock and the repayment of certain indebtedness held by the holder of
such shares, of which approximately $52,000 was outstanding at June 30, 1996 and
(iii) approximately $0.1 million will be used for repayment of outstanding
related-party indebtedness. See Notes 5 and 6 to the Company's financial
statements and "Certain Transactions" for further information.

The principal purposes of this offering are to increase the Company's equity
and to create a public market for the Company's Common Stock. The Company
believes that success in its industry requires substantial capital in order to
maintain the flexibility to take advantage of opportunities that arise and to be
able to withstand adverse business conditions, should they occur. Portions of
net proceeds may also be used to fund acquisitions of complementary businesses,
products or technologies, although no specific acquisitions are planned or under
negotiation as of the date of this Prospectus. The Company has not allocated a
significant portion of the net proceeds of this offering to any particular use.
Accordingly, management will have significant flexibility in applying the net
proceeds of this offering. Pending application of the proceeds as described
above, the Company intends to invest the net proceeds in investment-grade,
short-term securities.

The Company will not receive any of the proceeds from the sale of shares of
Common Stock by the Selling Stockholder. See "Principal and Selling
Stockholders."

DIVIDEND POLICY

The Company has never declared or paid cash dividends on the Common Stock.
The Company currently intends to retain earnings, if any, to finance the growth
and development of its business and does not anticipate paying cash dividends in
the foreseeable future. The terms of the Company's bank credit facilities
prohibit the payment of cash dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." The future payment of cash dividends, if any, is also within
the discretion of the Board of Directors and will depend on the future earnings,
capital requirements, financial condition and future prospects of the Company
and such other factors as the Board of Directors may deem relevant.

14
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1996, (i) on an actual basis giving effect to a 4.5-for-one stock split and
(ii) as adjusted to give effect to (a) the issuance of 1,530,950 shares of
Common Stock upon the conversion of all outstanding shares of Class C Preferred
Stock and (b) the sale of 2,270,000 shares of Common Stock offered by the
Company hereby, and the application of the estimated net proceeds of this
offering as described in "Use of Proceeds." This table should be read in
conjunction with the Company's financial statements and notes thereto included
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------
AS
ACTUAL ADJUSTED
--------- ---------
(IN THOUSANDS EXCEPT
FOR SHARE DATA)
<S> <C> <C>
Long-term debt, net of current portion...................................................... $ 2,952 --
---------
Mandatorily redeemable Class C Preferred Stock, $5.14 par value; 340,211 shares authorized,
issued and outstanding, actual; none issued and outstanding, as adjusted................... 2,262 --
---------
Stockholders' equity (deficit) (1)(2):
Class B Preferred Stock, $1.00 par value; 1,000 shares authorized, 1,000 issued and
outstanding, actual; none issued and outstanding, as adjusted............................ 1 --
Common Stock, $.01 par value; 45,000,000 shares authorized, 3,590,451 issued and
outstanding, actual; 45,000,000 shares authorized, 7,391,401 issued and outstanding, as
adjusted................................................................................. 36 $ 74
Additional paid-in capital.................................................................. 343 16,202
Accumulated deficit......................................................................... (530) (530)
--------- ---------
Total stockholders' equity (deficit).................................................... (150) 15,746
--------- ---------
Total capitalization.................................................................. $ 5,064 $ 15,746
--------- ---------
--------- ---------
</TABLE>

- ------------------------
(1) Does not include 1,073,704 shares of Common Stock issuable upon the exercise
of stock options outstanding as of June 30, 1996, with exercise prices
ranging from $0.30 to $7.93 per share, and approximately 541,215 additional
shares issuable upon the exercise of stock options expected to be granted,
after fiscal 1996, each with an exercise price of $7.00 per share. See
"Management -- Amended and Restated Omnibus Stock Plan," "Description of
Capital Stock -- Common Stock" and Note 10 to the Company's financial
statements.

(2) Upon the consummation of this offering, the conversion of the Class C
Preferred Stock and the redemption of the Class B Preferred Stock, the
Company will be authorized to issue 5,000,000 shares of undesignated
Preferred Stock, $.01 par value per share, of which none will be issued and
outstanding. See "Description of the Capital Stock -- Preferred Stock."

15
<PAGE>
DILUTION

The pro forma net tangible book value of the Company as of June 30, 1996 was
$2.1 million, or $.41 per share of Common Stock. "Pro forma net tangible book
value" per share represents the amount of total tangible assets less total
liabilities, divided by the total number of shares of Common Stock then
outstanding (without giving effect to this offering but assuming the automatic
conversion of all outstanding shares of Class C Preferred Stock into 1,530,950
shares of Common Stock and the effectiveness of a 4.5-for-one stock split).

After giving effect to the sale by the Company of the 2,270,000 shares of
Common Stock offered by the Company and the application of the estimated net
proceeds of this offering as described in "Use of Proceeds" (after deduction of
underwriting discounts and commissions and estimated offering expenses), the
Company's pro forma net tangible book value at June 30, 1996, would have been
$15.7 million, or $2.13 per share of Common Stock to purchasers of Common Stock
in this offering. This represents an immediate dilution of $4.87 per share to
new investors. The following table illustrates the per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share............................. $ 7.00
Pro forma net tangible book value per share at June 30, 1996...... $ 0.41
Increase in pro forma net tangible book value per share
attributable to new investors.................................... 1.72
---------
Pro forma net tangible book value per share after this offering..... 2.13
---------
Dilution per share to new investors................................. $ 4.87
---------
---------
</TABLE>

The following table summarizes, on a pro forma basis as of June 30, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders (including holders of shares of Class C Preferred Stock to be
converted into Common Stock concurrently with this offering, but not including
the holder of shares of Class B Preferred Stock to be redeemed with the proceeds
of this offering) and by purchasers of Common Stock in this offering:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ --------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders (1)(2)...................... 5,121,401 69.3% $ 2,566,905 13.9% $ 0.50
New Investors (1)................................. 2,270,000 30.7 15,890,000 86.1 $ 7.00
----------- ----- -------------- -----
Total......................................... 7,391,401 100.0% $ 18,456,905 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
</TABLE>

- ------------------------
(1) The sale by the Selling Stockholder in this offering will reduce the number
of shares of Common Stock held by existing stockholders to 4,891,401, or
approximately 66.2% (or approximately 63.0% if the Underwriters'
over-allotment option is exercised in full), and will increase the number of
shares held by new investors to 2,500,000, or approximately 33.8% (2,875,000
shares, or approximately 37.0%, if the Underwriters' over-allotment option
is exercised in full), of the total number of shares of Common Stock
outstanding after this offering. See "Principal and Selling Stockholders."

(2) Does not include 1,073,704 shares of Common Stock issuable upon the exercise
of stock options outstanding as of June 30, 1996, with exercise prices
ranging from $0.30 to $7.93 per share, and approximately 541,215 additional
shares issuable upon the exercise of stock options expected to be granted
after fiscal 1996, each with an exercise price of $7.00 per share. See
"Management -- Amended and Restated Omnibus Stock Plan," "Description of
Capital Stock -- Common Stock" and Note 10 to the Company's financial
statements. To the extent outstanding stock options are exercised, there
will be further dilution to new investors.

16
<PAGE>
SELECTED FINANCIAL DATA

The following table sets forth for the periods indicated selected financial
data for the Company. The statement of operations and balance sheet data for the
years ended June 30, 1994, 1995 and 1996 have been derived from the Company's
financial statements, which have been audited by Price Waterhouse LLP,
independent accountants. The statement of operations and balance sheet data for
the years ended June 30, 1992 and 1993 have been derived from the Company's
audited financial statements which have not been included in this Prospectus.
The information set forth below is qualified by reference to, and should be read
in conjunction with, the Company's financial statements and the notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- products and services......................... $ 7,877 $ 11,137 $ 14,523 $ 12,415 $ 19,983
Costs and operating expenses:
Cost of products and services.......................... 4,462 5,870 7,675 6,579 10,294
Selling, general and administrative.................... 3,098 4,065 5,473 6,049 7,293
Research and development............................... 218 780 573 1,045 957
--------- --------- --------- --------- ---------
Income (loss) from operations............................ 99 422 802 (1,258) 1,439
Interest expense......................................... 56 53 156 335 379
--------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary
item.................................................... 43 369 646 (1,593) 1,060
Income taxes............................................. 21 151 -- -- --
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item.................. 22 218 646 (1,593) 1,060
Extraordinary item -- tax benefit of net operating loss
carryforwards........................................... 21 151 -- -- --
--------- --------- --------- --------- ---------
Net income (loss)........................................ $ 43 $ 369 $ 646 $ (1,593) $ 1,060
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income per share (1)....................... $ 0.18
---------
---------
Number of shares used in computing pro forma net income
per share............................................... 5,894
---------
---------
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash........................................................ $ 52 $ 62 $ 147 $ 190 $ 369
Working capital (deficit)................................... 117 519 590 (1,374) 1,897
Total assets................................................ 4,645 6,582 7,407 8,293 14,298
Total liabilities........................................... 3,195 4,763 4,943 7,414 12,187
Mandatorily redeemable preferred stock...................... 1,749 1,842 1,982 2,122 2,262
Stockholders' equity (deficit).............................. (299) (23) 483 (1,242) (150)
</TABLE>

- ------------------------
(1) For a description of the computation of pro forma net income per share and
shares used in computing pro forma net income per share, see Note 1 of the
notes to the Company's financial statements included elsewhere in this
Prospectus.

BACKLOG

<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Order Backlog.................................................... $ 5,656 $ 3,606 $ 10,394
Contract Backlog................................................. 2,600 1,005 37,201
</TABLE>

17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company sells carrier network products and network management products,
both through direct channels and through its primarily domestic strategic
alliance partners, for delivery to end users in the United States and
internationally. Since June 1994, the Company, consistent with its strategic
emphasis, has derived most of its revenue from sales of its carrier network
products to carriers. The Company expects such sales to increase as a percentage
of its revenue for at least the next several years. The balance of the Company's
revenue is derived from the sale of network management products to enterprise
customers, including agencies of the U.S. Government.

The Company has generated growth in its revenue in every fiscal year since
fiscal 1986 except for fiscal 1995. In fiscal 1995, the Company experienced
simultaneous delays in three large multi-year contract awards due to internal
customer matters unrelated to the Company and beyond its control. The delays
caused an estimated decline of approximately $5.5 million in the Company's
revenue, without any offsetting reduction in expenses, because of the need to
retain key personnel, maintain fixed overhead costs and incur substantial sales
and marketing expenses associated with trying to obtain the delayed contracts,
resulting in an adverse impact on the Company's net income and financial
condition in fiscal 1995. Two of these delayed contracts, one awarded by NYNEX
and one by ANSTEC, were finally awarded late in fiscal 1995 and early in fiscal
1996, with the Company realizing revenue from these contracts in fiscal 1996.

The Company's products typically are sold pursuant to long-term contracts
having an aggregate contract value of several hundred thousand to several
million dollars. As part of the contract, the Company agrees to provide certain
services, including postcontract customer support, assistance to customers and
end users in the development and installation of new systems, maintenance and
enhancement of installed systems, and customer training and technical support.
These contracts may involve significant production, modification or tailoring of
hardware and software. The Company recognizes revenue principally from contracts
of this type, using the percentage-of-completion method, based on performance
milestones specified in each contract, which fairly reflect progress toward
contract completion. Revenue from maintenance and other postcontract customer
support is recognized ratably over the term of the related agreement.

The Company sells most of its products as components in the products or
systems developed and marketed by its strategic partners. The Company also sells
products directly to end users. The Company typically experiences higher margins
in connection with its direct sales contracts, offset in part by relatively
higher sales and marketing expenses.

The Company tracks two types of backlog: "order backlog," which represents
signed purchase orders, and "contract backlog," which represents signed project
contracts that become order backlog upon the signing of specific purchase
orders. Order backlog reached its highest level in the Company's history during
fiscal 1996 and was $10.4 million at June 30, 1996, compared to $3.6 million at
June 30, 1995.

The Company's revenue typically is concentrated among certain customers, the
largest of which in fiscal 1996 consisted of TELMEX, ANSTEC and Teleglobe. These
customers represented approximately 29%, 11% and 11%, respectively, of total
revenue for the year ended June 30, 1996. See "Risk Factors -- Reliance on
Significant Customers and Large Orders; Long Sales Cycles; Fluctuations in
Results" and "Business -- Backlog."

Substantially all of the Company's revenue derives from dollar-denominated
sales and, although the Company in its most recent fiscal years had significant
sales to Canada and Mexico, the Company does not have significant foreign
operations. The Company's sales historically have been principally to its
strategic alliance partners in the United States for use or resale domestically
or to end users in

18
<PAGE>
foreign countries. The Company's customers pay for products in the United States
in U.S. dollars. The Company maintains no inventory abroad. All products are
shipped from the United States pursuant to terms of orders issued by customers.

In fiscal 1994, 1995 and 1996, the Company had significant sales to two
foreign customers: TELMEX in Mexico and Teleglobe in Canada. Sales directly to
other foreign customers in the aggregate consisted of less than 10% of total
revenue for those periods. Sales to Teleglobe, denominated principally in
Canadian dollars, comprised approximately 1%, 16% and 11% of total revenue in
fiscal 1994, 1995 and 1996, respectively. Sales to TELMEX comprised 0%, 0% and
29% of the Company's revenue for fiscal 1994, 1995 and 1996, respectively. Over
80% of the sales to TELMEX were denominated in U.S. dollars. Thus, although the
Company expects that sales directly to foreign customers may increase in the
future, the risks typically associated with sales to foreign customers such as
currency fluctuations, different cash cycles or other sales difficulties, have
not been, and are not at present, material in the case of the Company. See "Risk
Factors -- Risks Associated with Sales to Foreign End Users," and Note 1 to the
Company's financial statements included elsewhere herein.

The Company has experienced more favorable cash collection cycles for its
international sales than its domestic sales. For fiscal 1996, the accounts
receivable turnover rates (sales/average accounts receivable) were 2.60 for
sales to U.S. customers, which currently account for the most significant
portion of the Company's revenue, and 3.61 for sales to foreign customers, and
the accounts receivable turnover rates in days were 140 for U.S. sales and 101
for sales to foreign customers. Though the Company has not historically
experienced the greater risk that is generally associated with cash cycles for
sales to international customers, the Company believes that past experience is
not necessarily indicative of future results and that as its sales directly to
foreign customers increase it may experience greater delays in collections.

As a result of the size of most of its contracts and orders, the significant
length of sales cycles and the complexities which arise from time to time in
completing any given contract or order, the Company typically experiences
fluctuations in quarterly and year-to-year results. Marketing in foreign
countries, particularly in Asia and other emerging markets, frequently requires
extensive field testing and may result in delays in the timing and closing of
sales by the Company's strategic alliance partners, which in turn may delay
orders of Company products. The Company has experienced significant delays in
timing of revenue related to sales to end users in overseas markets. See "--
Selected Quarterly Results." See also "Risk Factors -- Reliance on Significant
Customers and Large Orders; Long Sales Cycles; Fluctuations in Results" and "--
Risks Associated with Sales to Foreign End Users."

The Company's cost of products and services consists of the cost of product
engineering and production, personnel cost of customer support personnel,
license fees paid to third-party software vendors, amortization of costs of
capitalized software development and the cost of hardware purchased by the
Company for incorporation into its products.

Selling, general and administrative expenses consist of costs to support the
Company's sales and administrative functions. Included within these costs are
salaries, bonuses, commissions, rent, insurance, depreciation and non-product
amortization expenses. Also included are costs associated with the Company's
participation in trade shows and industry conferences, and related travel and
other promotional costs.

Research and development expenses consist of personnel costs related to the
design and development of the Company's products. These costs are expensed as
incurred. However, computer software development costs incurred after the
technological feasibility of a product is established and until the product is
available for release to customers are capitalized. Capitalized software and
purchased technology costs are amortized on a product by product basis based on
the greater of the ratio of current sales to estimated total future sales or a
straight-line basis over the remaining estimated economic life of the product
(no greater than three years) including the current year.

19
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items on
the Company's statement of operations as a percentage of revenue:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
JUNE 30,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenue -- products and services................................................. 100.0% 100.0% 100.0%
Costs and operating expenses:
Cost of products and services.................................................. 52.8 53.0 51.5
Selling, general and administrative............................................ 37.7 48.7 36.5
Research and development....................................................... 3.9 8.4 4.8
----- ----- -----
Income (loss) from operations.................................................... 5.6% (10.1)% 7.2%
----- ----- -----
----- ----- -----
</TABLE>

YEARS ENDED JUNE 30, 1995 AND 1996

REVENUE. Revenue increased 61.3%, from $12.4 million in fiscal 1995 to
$20.0 million in fiscal 1996. The increase is attributable to increased sales
volume of the Company's carrier network products to Teleglobe and TELMEX and
delivery of NetPlus-Registered Trademark- network management systems to the U.S.
Government pursuant to the Company's contract with ANSTEC.

COST OF PRODUCTS AND SERVICES. Cost of products and services increased
56.1% from $6.6 million in fiscal 1995 to $10.3 million in fiscal 1996. The
increase is attributable to increased purchases of hardware related to
DCMS-Registered Trademark- units for the TELMEX contract which were subsequently
incorporated in shipped products. Gross margins were 47.0% and 48.5% for fiscal
1995 and 1996, respectively. The improvement in gross margin was caused
primarily by efficiencies resulting from increased order quantities and the sale
of products directly to end users which have higher associated profit margins.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 20.5% from $6.0 million in fiscal 1995 to $7.3 million in
fiscal 1996. These expenses represented 48.7% and 36.5% of total revenue in
fiscal 1995 and fiscal 1996, respectively. The increase in these expenses is
attributed to the selling cost associated with the TELMEX contract and costs
associated with the Company's continued expansion of marketing programs. The
Company expects these expenses to increase in future periods as a result of its
continued work on the TELMEX contract, its efforts to position itself to
penetrate international markets for carrier network products, its plans to
expand sales of network management products in the United States and the hiring
of additional management personnel. See "Business -- Sales and Marketing."

RESEARCH AND DEVELOPMENT. Research and development expense decreased 8.4%
from approximately $1.01 million in fiscal 1995 to approximately $1.0 million in
fiscal 1996, primarily as a result of completion of work on software development
related to the technology platform for the Teleglobe contract. As a percentage
of revenue, research and development expense decreased from 8.4% in fiscal 1995
to 4.8% in fiscal 1996 primarily as a result of the increase in period to period
revenues. The Company plans to spend significant resources on research and
development in future periods in order to enhance its technology and expects
that expenses, as a percentage of total revenue, will increase.

PROVISION FOR INCOME TAXES. No income tax benefit or provision was recorded
for the fiscal years ended June 30, 1995 and 1996, respectively, since any
benefit or provision was offset by a similar increase or decrease in the
valuation allowance. As of June 30, 1995 and 1996, a valuation allowance was
recorded for the full value of the net deferred tax assets as the Company's
results can vary based upon type, timing and quantity of product shipped and,
consequently, it is management's judgment that it is more likely than not that
the net deferred tax asset will not be realized.

20
<PAGE>
YEARS ENDED JUNE 30, 1994 AND 1995

REVENUE. Revenue decreased 14.5%, from $14.5 million in fiscal 1994 to
$12.4 million in fiscal 1995. The decrease is attributable to simultaneous
delays in three large contracts due to matters beyond the Company's control. See
"-- Overview."

COST OF PRODUCTS AND SERVICES. Cost of products and services decreased
14.3% from $7.7 million in fiscal 1994 to $6.6 million in fiscal 1995. The
decrease is attributable to reduced hardware purchases, reflecting the reduced
delivery of network management products in fiscal 1995. Since the decrease in
these costs was offset by a corresponding decrease in period to period revenue,
cost as a percentage of revenue remained unchanged. As a result, gross margins,
as a percentage of revenue were also unchanged.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 10.5% from $5.5 million in fiscal 1994 to $6.0 million in
fiscal 1995. These expenses represented 37.7% and 48.7% of revenue in fiscal
1994 and fiscal 1995, respectively. The increase in expenses resulted from
increases in the Company's direct sales force and in marketing programs,
specifically on bid and proposal efforts relating to the TELMEX and ANSTEC
contracts described under "Business -- Strategic Alliances and Other Customers."
Additional costs were incurred in fiscal 1995 as a result of the hiring of
executive accounting personnel. The increase in these expenses as a percentage
of revenue from fiscal 1994 to fiscal 1995 is primarily attributable to the
decrease in period to period revenue.

RESEARCH AND DEVELOPMENT. Research and development expenses increased by
82.4% from $0.6 million in fiscal 1994 to $1.0 million in fiscal 1995. These
expenses represented 4.0% and 8.4% of revenue in fiscal 1994 and 1995,
respectively. The increase in these expenses was primarily attributable to work
performed on the software development relating to the technology platform
developed in anticipation of a contract with Teleglobe. An increase in expense
was also experienced as a result of hiring additional software engineers and
support personnel in anticipation of planned research and development expansion
in fiscal 1996. The increase in these expenses as a percentage of total revenue
from fiscal 1994 to fiscal 1995 is primarily attributable to the decrease in
period to period revenue.

PROVISION FOR INCOME TAXES. No income tax benefit or provision was recorded
for the fiscal years ended June 30, 1994 and 1995 since any benefit or provision
was offset by a similar increase or decrease in the valuation allowance.

SELECTED QUARTERLY RESULTS

The following tables present certain unaudited statement of operations data
for each quarter of fiscal 1995 and fiscal 1996. These data have been derived
from the Company's unaudited financial statements and have been prepared on the
same basis as the Company's audited financial statements which appear elsewhere
in this Prospectus. In the opinion of the Company's management, these data

21
<PAGE>
include 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, the Company's
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
FISCAL 1995 FISCAL 1996
-------------------------------------------------- -------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1994 1994 1995 1995 1995 1995 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- products and
services...................... $ 2,879 $ 3,552 $ 2,807 $ 3,177 $ 3,433 $ 4,772 $ 4,906
Costs and operating expenses:
Cost of products and
services.................... 1,485 2,027 1,246 1,821 1,736 2,736 2,200
Selling, general and
administrative.............. 1,505 1,576 1,594 1,374 1,362 1,610 1,772
Research and development..... 218 268 226 333 132 235 264
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations.................... (329) (319) (259) (351) 203 191 670
Interest expense............... 53 74 102 106 104 97 84
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes......................... (382) (393) (361) (457) 99 94 586
Income taxes................... -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss).............. $ (382) $ (393) $ (361) $ (457) $ 99 $ 94 $ 586
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------

AS A PERCENTAGE OF REVENUES:
Revenue -- products and
services...................... 100% 100% 100% 100% 100% 100% 100%
Costs and operating expenses:
Cost of products and
services.................... 52 57 44 57 51 57 45
Selling, general and
administrative.............. 52 44 57 43 39 34 36
Research and development..... 7 8 8 11 4 5 5
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations.................... (11) (9) (9) (11) 6 4 14
Interest expense............... 2 2 4 3 3 2 2
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes......................... (13) (11) (13) (14) 3 2 12
Income taxes................... -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss).............. (13)% (11)% (13)% (14)% 3% 2% 12%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------

JUNE 30,
1996
-----------

<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- products and
services...................... $ 6,872
Costs and operating expenses:
Cost of products and
services.................... 3,622
Selling, general and
administrative.............. 2,549
Research and development..... 326
-----------
Income (loss) from
operations.................... 375
Interest expense............... 94
-----------
Income (loss) before income
taxes......................... 281
Income taxes................... --
-----------
Net income (loss).............. $ 281
-----------
-----------
AS A PERCENTAGE OF REVENUES:
Revenue -- products and
services...................... 100%
Costs and operating expenses:
Cost of products and
services.................... 53
Selling, general and
administrative.............. 37
Research and development..... 5
-----------
Income (loss) from
operations.................... 5
Interest expense............... 1
-----------
Income (loss) before income
taxes......................... 4
Income taxes................... --
-----------
Net income (loss).............. 4%
-----------
-----------
</TABLE>

The Company's quarterly operating results have in the past and will in the
future vary significantly as a result of the timing of contract execution,
orders for products, and delivery of significant product orders. Large orders
typically are preceded by long sales cycles and, accordingly, the timing of such
an order has been and will continue to be difficult to predict. The failure to
obtain one or more large orders, for any reason, could have a material adverse
effect on the Company's results of operations and financial condition. The
Company's results also vary based on the type and quantity of products shipped,
the timing of product shipments, the relative revenue mix in a given period and
the resulting margins. The variations may be material. See "Risk Factors --
Reliance on Significant Customers and Large Orders; Long Sales Cycles;
Fluctuations in Results."

The timing of large orders depends on a variety of factors affecting the
capital spending decisions of the Company's customers, which, in turn, can
affect the Company's quarterly operating results. These factors include changes
in governmental regulation, changes in the customers' competitive environment,
pricing policies by the Company or its competitors, personnel changes, demand
for the Company's products, the number, timing and significance of new product
and product enhancement

22
<PAGE>
announcements by the Company and its competitors, the ability of the Company to
develop, introduce and market new and enhanced versions of its products on a
timely basis, and the mix of direct and indirect sales and general economic
factors.

The Company's sales cycle, from initial contact to contract execution,
orders for products and delivery of product, also varies substantially from
customer to customer and from project to project. The purchase of carrier
network products and network management products generally involves a
significant commitment of customer capital and management time. The sales cycle
associated with the purchase of the Company's products is subject to a number of
additional significant risks, including customers' budgetary constraints and
internal acceptance reviews, over which the Company has little or no control.

The Company's expense levels are based, in part, on its expectations as to
future revenue levels. If revenue levels are below expectations, operating
results are likely to be materially adversely affected.

Based upon all of the foregoing, which explains any material variations in
the quarter-to-quarter results shown above, the Company believes that quarterly
revenue and operating results are likely to vary significantly in the future and
that period-to-period comparisons of its 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 the Company's
revenue or operating results will be below the expectations of public market
analysts and investors. In such event, the price of the Common Stock could be
materially adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

Net cash (used for) provided by operating activities in fiscal 1994, 1995
and 1996 was ($1,000), ($1.2 million) and $0.7 million, respectively. The
decrease in net cash used for operating activities from fiscal 1994 to fiscal
1995 primarily reflects a significant increase in accounts receivable and
inventories of $0.3 million and $0.2 million, respectively, which was primarily
attributable to the anticipation and subsequent delivery of products under the
Teleglobe contract and a decrease in accounts payable of $0.2 million, which
resulted primarily from the timing of vendor invoices, partially offset by an
increase in deferred revenue of $0.3 million. The increase in net cash provided
by operating activities from fiscal year 1995 to fiscal 1996 is due primarily to
the Company once again becoming profitable with net income of $1.0 million in
fiscal 1996, as compared to a net loss of $1.6 million in fiscal 1995, and an
increase in accounts payable, accrued expenses and deferred revenue of $1.9
million, $0.7 million and $0.9 million, respectively, which resulted primarily
from the timing of significant contracts and customer advances on contracted
work, offset in part by an increase in accounts receivable and inventories of
$3.9 million and $0.9 million, respectively, which resulted primarily from sales
to TELMEX and the purchased materials for production under such contract.

Cash used for investing activities of $0.2 million, $1.0 million, and $1.3
million in fiscal 1994, 1995 and 1996, respectively, reflect purchases of
property and equipment, capitalization of software development costs and the
sale of short-term investments. Purchases of property and equipment, consisting
primarily of computers and related equipment, were $0.3 million, $0.5 million
and $0.4 million in fiscal 1994, 1995 and 1996, respectively. Capitalized
software development costs were $0.7 million, $0.5 million and $0.9 million in
fiscal 1994, 1995 and 1996, respectively. Sale of short-term investments was
$0.8 million in fiscal 1994.

To date, the Company has used sales of preferred equity, cash generated from
operations and revolving bank lines of credit to fund its working capital and
investing activities. Effective March 1, 1996, the Company entered into a credit
agreement with Wells Fargo HSBC Trade Bank to finance inventory for a large
foreign contract. Under the agreement, the Company can borrow up to $1 million
at 1.25% over the bank's prime rate. At June 30, 1996, $1.0 million was
outstanding under the line. The agreement requires the Company to comply with
certain financial covenants. The U.S. Export-Import Bank guarantees 90% of the
outstanding balance, which is collateralized by the inventory and the foreign
receivables generated by the contract. This agreement expires on August 31,
1996.

23
<PAGE>
The Company's other borrowings are from Citizens Bank of Maryland. The
Company has a $2.5 million line of credit of which $1.8 million was outstanding
at June 30, 1996, which expires on November 30, 1997. Borrowings under the
facility bear interest, payable monthly, at 0.5% over the bank's prime rate. The
Company also has a $1 million revolving line of credit of which approximately
$1.0 million was outstanding at June 30, 1996. This facility bears interest,
payable monthly, at 0.5% over the bank's prime rate and is due on November 30,
1997. In addition, the Company has outstanding installment notes due in varying
monthly installments through June 2000, bearing interest at 1.0% over the bank's
prime rate in the aggregate principal amount as of June 30, 1996 of
approximately $0.6 million. These credit arrangements are secured by accounts
receivable, equipment and inventory certain of which are subordinated to the
security interests under the credit agreement described in the immediately
preceding paragraph. In addition, on June 21, 1996, the Company entered into a
loan agreement for $750,000, bearing interest at a rate of 0.5% over the bank's
prime rate, payable monthly. The principal is due on August 20, 1996. These loan
arrangements require the Company to comply with covenants to maintain certain
levels of minimum tangible net worth, debt to net worth ratios, working capital,
current ratios and total liabilities to tangible net worth ratios.

The Company believes that the net proceeds from this offering, together with
existing cash balances, cash flow from operations and available bank lines, will
be sufficient to support the Company's working capital requirement for at least
the next 12 months. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's working capital requirements, the Company
may be required to raise additional funds. No assurance can be given that
additional financing will be available or that, if available, such financing
will be obtainable on terms favorable to the Company or its stockholders. To the
extent the Company raises additional capital by issuing equity or convertible
debt securities, ownership dilution to the Company's stockholders will result.
In the event that adequate funds are not available, the Company's business may
be adversely affected.

RECENT ACCOUNTING PRONOUNCEMENTS

SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," and SFAS No. 123, "Accounting for Stock
Based Compensation," both effective beginning with fiscal 1997, are not expected
to have a material impact on the Company's financial position or results of
operations.

------------------------

The Company's business is subject to significant risks that could cause the
Company's results to differ materially from those expressed in any
forward-looking statements made in this Prospectus. These risks include the
matters set forth above this caption, under "Risk Factors" and elsewhere herein.

24
<PAGE>
BUSINESS

GENERAL

ACE*COMM develops, markets and services OSS products for networks deployed
by telecommunications service providers, such as telephone companies, other
public carriers and large enterprises operating data and voice networks using
intranets and the Internet. The Company's products perform such functions as
billing data collection, network surveillance, alarm processing and network
management for some of the largest carriers and enterprises in the world.

CARRIER NETWORK PRODUCTS

The Company's carrier network products include billing data collection and
network surveillance systems for carriers seeking the ability to bring services
to market quickly and for many emerging carriers that lack state-of-the-art
billing data collection systems. These carriers typically focus their internal
development resources on networking and switching technology and on marketing
their services and turn to outside suppliers to obtain OSSs. Outside suppliers
provide flexible, efficient solutions that may be more costly for carriers to
develop internally.

The Company's carrier network products, which consist of software and
hardware, connect to existing network infrastructures and enable carriers to
rapidly and accurately collect call records and performance data and generate
displays, graphics and reports which are used for billing, fraud detection,
customer care, marketing research and forecasting and other operations support
functions. These products are designed to enhance the carriers' competitive
position by allowing them to offer new features and services, minimize network
down-time, increase revenue through more accurate and timely billing and improve
network productivity. The Company has expertise derived from 13 years of
developing products adapted to a variety of network hardware and software
configurations. The Company believes that it is well-positioned to continue to
offer its carrier network products to international customers located, for
example in Europe, Asia and the Pacific Rim, which typically operate a wide
variety of switches from different manufacturers and require a data collection
system capable of adapting to and integrating with the billing system and other
OSSs. The Company's carrier network products have been installed in over 500 end
user sites in 32 countries in North, South and Central America, Europe, the
Middle East, and Asia, including China.

The Company expects to increase revenues derived from sales, directly or
indirectly through its strategic alliance partners, from international markets,
which are experiencing increasing deregulation and privatization, and where
telecommunications infrastructures have not reached nearly the stage of
development as in the United States. The Company believes that its strategic
alliances with prominent U.S. and international carriers and equipment
manufacturers, such as AT&T, ICL and Teleglobe which are actively marketing
carrier systems abroad, will enable it to effectively increase its penetration
of international markets.

The Company also expects demand for its carrier network products to increase
in the United States as a result of the recent passage of the U.S.
Telecommunications Act of 1996, which removed certain existing barriers to entry
and is expected to result in the creation of new, alternative carriers and to
cause existing carriers to upgrade their systems to meet increasing competition.

NETWORK MANAGEMENT PRODUCTS

The Company's network management products are designed to meet the growing
needs of large enterprises in the United States and abroad, including government
agencies, military organizations, educational institutions and "Fortune 1000"
size organizations. As these enterprises have become increasingly dependent on
the Internet and intranets for voice and data communications, their demand for
reliable and flexible network management tools has increased.

The Company has packaged network management products into standardized,
flexible state-of-the-art software based systems that enable network managers to
manage voice and data communications by automating service administration,
tracking network connections, detecting system errors

25
<PAGE>
and malfunctions, controlling the network inventory assignments and
configuration, monitoring traffic and performing billing functions. The
Company's network management products have been installed in networks in over
100 end users sites in 10 countries.

The Company believes it is well positioned to develop products to support
the convergence and growth of telephony and data networks within the enterprise,
as a result of its knowledge and experience in data control and network
switching technology. The Company's network management products are designed to
increase the efficiency of communication operations and incorporate recent
developments in object-oriented development, real-time response, client server
architecture and graphical user interfaces.

INDUSTRY BACKGROUND

CARRIERS

Historically, the telecommunications industry has been characterized by
significant government regulation or ownership and limited competition. In this
environment, telecommunications services consisted primarily of monopoly local
and long distance telephone service over traditional landlines. The beginning of
the break-up of AT&T in 1984 began a deregulatory trend that has led to a
proliferation of competition in the long-distance carrier market. More recently,
the passage of the U.S. Telecommunications Act of 1996 is expected to create an
environment where both long distance and local exchange carriers in the United
States will increasingly compete with one another for both local and long
distance services. In addition, domestic service providers are aligning with
international telephone companies to deliver seamless services globally. Today,
both domestic and international telephony carriers face increasing competition
from cable and wireless companies for telephony and new, high bandwidth voice,
data and video services.

In response to this evolving competitive environment, carriers have sought
to reduce expenses and differentiate themselves by improving existing services
and rapidly introducing new services and new technologies. New
telecommunications services include high-speed data services, video
teleconferencing, video-on-demand, home shopping and home banking. Competition
has increased the importance of rapidly bringing these new and enhanced services
to market. The availability of new and enhanced services has fueled a dramatic
increase in usage of telecommunications services by organizations and
individuals, placing additional burdens on existing telecommunications
infrastructures.

Internationally, demand for better telecommunications services has increased
competition and resulted in privatization, investment in new infrastructures and
increased competition to provide better service. In less developed parts of the
world, carriers are implementing new systems through traditional landline
networks, new wireless technologies and other new technologies. Various factors
have further contributed to acceleration in the rate of growth in the
development of the telecommunications systems outside of the United States,
including the globalization of business, the rise in standards of living, the
increasing demand for reliable communications and the increasing deregulation in
the industry. Service providers in less developed parts of the world typically
are building systems through the purchase of equipment from a wide variety of
suppliers, which results in a heterogeneous assortment of switches and other
network hardware and software. This mix generates a need for products that
support network operations and can be flexible and adapted to these various
switches and system features. The Company's specialized knowledge and experience
with a wide variety of switch equipment is particularly suited to meeting these
requirements.

To develop, deploy and manage networks and services, carriers rely on OSSs
including network management systems ("NMS") that, among other functions,
monitor equipment performance to detect errors (fault management), report
network performance and traffic loads (traffic reporting), help in the
performance of market research and forecasting and collect and consolidate
customer usage information (billing data collection). Historically, OSSs and
NMSs were developed and deployed in an environment characterized by limited
competition and slowly changing technologies and services. These systems were
typically mainframe-based, with proprietary software written in early generation
programming languages. As a result, these "legacy" systems were not designed for
rapid

26
<PAGE>
deployment or adaptation, do not easily support heterogeneous equipment and are
not easily customized to fit specific business needs. In view of the industry
trends toward increased competition, technological complexity and rapid change,
carriers require OSSs and NMSs that:

- can be rapidly deployed and easily adapted to changing business and
network requirements;

- interface with a wide variety of existing network equipment and systems
and accommodate new equipment and systems as they are deployed;

- can be tailored through software to provide a variety of OSS and NMS
functions; and

- allow existing networks to accommodate rapid growth through scaleable
architecture.

OSSs and NMSs that provide the foregoing benefits, and the products designed to
support them, will enable carriers to rapidly and cost effectively bring new and
enhanced services to market.

ENTERPRISE NETWORKS

The proliferation of new voice and data services offered by communications
companies has increased the awareness of and demand for network management and
billing systems. As a result of the growth of network usage and competitive
pressures, enterprises in most industries have developed needs for sophisticated
NMSs, which permit network managers to manage networks carrying different types
of voice and data communications and to lower costs, manage growth, track
expenses and provide services without interruption.

The growing dependence on intranets and the Internet to support the
expanding information flow between offices, buildings and countries, both within
the enterprise and to and from customers and suppliers of the enterprise,
requires an efficient NMS to avoid the costly disruption of critical day-to-day
operations. Enterprises increasingly rely on e-mail, phone mail, facsimiles,
on-line order entry, customer service and telecommuting programs for employees
to transmit critical business information. For example, banks rely on dispersed
automated teller machines to conduct banking transactions, and doctors and
hospitals rely on networks to transmit medical records and provide on-line care.
Furthermore, as enterprises increase the employment of sophisticated network
equipment like ATM, Frame Relay and X.25 data switches, it will become
increasingly important for network managers to have the ability to charge based
on the amount of data transmitted. In cooperation with and funded by Newbridge,
the Company is developing the billing component for their advanced data
switches. The billing element gives access providers flexible options for
billing users of data network services. The Company anticipates similar
opportunities to develop other network edge technologies for equipment and
service providers in the growing market for data services.

Enterprises which require NMSs capable of handling large numbers of
subscribers efficiently, reliably and rapidly include: government agencies,
military organizations, educational institutions and "Fortune 1000" size
organizations. The NMS requirements of an organization become more sophisticated
as the number of subscribers, locations, users, countries, third parties
communicating with the organization, and types of hardware involved, increases.
Network managers therefore require NMSs that provide:

- the ability to perform high volume data collection and to produce
displays, graphics and reports with respect to usage, surveillance and
management requirements;

- the ability to manage communications over both voice circuits (e.g.,
telephone, voice-mail) and data circuits (e.g., the Internet and intranet
connections, e-mail, facsimilies, orders, inventory control)
simultaneously;

- the ability to bill for usage;

27
<PAGE>
- proprietary and standard protocol features which may include the Simple
Network Management Protocol ("SNMP");

- compatibility with standard network management platforms (e.g.,
Hewlett-Packard Open View, IBM Netview and Sun Net Manager) and the
ability to run under standard operating systems (e.g., UNIX, Windows 95
and Windows NT); and

- flexibility to accommodate expanding network management requirements.

Telecommunications service providers benefit from the availability of timely
and accurate information about their deployed networks because it allows
increased service availability without increasing network investment. The
Company believes that advanced products that support their network operations
and sophisticated network management products are important to their future
success.

ACE*COMM SOLUTIONS

The Company provides flexible, tailored solutions that operate at the edge
of the network and address a range of systems and network management needs. The
Company's products, developed with the benefit of the Company's 13 years of
experience, are designed to improve the efficiency of revenue collection for
carriers and decrease network operating expenses for enterprises. These products
provide the information required for prompt, accurate billing, real time fraud
detection, subscriber management and the ability to conduct market research and
forecasting. The products incorporate open system architectures, accommodate
growth through scaleable architecture, and can adapt to most standard
interfaces. Network management products are modular products designed to
increase the efficiency and management of data and voice networks and facilitate
communications on enterprise intranets and the Internet.

The Company develops close, long-term relationships with its customers, from
the early stage of project development through product implementation and
upgrading, to identify their needs, and design and implement solutions that can
operate on a stand-alone basis or be tailored to a customer's specific network.
The Company has developed, and continuously refines, its base of software
applications, which can be combined and tailored to meet the current and
evolving requirements of its customers. The Company works closely with customers
after initial implementation, to enable customers to include new features,
expand into additional geographic markets or operate with new network
technologies and protocols. In addition, the Company provides ongoing support,
maintenance and training related to the customer's system.

STRATEGY

The Company's objective is to be the market leader in the markets in which
it participates. The Company plans to achieve this objective by implementing the
following strategies:

FOCUS ON NEW AND EMERGING GROWTH MARKETS. The Company's principal marketing
emphasis is on two types of carriers: existing providers and emerging providers.
Existing providers are replacing their older systems, augmenting their existing
systems to support new features and services or adding new systems to enable
them to expand into new domestic and international markets. Emerging providers
worldwide are expected to offer new types of services such as personal
communications systems ("PCS") and are entering existing service markets that
have been recently opened to competition as a result of the U.S.
Telecommunications Act of 1996 and similar legislation in other countries. The
Company believes that its experience in providing solutions to markets worldwide
within the carrier market, including local exchange, long distance and wireless,
involving applications for a wide variety of switches and other heterogeneous
network system elements, provides it with a significant competitive advantage in
designing products which can effectively handle the growing needs of these
providers.

EXPAND STRATEGIC ALLIANCES. The Company is strengthening its existing
strategic alliances with marketing partners and creating new alliances as a
means of identifying new business opportunities

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and entering new markets. These strategic alliances are with
internationally-recognized telecommunications equipment and service providers.
The alliances are a critical component of the Company's strategy to increase
penetration in large international markets, by leveraging on the reputation and
marketing efforts of its partners.

POSITION COMPANY PRODUCTS IN INTERNATIONAL MARKETS. Through its alliances
with internationally focused partners, the Company intends to continue to
identify new users in emerging countries. Each new installation represents an
opportunity for the Company to provide additional products and services for end
users. The Company has expanded its opportunities by providing products to one
type of carrier in a country, often a cellular carrier, and leveraging its
performance and reputation with that customer to sell products to other local
carriers. The Company's experience with TELMEX is a model for this strategy. See
" -- Strategic Alliances and Other Customers."

LEVERAGE TECHNOLOGICAL LEADERSHIP. The Company is continually pursuing
opportunities to use its technological leadership to create product enhancements
such as real-time data collection and subscriber data warehousing. Recently, the
Company led a national effort involving, among others, Cabletron, Microsoft,
Novell, Hewlett-Packard, and IBM, for the development of a standard protocol for
use with the Microsoft Windows operating system ("WinSNMP") which is enabling
the development of flexible, decentralized data network management systems. In
conjunction with this effort, the Company developed enabling technology that
facilitates the use of Microsoft Windows, Intel processors and the Company's
NetPlus products for managing networks. To date, over 500 such kits have been
sold to customers such as Microsoft Corporation, Oracle Corporation, 3Com
Corporation, Lotus Development Corporation, CISCO Systems, Inc. and Symantec
Inc. To further its penetration of the data network market, the Company is also
developing the billing component for advanced data switches, which provides
access providers with flexible options for billing users of data network
services. The Company anticipates similar opportunities to develop other network
edge technologies for equipment and service providers in the growing market for
data services.

EXPAND SOFTWARE OPTIONS TO MEET THE NEEDS OF ENTERPRISES. The Company
continues to package its NetPlus software features into Company-standard systems
designed to work individually or as a group and to facilitate enterprise-wide
voice and data communications. The Company is also expanding the number of
available features to support data communications networks and operations. The
Company believes it will be particularly important to provide network managers
with the flexibility to meet the increasing demands of converging voice and data
telecommunications markets and expanding enterprise network requirements.

MAINTAIN ISO 9001 PRODUCT QUALITY REGISTRATION. The Company has invested
nearly $1.5 million over the last several years to obtain, and plans to continue
such investments to maintain, the registration of its processes and procedures
under the international quality standard ISO 9001. This standard assures that
the Company meets rigorous performance and quality criteria established by an
internationally recognized organization. Compliance with this standard is
particularly important in establishing credibility and acceptance in
international markets.

PRODUCTS

All of the following products reflect the Company's extensive knowledge of
switch interface technology and experience in the collection and management of
data from switches made by virtually any manufacturer. The Company has applied
the same expertise to network management products for large enterprises, whose
complex networks often involve remote locations and require similarly flexible
and innovative designs to facilitate the flow of communications.

CARRIER NETWORK PRODUCTS

The Company's carrier network products meet the requirements of the existing
telephony wireline businesses and the growing markets of cable television, the
Internet and wireless businesses. The automation of data collection from remote
switches enables carriers to operate larger, increasingly complex systems with
more customer features more reliably, more cost effectively and with fewer

29
<PAGE>
personnel. The Company's carrier network products are designed to facilitate
more accurate and more frequent billing, thereby reducing billing lag time and
accounts receivable. They also enable carriers to track calling patterns, reduce
fraud, perform fault management, improve network performance, and verify that
calls are not needlessly routed through inefficient or expensive paths. These
products enable a carrier to increase the size of its system and provide its end
users with better service, in remote and international locations. Following are
descriptions of the Company's principal carrier network products:

DATA COLLECTION

DCMS-REGISTERED TRADEMARK- -- DCMS, Distributed Call Measurement
System-TM-, is a hardware and software based microprocessor controlled
product which collects call record data from telephone switches and
electronically transmits them to a central location, where the data can be
processed for such purposes as billing, traffic analysis and fraud
detection. DCMS eliminates magnetic tape storage units and manual data
collection, reduces processing costs, and increases the accuracy of billing
data which, in turn, increases revenue. The most recent version of DCMS,
NEDS-TM-, Network Element Data Server, can provide the data on a real-time
basis. The Company also offers the DCMS*Plus-TM-, a version of DCMS which is
based on a new technology platform and is targeted at carriers in third
world and emerging countries. These products can be adapted to support
virtually all wireline and wireless telephone switches.

BILLING REPORTS AND ACCESS TO CUSTOMER DATA

UPS-32-REGISTERED TRADEMARK- -- UPS-32, Universal Polling System-32-TM-,
is a mini-computer, server or PC-based product, programmed to control the
collection and transmission of call detail records transmitted by multiple
DCMS units and similar equipment of other vendors. UPS-32 collects call data
from dispersed switch sites, processes and formats the data on a
customer-defined schedule, and distributes the data to the customer's
billing center. The most recent version of UPS-32, CANS-TM-, Central Access
Network Server, collects and distributes data in real-time.

TIBS-TM- -- TIBS, TELMARS-TM- International Billing System, a
software-based alternative carrier billing system, uses information gathered
by the DCMS or other providers' data collection products, and provides
carriers with billing information. TIBS is designed to reliably and
accurately bill for subscriber calls originating in over 30 countries, and
to support accurate currency conversions based on daily exchange rates.

TREX*COMM-TM- -- TREX*COMM is a software-based product designed for U.S.
local exchange carriers who use network switches to provide customer
premises voice and data communication services for business customers, under
a service concept called CENTREX. TREX*COMM automates the transfer of
CENTREX call usage data from remote switch sites to customers' equipment and
sorts records by customer codes, group codes, or other identifying data
fields. Using standard modem protocols, customers can dial the TREX*COMM
system to retrieve their data. Running on UNIX platforms and used in
conjunction with a data collection product, such as the DCMS, TREX*COMM
makes network information available to CENTREX subscribers to enable them to
manage and control data.

SURVEILLANCE AND ALARM (TRAFFIC REPORTING)

UTS-32-REGISTERED TRADEMARK- -- UTS-32, Universal Traffic System-32-TM-,
uses information gathered by DCMS products or other providers' data
collection products to provide reports on system traffic and usage on a
periodic basis. UTS-32 produces hourly group traffic reports, multi-day
study reports, multi-day load balancing reports, multi-day group traffic
analyses, weekly historical usage reports, yearly trunk forecasting reports,
and other engineering information used to monitor and maximize the
efficiency of the system and enable the carrier to minimize down-time.

RTMS-TM- -- RTMS, Real Time Management System, a system originally
developed for Teleglobe, monitors network data in real-time and provides,
from a single data base, information for billing, fraud detection,
subscriber management and network management. The heart of

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<PAGE>
RTMS is a 600 gigabyte data warehouse. RTMS uses NEDS to capture call
records in real-time from remote switches. RTMS processing software presents
the data for analysis within 15 seconds of call completion.

ANMS-REGISTERED TRADEMARK- -- ANMS, AMAT Network Management System-TM-,
monitors the elements of a billing network. ANMS is a mini-computer based
product that collects and reports on alarms sent by DCMSs, UPS-32s and other
network elements in the billing system to assure that no billing data is
lost. In addition, ANMS serves as a user interface and collects system logs
from the network elements. The Company presently is adding standard network
management protocols to ANMS.

NETWORK MANAGEMENT PRODUCTS

The Company's network management products meet the requirements of network
managers of large, growing and increasingly complex integrated voice and data
networks. The Company's network management products are designed to enable the
managers to operate their networks more effectively, to more accurately control
costs, to minimize network down time, and to implement other network management
features as their requirements grow and change.

NETPLUS-REGISTERED TRADEMARK- VOICE AND DATA NETWORK MANAGEMENT SYSTEM
-- The NetPlus family of network management products consists of five
systems designed to automate network operations and management functions.
These systems employ a client server architecture and common database that
permit them to operate either independently or as an integrated whole.
NetPlus products are scaleable, providing flexibility to accommodate a broad
range of network sizes and multiple locations. The Company typically
provides NetPlus products as fully integrated hardware and software
configurations. These products are intended to manage voice and data
networks for 1,000 to 50,000 users. The Company also licenses NetPlus
software to resellers to reach the market for small size networks. NetPlus
products are capable of providing total network management including: FAULT,
CONFIGURATION, ACCOUNTING, PERFORMANCE AND SECURITY MANAGEMENT ("FCAPS").
These products allow a network to automate tasks such as alarm processing,
connectivity tracking, automatic cable and channel assignment, creation of
subscriber and circuit records, inventory control, traffic surveillance and
management, work order and trouble ticket processing, directory assistance
and subscriber billing.

The Company employs a documented Quality Management Program to monitor the
quality of its products and detect errors. The Company has established an
internal Quality Management Committee to set quality objectives for the Company
and a Quality Assurance Department to implement and monitor compliance with the
applicable procedures. The Company's quality assurance and error detection
system is based on ISO 9001 international quality standards, applicable to such
matters as management responsibility, quality systems, contract review, design
control, document and data control, control of inspection, measuring and test
equipment, training, servicing and inspection and test status. The Company's
procedures are audited twice each year both internally, and by the ISO. The
Company has experienced no product returns in the past 10 years as a result of
undetected errors. Where undetected errors occur, the Company may incur
additional costs and delays in order to remedy the errors.

SALES AND MARKETING

Historically, the Company's sales and marketing efforts have been managed by
a small group of senior managers with substantial experience in the
telecommunications service provider market. These managers relied on the
Company's proven performance in promoting the Company's products. Sales
opportunities originated primarily from (i) referrals, (ii) involvement in trade
shows and industry conferences, (iii) responses to Requests for Proposals
received from telecommunications service providers, governments and other
organizations and (iv) leads from or contract proposals with the Company's
strategic alliance partners. See "-- Strategic Alliances and Other Customers."

31
<PAGE>
The sales process for new contracts 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.

As part of its sales strategy, the Company spends a significant amount of
time consulting with strategic partners and end users to adapt its products to
meet end user requirements. Through ongoing sales, maintenance, training and
systems analysis, the Company maintains contact with its partners and end users
to determine their evolving requirements for updates and enhancements. Through
these processes, the Company gains valuable industry expertise, as well as the
ability to identify emerging industry applications and new sales opportunities.

At present, the Company plans to significantly increase its sales efforts
over the next six to 12 months through more aggressive sales and marketing
strategies. The Company is hiring more direct, experienced sales
representatives, adding non-exclusive third party distribution channels and
developing additional strategic alliances with carriers and communications
equipment manufacturers to market the Company's products.

The Company's products typically are sold to strategic alliance partners or
through them, to their end user customers. Resellers are also used to target
markets where large numbers of customers with smaller networks are predominant.
A small, direct sales force markets the Company's products in markets where
relationships are not established. In fiscal 1996, sales to strategic alliance
partners, resellers and through the direct sales force comprised approximately
60%, 1% and 39% of revenue, respectively. The Company is in the process of
identifying and targeting the markets most likely to need its products. To date,
as a result of market research and analysis, the Company has begun to actively
market its network management products to universities and airports. The Company
also plans certain promotional efforts targeted at identified potential
enterprise customers, such as through participation at the Association of
College and University Telecommunications Administrators conference and other
national conferences on network management and billing.

The Company is working with several manufacturers to promote the visibility
and positioning of its network management products. As a leader in the promotion
of SNMP, which is emerging as an industry standard for network management, the
Company has sold licenses to various suppliers, including Microsoft Corporation,
3Com Corporation, CISCO Systems, Inc., Lotus Development Corporation, Oracle
Corporation and Symantec Inc., enabling them to incorporate WinSNMP in their
products for use in establishing network management applications, which could
include NetPlus products.

The Company plans to increase its promotional and name recognition efforts
over the next 12 months. It will continue to exhibit in trade shows and industry
conferences, publish newsletters and hold user group meetings. The Company has
also established a home page on the Internet to communicate with customers and
prospects.

CUSTOMER SUPPORT

The Company believes that a high level of engineering and development
services and customer support is critical to the Company's continuing success in
developing relationships with its strategic partners and end users. To augment
its sales efforts, the Company offers product-related engineering and
development services to its customers. The Company offers a range of other
services to customers, including requirements analysis, project management,
system design, tailoring and installation, training, ongoing support and
upgrades. Because the Company's services personnel work closely with customers,
they are able to gain valuable industry expertise, as well as identify emerging
industry applications. In addition, the Company's services personnel are able to
identify new sales opportunities. When the Company undertakes engineering and
development services for customers, the development often results in product
enhancement.

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<PAGE>
The Company offers technical customer support 24 hours per day, seven days
per week. Support is provided via telephone, remote login, e-mail and, if
necessary, on-site assistance. In addition, the Company has established a World
Wide Web site on the Internet which keeps customers informed of product
developments. International customers are supported directly by the Company or
by local representatives that have been trained by the Company. These
representatives do not represent the Company exclusively. The Company also
conducts training classes for its strategic partners and other customers.

STRATEGIC ALLIANCES AND OTHER CUSTOMERS

In order to develop, market and distribute its products effectively, the
Company has established strategic alliances with several large customers (the
"strategic alliance partners" or "partners") to which the Company sells products
for use by them or their customers. The Company's strategic alliances apply to
both its carrier network products and its network management products. Each
alliance is designed to do one or more of the following: develop products
designed to meet the needs of the partner or its customers, establish a joint
marketing relationship to include Company products in systems sold by the
partner, and create a reseller channel for the Company's products. These
alliances have been especially helpful in enabling the Company to install
products in foreign countries, where the Company's strategic alliance partners
are well known and have well developed business relationships.

A strategic alliance typically involves a formal agreement between the
Company and the strategic alliance partner, pursuant to which the parties agree
to develop and sell products to the partner for use by the partner, or by its
customers who are in such cases the end users of the Company's products. Each
agreement specifies the terms of the alliance, which may include 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 the
Company from time to time to purchase products, subject to the terms of the
overall agreement. The products are purchased and paid for by the partner either
for its own use or 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 the Company's 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.

The Company's carrier network products have been installed in over 500 end
user sites in 32 countries. The Company's carrier network product customers
accounted for approximately 40.6%, 62.8% and 67.6%, respectively, of the
Company's revenue in fiscal 1994, 1995 and 1996, respectively. The Company's
carrier network product customers in each of the past three fiscal years which
contributed 10% or more of the Company's revenue from carriers and the
percentages of carrier revenue and of total revenue attributable to each one in
each of such periods were as follows:

<TABLE>
<CAPTION>
PERCENT OF PERCENT OF
FISCAL CARRIER TOTAL COMPANY
YEAR REVENUE REVENUE
- --------- ------------- -------------

<S> <C> <C> <C>
1994 AT&T World Services 30.2% 12.2%
CBIS 17.1 7.0
Digital Equipment - Espana 11.2 4.5

1995 AT&T World Services 29.1% 18.3%
Teleglobe 25.2 15.8

1996 TELMEX 42.6% 28.8%
Teleglobe 15.8 10.7
</TABLE>

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<PAGE>
The Company's network management products have been installed in over 100
end user sites in 10 countries. Network management products accounted for
approximately 59.4%, 37.2% and 32.4% of the Company's revenue in fiscal 1994,
1995 and 1996, respectively. The Company's network management product customers
in each of the past three fiscal years which contributed 10% or more of the
Company's revenue from sales of these products to enterprise customers and the
percentage of enterprise revenue and total revenue attributable to each in each
of such periods were as follows:

<TABLE>
<CAPTION>
PERCENT OF
ENTERPRISE PERCENT OF
FISCAL CUSTOMER TOTAL COMPANY
YEAR REVENUE REVENUE
- --------- ------------- -------------

<S> <C> <C> <C>
1994 ServAir 36.5% 21.7%
AmerInd 21.4 12.7
AT&T Federal Systems 14.5 8.6
U.S. Navy 13.0 7.7

1995 AmerInd 38.0% 14.1%
AT&T Federal 15.7 5.8
GTE Government Systems 16.2 6.0
ServAir 10.4 3.8

1996 ANSTEC 35.1% 11.3%
GTE Government Systems 19.0 6.1
AmerInd 12.2 3.9
</TABLE>

The following is a list of the Company's most significant strategic
alliances:

CARRIER NETWORK PRODUCTS

- AT&T WORLD SERVICES, INC. ("AT&T WORLD SERVICES") -- selected the DCMS
and UPS-32 as operating components of its billing analysis systems for
international toll gateways, to be sold to customers worldwide. These
systems are used to collect data for traffic analysis and billing.
These systems have been sold to Telecom Networks and International,
Ltd. of Auckland, New Zealand; the Philippines Long Distance
Telephone; Brunei; Codetel, the Dominican Republic's long distance
carrier; Unisource, a consortium of joint venture companies providing
services in Europe; Taiwan's International Telephone Authority and
Compania Anonima Nacional Telefonos de Venezuela.

- CINCINNATI BELL INFORMATION SYSTEMS, INC. ("CBIS") -- CBIS is the
largest cellular billing service provider in the world. The Company
and CBIS developed a customized version of the DCMS which contains
information management software designed to meet the needs of cellular
service providers. CBIS has installed over 50 DCMS units in the United
States for AT&T Wireless, formerly McCaw Cellular, one of CBIS's
largest customers. In addition, the Company currently is doing
follow-on work to further upgrade these systems and to deploy
additional DCMS products for other CBIS customers.

- TELEGLOBE CANADA, INC. -- Teleglobe is the government chartered
international long distance provider for Canada. Teleglobe has an
agreement with the Company for the development of a data collection
network, data warehouse and operator display system to capture and
monitor international traffic and usage data and provide information
for fraud detection and other OSS functions on a real-time basis. The
result of this cooperative development project was the Company's RTMS
product, which is being marketed to other carriers worldwide.

- LUCENT TECHNOLOGIES, INC. (FORMERLY AT&T NETWORK SYSTEMS) -- developed
an OEM version of the DCMS to be used in combination with Lucent's
BILLDATS-Registered Trademark- (corresponding to the Company's
UPS-32/CANS product) collection software with the Company. Lucent has

34
<PAGE>
deployed BILLDATS systems incorporating the Company's products in
various domestic and international teleprocessing projects, including
projects for Ameritech, the People's Republic of China and Korea
Mobile Telephone. As Lucent pursues other opportunities in Asia, the
Company expects its product to be included in future proposals.

- SAMSUNG ELECTRONICS COMPANY, LIMITED, LG INFORMATION AND
COMMUNICATIONS, LIMITED AND ILGIN CORPORATION -- formed a consortium
to provide a billing data collection system for Korea Telecom, the
national carrier for the Republic of South Korea. The consortium has
purchased significant quantities of the Company's products for tests
and field trials and the Company expects to conclude partnering
agreements with the consortium members in the near future.

- INTERNATIONAL COMPUTERS LIMITED -- is installing the Company's NEDS
and CANS products along with its own billing system for Vodafone
Limited in the United Kingdom and the national cellular carrier in
Indonesia.

- GTE-TSI -- ordered DCMSs for installation at NYNEX Mobile, SNET
Cellular and Puerto Rico Telephone Company Cellular for use with
GTE-TSI's telephone fraud detection product. GTE-TSI has installed the
UPS-32 product as part of its own product and the Company expects to
install additional units pursuant to this arrangement.

NETWORK MANAGEMENT PRODUCTS

- ANSTEC, INC. -- teamed with the Company and was selected, through a
competitive procurement process, to install the Company's NetPlus
products at 107 U.S. Air Force bases and 50 other U.S. government
installations throughout the world.

- AMERLND, INC. -- installed a version of the Company's NetPlus products
as a part of the U.S. Army's automated directory attendance system at
installations throughout the United States.

- BELLSOUTH COMMUNICATION SERVICES, INC. UNDER CONTRACT TO HARRIS
CORPORATION -- installed systems containing the Company's NetPlus
products to be operated by Harris Corporation at National and Dulles
Airports near Washington, D.C. The Company expects to participate in
further airport projects with BellSouth and Harris Corporation.

- GTE GOVERNMENT SYSTEMS -- provides telephone systems at military
facilities throughout the world. The Company, as a subcontractor to
GTE Government Systems for network management products, installs and
supports NetPlus products at 40 of these military facilities. The
Company expects, through its continuing relationship with GTE
Government Systems, to provide additional products and services to
military facilities.

- AT&T CORPORATION, FEDERAL SYSTEMS DIVISION -- provides telephone
systems for the Executive Branch of the U.S. Government. The Company,
as a subcontractor to AT&T, installed and supports NetPlus products in
the U.S. Department of State and the Executive Office of the
President.

The following is a list of some of the Company's other most significant
customers that have installed the Company's carrier network and network
management products within their organizations:

- TELEFONOS DE MEXICO, S.A. DE C.V. -- TELMEX, the national and local
long distance carrier of Mexico, selected the Company to upgrade data
collection throughout its switch network system. The three-year
contract has an estimated value of $12 million.

- GTE TELOPS (A DIVISION OF GTE TELEPHONE COMPANY) -- purchased DCMS
systems for installation on certain switch types throughout its
network.

- TELCEL -- is the largest cellular carrier in Mexico and has installed
the Company's DCMS and UPS-32 products in its network.

35
<PAGE>
- NYNEX -- is installing one of the Company's newest products,
TREX*COMM, to support its CENTREX customers.

- ALLTEL -- is using the Company's UPS-32 product to provide billing
data collection services to its customers.

- UNIVERSITY OF IOWA -- awarded the Company a contract to install
NetPlus to manage and monitor the University's voice and data network.

In addition, companies such as ISI Infortext Inc., Computer Science
Corporation, Polaris Communication Services, Inc. and Telsoft International,
Inc. have agreed to promote and sell the Company's products on a non-exclusive
basis. They participate in trade shows, industry conferences and customer events
and feature ACE*COMM products in their marketing programs.

As more ATM, Frame Relay and X.25 data switches are incorporated into
carrier and enterprise networks, it will become increasingly important for
network managers to be able to bill customers based on actual usage. Pursuant to
an agreement with Newbridge, the Company is developing a billing component for
advanced data switches, which provides access providers with flexible options
for billing users of data network services. The Company will receive an up-front
payment for the development work and on-going fees with respect to sales of the
software by Newbridge to its customers. To date, revenues from this agreement
have not been material. The Company anticipates similar opportunities to develop
other network edge technologies for equipment and service providers in the
growing market for data services.

The Company plans to continue to develop and expand its strategic alliances
with established, well-recognized industry leaders, as it believes that these
alliances enable the Company to increase sales most cost-effectively and
successfully position it to increase market penetration of its products.

BACKLOG

The Company tracks two types of backlog: "order backlog," which represents
signed purchase orders, and "contract backlog," which represents signed project
contracts that become order backlog upon the signing of specific purchase
orders. Order backlog was approximately as follows: $5.7 million, $3.6 million
and $10.4 million, at June 30, 1994, 1995 and 1996, respectively. Contract
backlog was approximately: $2.6 million, $1.0 million and $37.2 million at June
30, 1994, 1995 and 1996, respectively.

The Company's contracts are large and technically complicated and require a
significant commitment of management and financial resources from the Company's
customers. The development of a contract typically is a lengthy process because
it must address a customer's specific technical requirements and often requires
internal approvals that require substantial lead time. Accordingly, the Company
may experience significant variations in revenue from quarter to quarter,
reflecting delays in contract signing or contract order deliveries. No assurance
can be given that current backlog will necessarily lead to revenue in any future
period.

COMPETITION

Competition in the market for the Company's products is driven by rapidly
changing technologies, evolving industry standards, frequent new product
introductions and enhancements and rapid changes in customer requirements. To
maintain and improve its competitive position, the Company must continue to
develop and introduce, on a timely and cost-effective basis, new products and
product features that keep pace with technological developments and emerging
industry standards and address the increasingly sophisticated needs of its
customers.

The Company expects the continued growth of the carrier market and of the
large enterprise network management market to encourage new competitors to enter
the markets in the future. The Company believes that the principal competitive
factors in these markets include specialized project management capabilities and
technical expertise, compliance with industry quality standards and protocols,
customer support, product features such as adaptability, scaleability and
flexibility, ability

36
<PAGE>
to integrate with other products, functionality and ease of use, product
reputation, responsiveness to customer needs, and timeliness of implementation.
In the future, the Company will be required to respond promptly and effectively
to the challenges of technological change and its competitors' innovations.

In the carrier network products market, the Company's current and
prospective competitors include (i) large carriers which internally develop full
system products for themselves, tailored to their particular specifications,
(ii) companies, such as Securicor Telesciences, Inc., CGI, Inc. ("CGI"), and IDT
- - Alston that can supply individual billing data collection components and (iii)
vendors that supply product components, including Hewlett-Packard Company
("HP"), IBM Corporation ("IBM"), Moscom Corporation ("Moscom"), Objective System
Integrators, Inc. ("OSI") and CGI.

In the network management products market, the Company's current and
prospective competitors include (i) companies that provide products for
telephony networks, such as Telco Research Corporation, Complimentary Solutions,
Inc., Stonehouse & Company, Switchview, Inc., Moscom and OSI and (ii) companies
that provide products for data networks, such as Remedy Corporation, Net Manage,
Inc., Computer Associates International, Inc., FTP Software, Inc., Castle Rock
Computing, HP, IBM and Sun Microsystems, Inc.

The Company believes that its ability to compete in both markets depends in
part on a number of competitive factors outside its control, including the
ability of others to develop technology that is competitive with the Company's
products, the price at which competitors offer comparable products and services,
the extent of competitors' responsiveness to customer needs and the ability of
the Company's competitors to hire, retain and motivate key personnel.

The Company competes with a number of companies that have substantially
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition than the Company. As a result, the Company's
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 can the Company. There can be no
assurance that the Company's current or potential competitors will not develop
products comparable or superior to those developed by the Company or adapt more
quickly than the Company to new technologies, evolving industry trends or
changing customer requirements.

RESEARCH AND PRODUCT DEVELOPMENT

The Company's research and development efforts are focused on developing new
products to meet the growing needs of carriers and enterprises and on improving
existing products by incorporating new features and technologies. The Company
believes that the timely development of new products and enhancements is
essential to its maintaining its competitive position in the marketplace.

In its research and development efforts the Company works closely with
customers, end users and leading technology vendors, often in cooperative
funding arrangements. For example, the Company is working with Newbridge to
develop new software for its data switch products. The Company continually
reviews opportunities to license technologies from third parties when
appropriate based on timing and cost considerations. The Company believes that
this approach facilitates and accelerates the development of new and enhanced
products.

The Company's efforts are influenced significantly by industry developments
and by customer and end user requirements. New features may be tailored
initially for delivery to a single customer and subsequently incorporated into
future versions of the product which are available to all customers.

During the fiscal years 1994, 1995 and 1996, product research and
development expenses were $0.6 million, $1.0 million and $1.0 million,
respectively.

37
<PAGE>
PROPRIETARY RIGHTS AND LICENSES

The Company does not currently hold any patents and relies on a combination
of statutory and/or common law, copyright, trademark, contract and trade secret
laws to maintain its proprietary rights to its products. The Company believes
that, because of, among other things, the rapid pace of technological change in
the telecommunication and software industries, patent protection for its
products is a less significant factor in the Company's success than the
knowledge, ability and experience of the Company's employees, the frequency of
product enhancements and the timeliness and quality of support services provided
by the Company.

The Company generally enters into confidentiality agreements with its
employees, consultants, customers and potential customers and limits access to,
and distribution of, its proprietary information. Use of the Company's software
products is usually restricted to specified locations and is subject to terms
and conditions prohibiting unauthorized reproduction or transfer of the software
products. The Company also seeks to protect its software, including the source
code, as a trade secret and as a copyrighted work.

EMPLOYEES

At June 30, 1996, the Company employed a total of 137 employees, including
34 involved in manufacturing and quality assurance, 29 in research and
development, 23 in sales and marketing, 16 in professional services and 35 in
administration and finance. None of the Company's employees is represented by a
labor union. The Company has experienced no work stoppages and believes that its
employee relations are good.

PROPERTIES

The Company leases space at its four office locations: two in Gaithersburg,
Maryland and one each in Flemington, New Jersey and Orlando, Florida. The
Gaithersburg offices are the Company's corporate headquarters and are used for
product assembly, software and engineering development and support. The
Flemington office is used for the development and project management liaison
with NYNEX, AT&T and Lucent Technologies. The Orlando office is used primarily
for sales and sales support.

The following sets forth information concerning the Company's leased
facilities:

<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE LEASE EXPIRATION ANNUAL RENT
- ------------------------------- --------- ----------------------- ------------
<S> <C> <C> <C>
Gaithersburg, Maryland
Perry Parkway 21,800 July 31, 1996 (1) $ 220,000
North Frederick Avenue 4,500 December 1, 1996 $ 36,000
Flemington, New Jersey 2,500 December 31, 1996 $ 39,600
Orlando, Florida 400 April 30, 1997 $ 11,040
</TABLE>

- ------------------------
(1) Following expiration of the lease, the Company has continued its lease on a
month-to-month basis pending the commencement of a lease for new facilities
in Gaithersburg.

The Company has entered into a lease commencing September 1, 1996, or upon
the completion of the premises if later, for premises approximating 37,874
square feet on Quince Orchard Road in Gaithersburg, Maryland with an expiration
date of September 1, 2003, or seven years from the commencement of the lease if
later, and annual rent of approximately $615,000. These new leased premises will
replace the facilities which the Company currently leases on Perry Parkway and
North Frederick Avenue in Gaithersburg. The Company believes that its facilities
are adequate for its current needs and that suitable additional space will be
available as required.

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

38
<PAGE>
MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- ---------------------------------------------------------
<S> <C> <C>
George T. Jimenez..................... 60 President, Chief Executive Officer and Chairman of the
Board
S. Joseph Dorr........................ 49 Vice President -- Network Management Division
Dr. Thomas V. Russotto................ 51 Vice President -- Carrier Networks Division
Jeffrey S. Simpson.................... 41 Vice President -- Finance
James M. Moore........................ 54 Vice President -- Marketing
Loretta L. Rivers..................... 39 Secretary
Paul G. Casner, Jr. .................. 58 Director
Gary P. Golding....................... 39 Director
Gilbert A. Wetzel..................... 64 Director
</TABLE>

GEORGE T. JIMENEZ is the Chief Executive Officer of the Company and has
served as President, Treasurer and a Director of the Company since its inception
in 1983. From 1980 to 1983, Mr. Jimenez served as the President of the Company's
predecessor.

S. JOSEPH DORR has been Vice President -- Network Management Division since
1988 and a Vice President of the Company since 1983. From 1983 to 1989, he
served as Corporate Secretary of the Company. From 1980 to 1983, he served as
Director of the Commercial Systems Division of the Company's predecessor.

DR. THOMAS V. RUSSOTTO has been Vice President -- Carrier Networks Division
since 1988 and a Vice President of the Company since 1985. From 1983 to 1985, he
served as Director of Product Development at the Company.

JEFFREY S. SIMPSON has been Vice President -- Finance of the Company since
July 1996 and a financial consultant to the Company since March 1996. From 1988
to January 1996, Mr. Simpson served in various positions with The Compucare
Company, a software development company, including Controller from March 1990 to
May 1993, Chief Financial Officer from May 1993 to August 1995 and Vice
President, Finance, from September 1995 to January 1996. From 1985 to 1988, Mr.
Simpson served as a Manager of Financial Planning and Analysis with U.S. Sprint.

JAMES M. MOORE has been Vice President -- Marketing of the Company since May
1996. From March 1994 to May 1996, Mr. Moore served as Vice President, Business
Market of NYNEX, a telecommunications company, and from May 1992 to March 1994
he served as Managing Director, Business Market of NYNEX. From March 1989 to May
1992, Mr. Moore served as Managing Director, Marketing of New England Telephone
Company.

LORETTA L. RIVERS has been Corporate Secretary and Administrative Supervisor
of the Company since 1989 and has served in various capacities with the Company
since its inception in 1983.

PAUL G. CASNER, JR. has been a Director of the Company since 1983. Since
April 1994, Mr. Casner has served as President of DRS Electronic Systems Group,
which is comprised of the following entities: Technology Applications & Service
Company ("TAS"), DRS Military Systems, DRS Medical Systems, Inc. and Laurel
Technologies. From March 1991 to September 1993, Mr. Casner served as Chairman
and Chief Executive Officer of TAS.

GARY P. GOLDING has been a Director of the Company since 1991. Since January
1989, Mr. Golding has served as General Partner of CEO Venture Fund, a venture
capital firm, and of CEO Venture Fund II. Mr. Golding is a director of Databook,
Inc.

39
<PAGE>
GILBERT A. WETZEL has been a Director of the Company since 1992. Mr. Wetzel
has served as Regional Director of Key Executive Services for Right Associates,
an international human resources consulting firm, since 1994. He is the 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.

The directors are divided into three classes, denominated as Class I, Class
II, and Class III, with the terms of office of each Class expiring at the 1997,
1998 and 1999 annual meetings of stockholders, respectively. At each annual
meeting following such initial classification and election, directors elected to
succeed those directors whose terms expire shall be elected for a term to expire
at the third succeeding annual meeting of stockholders after their election,
provided that the stockholders electing new or replacement directors may from
time to time specify a term of less than three years in order to maintain the
number of directors in each class as nearly equal as possible. The directors
have been initially divided into classes as follows: Class I -- Gary P. Golding
and Gilbert A. Wetzel, Class II -- Paul G. Casner, Jr., Class III -- George T.
Jimenez. Officers of the Company serve at the discretion of the Board of
Directors. There are no family relationships among any of the Company's
directors and executive officers.

BOARD COMMITTEES AND COMPENSATION

The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee oversees actions taken by the Company's
independent auditors, recommends the engagement of auditors and reviews any
internal audits the Company may perform. The current members of the Audit
Committee are Messrs. Golding, Wetzel and Casner. The Compensation Committee
approves the compensation of executives of the Company, makes recommendations to
the Board of Directors with respect to standards for setting compensation levels
and administers the Company's Amended and Restated Omnibus Stock Plan (the
"Stock Plan"). The current members of the Compensation Committee are Messrs.
Golding, Wetzel and Casner, none of whom is employed by the Company.

Directors are reimbursed for their travel expenses in attending Board and
Committee meetings. Each of the Company's current non-employee directors (other
than Mr. Golding) was granted an option to purchase 4,500 shares of the
Company's Common Stock at an exercise price of $1.55 per share on December 9,
1995, pursuant to the Company's Amended Stock Option Plan for Directors (the
"Directors Stock Plan"). Only non-employee directors may participate in the
Directors Stock Plan. The plan authorizes the issuance of up to 200,000 shares
of Common Stock, subject to adjustment to reflect stock splits, recapitalization
and other changes in the outstanding stock. Each eligible director is entitled
under the plan to receive upon his election or reelection as a director an
option for a number of shares equal to 4,500 multiplied by the number of years
in the term for which he is then elected, exercisable at the fair market value
of the Common Stock on the date of grant. The option becomes exercisable in
equal installments of 4,500 shares on each anniversary of the date of grant or,
on such earlier date as the director ceases to be a director other than by
reason of his removal for cause, if such date is 15 days prior to such an
anniversary date and such director has served at least 12 months in office. Each
option expires upon the earlier of five years from the date of grant, the
expiration of six months following death, resignation or removal other than for
cause, or upon removal of a director for cause.

EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to the Company in all capacities during the fiscal
year ended June 30, 1996, by the following

40
<PAGE>
executive officers (the "Named Executive Officers"): (i) the Company's Chief
Executive Officer and (ii) the Company's other executive officers whose salary
and bonus for the fiscal year exceeded $100,000.

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)(1) COMPENSATION(2)
- --------------------------------------------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C>
George T. Jimenez............................ $ 158,000 $ 54,079 71,384 $ 15,778
President, Chief Executive Officer and
Chairman of the Board
S. Joseph Dorr............................... $ 120,000 $ 31,521 31,568 $ 4,562
Vice President
Dr. Thomas V. Russotto....................... $ 121,000 $ 59,441 61,115 $ 5,851
Vice President
</TABLE>

- ------------------------
(1) Options expected to be granted in fiscal year 1997 for fiscal year 1996
performance.

(2) Consists of Company contributions to the Company's 401(k) plan on behalf of
each Named Executive Officer and amounts paid in connection with a life
insurance policy for Mr. Jimenez and disability insurance policies for each
Named Executive Officer as follows: (i) Mr. Jimenez; $4,638 for the 401(k)
plan, $6,975 for life insurance and $4,165 for disability insurance; (ii)
Mr. Dorr; $3,516 for the 401(k) plan and $1,045 for disability insurance;
and (iii) Dr. Russotto; $4,638 for the 401(k) plan and $1,213 for disability
insurance.

The following table sets forth information regarding the grant of options to
purchase Common Stock to each of the Named Executive Officers during the fiscal
year ended June 30, 1996.

OPTION GRANTS IN FISCAL 1996

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------
NAME GRANTED FISCAL 1996(1) SHARE(2) DATE 5% 10%
- ----------------------------------------- ----------- --------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
George T. Jimenez........................ 33,413 4.7% $ .64 03/19/01 $ 5,908 $ 13,055
S. Joseph Dorr........................... -- -- -- -- -- --
Dr. Thomas V. Russotto................... 22,783 3.2% $ .64 03/19/01 4,028 8,902
</TABLE>

- ------------------------
(1) All of the options were granted under the Stock Plan and were fully vested
and exercisable on the date of grant.

(2) The exercise price per share of the options granted represented the fair
market value of the underlying shares of Common Stock on the dates the
respective options were granted.

(3) Potential realizable value is based on the assumption that the Common Stock
of the Company appreciates at the annual rate shown (compounded annually)
from the date of grant until the expiration of the five year option term.
These numbers are calculated based on the requirements promulgated by the
Securities and Exchange Commission (the "Commission") and do not reflect the
Company's estimate of future stock price growth.

41
<PAGE>
The following table sets forth certain information concerning option
exercises during fiscal 1996 by the Named Executive Officers and the number and
value of securities underlying options held by each of the Named Executive
Officers at the end of fiscal 1996.

AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT JUNE 30, IN-THE-MONEY OPTIONS
SHARES 1996 AT JUNE 30, 1996(2)
ACQUIRED ON VALUE -------------------------------- --------------------------------
NAME EXERCISE(#) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------- ----------- ----------- ------------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
George T. Jimenez................ 27,842 $ 557 182,953 0 $ 1,192,996 $ 0
S. Joseph Dorr................... 17,060 341 120,556 0 795,082 0
Dr. Thomas V. Russotto........... 34,308 30,592 69,569 0 433,733 0
</TABLE>

- ------------------------
(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 initial public
offering price.

AMENDED AND RESTATED OMNIBUS STOCK PLAN

The Company's Board of Directors and stockholders have adopted an Amended
and Restated Omnibus Stock Plan (the Stock Plan), pursuant to which options
previously have been granted. The maximum number of shares of Common Stock in
respect of which stock-based awards may be granted under the Stock Plan is
2,200,000. The shares of Common Stock to be delivered under the plan are
available from the authorized but unissued shares of Common Stock.

The Stock Plan is administered by the Compensation Committee of the Board of
Directors (the "Committee"), upon which no director who is an officer of the
Company may serve, and which comprises only Directors who are "non-employee
directors" within the meaning of Rule 16b-3 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and who are "outside directors" within
the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"). All employees of the Company, including employee directors, are
eligible to participate in the Stock Plan. The Committee's determinations of
which eligible individuals are granted awards and the terms thereof are based on
each individual's present and potential contribution to the success of the
Company.

Stock options may be granted under the Stock Plan at the discretion of the
Committee and subject to such terms and conditions determined by the Committee
and set forth in a grant agreement. Options granted under the Stock Plan may be
either nonqualified options or incentive stock options. The Committee has
discretion to fix the exercise price of such options at a price not less than
100% of the fair market value of the underlying shares of Common Stock at the
time of grant thereof. The Committee has broad discretion as to the terms and
conditions upon which options shall be exercisable, but under no circumstances
will an incentive stock option have a term exceeding 10 years from date of
grant.

The option exercise price may be satisfied in cash or, in the discretion of
the Committee, by exchanging shares of Common Stock owned by the optionee, by a
combination of cash and shares of Common Stock or by such other means as the
Committee may prescribe. The ability to pay the option exercise price in shares
of Common Stock would, if permitted by the Committee, enable an optionee to
engage in a series of successive stock-for-stock exercises of an option
(sometimes referred to as "pyramiding") and thereby fully exercise an option
with little or no cash investment. The Company also may make or guarantee loans
to optionees to assist optionees in exercising stock options.

42
<PAGE>
The terms of an option may provide for the automatic grant of a new award,
exercisable for not more than the number of shares tendered when the exercise
price of the option and/or related tax obligation is paid by tendering shares of
Common Stock (sometimes referred to as "reload options"), subject to certain
limitations set forth in the Stock Plan.

Incentive stock option awards under the Stock Plan must comply with Section
422 of the Code. Incentive stock option awards made to an optionee who owns more
than 10% of the outstanding stock of the Company must have an exercise price
that is not less than 110% of the fair market value of the underlying shares on
the date of grant, a term not exceeding five years, and the aggregate fair
market value of shares of Common Stock with respect to which all incentive stock
options first become exercisable by an optionee in any calendar year shall
either not exceed $100,000 or be treated as non-qualified options.

The Committee also may grant stock appreciation rights. Upon the exercise of
a stock appreciation right with respect to a share of Common Stock, a
participant would be entitled to receive the excess of the fair market value of
such shares over the base price of such right, which is specified by the
Committee upon grant and may not be less than 100% of the fair market value of
the underlying shares at the date of grant. The Committee has the authority to
determine whether the value of a stock appreciation right is paid in cash or
shares of Common Stock or a combination of both.

The Committee also has discretion to make contingent grants of performance
shares which will be earned to the extent performance goals established by the
Committee are achieved over a period of time specified by the Committee. The
Committee will have discretion to determine the value of each performance share,
to adjust the performance goals as it deems equitable to reflect events
affecting the Company or changes in law or accounting principles or other
factors, and to determine the number of performance shares which have been
earned based on performance relative to such performance goals. The value of
performance shares that are earned may, in the discretion of the Committee, be
paid in the form of cash, shares of Common Stock, or a combination of both.

Awards of stock under the Stock Plan will be made at the discretion of the
Committee and may be subject to forfeiture and restrictions on transfer. In
general, a participant who has been granted restricted stock will from the date
of grant have the benefits of ownership in respect of such shares, including the
right to vote such shares and to receive dividends and other distributions
thereon, subject to the restrictions set forth in the Stock Plan and in the
instrument evidencing such award. The shares of restricted stock will be held by
the Company, or by an escrow agent designated by the Company, during the
restricted period and may not be sold, assigned, transferred, pledged, or
otherwise encumbered until the restrictions have lapsed. The Committee has
authority to determine the duration of the restricted period and the conditions
under which stock may be forfeited, as well as the other terms and conditions of
such awards.

The Stock Plan also authorizes the Committee to grant to participants awards
that are valued in whole or in part by reference to, or are otherwise based on,
the value of shares of Common Stock ("Stock Unit Awards"). The Committee has
discretion to determine the participants to whom Stock Unit Awards are to be
made, the times at which such awards are to be made, the size of such awards,
and all other conditions of such awards, including any restrictions, deferral
periods, or performance requirements. The provisions of the Stock Unit Awards
will be subject to such rules and regulations as the Committee shall determine
at the time of grant.

Any award under the Stock Plan may provide that the participant has the
right to receive currently or on a deferred basis dividends or dividend
equivalents and/or other cash payments in addition to or in lieu of such award,
all as the Committee shall determine.

If the Committee determines that any stock split, stock dividend or other
distribution (whether in the form of cash, securities, or other property),
recapitalization, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase or exchange of shares, issuance of warrants or other
rights to purchase shares at a price below fair market value, or other similar
corporate event affects

43
<PAGE>
the Common Stock such that an adjustment is required in order to preserve the
benefits intended under the Stock Plan, then the Committee has discretion to
make (i) equitable adjustments (a) in the number and kind of shares that may be
the subject of future awards under the Stock Plan or (b) the number and kind of
shares (or other securities or property) subject to outstanding awards and the
respective grant of exercise prices thereof and/or, (ii) if appropriate, to
provide for the payment of cash to a participant.

The Committee has broad discretion as to the specific terms and conditions
of each award and any rules applicable thereto, including but not limited to the
effect thereon of the death, retirement, or other termination of employment of
the participant and the effect, if any, of a change in control of the Company.
The terms of each award are to be evidenced by a written instrument delivered to
the participant. The awards authorized under the Stock Plan are subject to
applicable tax withholding by the Company which may be satisfied by the
withholding of shares issuable under the Stock Plan.

No award may be granted under the Stock Plan after the tenth anniversary of
the effective date of the Stock Plan.

The Stock Plan may be amended or terminated at any time by the Board of
Directors, except that no amendment may be made without stockholder approval if
such approval is necessary to comply with any tax or regulatory requirement.

The Stock Plan is not subject to any provision of the Employee Retirement
Income Security Act of 1974, as amended, and is not qualified under Section
401(a) of the Code.

Special rules apply to a participant who is subject to Section 16 of the
Exchange Act. Certain additional special rules apply if the exercise price for
an option is paid in shares of Common Stock previously owned by the optionee
rather than in cash.

Counsel has provided the Company with the following brief summary of the
Federal income tax consequences under the Code as currently in effect with
respect to (i) incentive stock options, (ii) non-qualified stock options and
(iii) restricted stock awards:

(i) INCENTIVE STOCK OPTIONS. No taxable income is realized by the optionee
upon the grant or exercise of an incentive stock option. If there were no
disposition of the option shares until more than two years after the option is
granted and more than one year after the option is exercised, the gain or loss
realized by the optionee on the sale of such shares would be treated as
long-term capital gain or loss, and the Company would not be entitled to any
income tax deduction by reason of the grant or exercise of the option. If the
option shares were disposed of in a sale, exchange, gift or other "disqualifying
disposition" prior to the expiration of the
two-years-from-grant/one-year-from-exercise holding period, generally (a) the
optionee would realize taxable ordinary income in the year of such disposition
in an amount equal to the excess (if any) of the fair market value of such
shares at the time of exercise of the option over the option price thereof
(except that, if the disposition is a sale or exchange of the type on which a
loss, if sustained, would be recognized to such optionee, ordinary income would
be realized by such optionee in an amount equal to only the gain realized on
such sale or exchange if such gain is less than such excess) and would realize
capital gain on the balance of the gain, and (b) the Company generally would be
entitled to a deduction for such year in the amount of the ordinary taxable
income to the optionee.

(ii) NON-QUALIFIED OPTIONS. No taxable income is realized by the optionee
upon the grant of a non-qualified option. On exercise, the excess of the fair
market value of the shares at the time of exercise over the option price of such
shares would be treated as compensation. Special rules may apply to a
participant who is subject to Section 16 of the Exchange Act. Any amounts
treated as compensation (a) would be taxable at ordinary income tax rates in the
year of exercise, (b) would be subject to withholding for Federal income tax
purposes, and (c) generally would be an allowable income tax deduction to the
Company. The optionee's tax basis for shares acquired upon exercise of a

44
<PAGE>
non-qualified option would be equal to the option price paid for the shares plus
any amounts treated as compensation. An optionee would generally be entitled to
capital gain treatment on the difference between his tax basis and the sale
price of the shares acquired upon exercise.

(iii) RESTRICTED STOCK AWARDS. No income would be realized by an employee
in connection with the grant of a restricted stock award. When the restrictions
lapse, the employee would be required to include as taxable ordinary income the
fair market value of such shares at the time the restrictions lapse. The Company
would be entitled to a deduction for Federal income tax purposes equal to the
amount so included in such employee's income. An employee may, by making a
Section 83(b) election within 30 days after the transfer of stock, choose to
recognize income upon the grant of a restricted stock award. Any appreciation in
the stock value after the grant date will be eligible for capital gain treatment
upon the subsequent sale of the stock. However, if the stock is forfeited later,
the loss deduction allowable is limited to the price paid for the stock (if any)
minus any amounts received upon such forfeiture.

(iv) PAYMENT OF WITHHOLDING TAXES. The Company may withhold, or require a
participant to remit to the Company, an amount sufficient to satisfy any
Federal, state and local withholding tax requirements. The Committee may permit
a participant to satisfy a tax withholding requirement on exercise of an option
by delivery to the Company of shares of its Common Stock owned by the
participant, including shares the participant is entitled to receive upon
exercise of the option.

(v) CODE SECTION 162(M). Section 162(m) of the Code limits the tax
deduction available for compensation paid to the Company's five most
highly-compensated individuals in excess of $1,000,000. To the extent
practicable, awards under the Stock Plan to designated executives will qualify
as "performance-based" compensation which is excluded from the Section 162(m)
cap on deductibility. Stock options and stock appreciation rights issued under
the Stock Plan are expected to be fully deductible as performance-based.

(vi) OTHER. To the extent payments which are contingent on a change in
control are determined to exceed certain Code limitations, they may be subject
to a 20% nondeductible excise tax and the Company's deduction with respect to
the associated compensation expense may be disallowed in whole or in part.

The foregoing discussion summarizes the Federal income tax consequences of
the Stock Plan based on current provisions of the Code which are subject to
change. This summary does not cover any state or local tax consequences of
participation in the Stock Plan.

EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS

The Company currently has no employment contracts with any of the Named
Executive Officers, and the Company has no compensatory plan or arrangement with
such Named Executive Officers where the amounts to be paid exceed $100,000 and
which are activated upon resignation, termination or retirement of any such
executive officers upon a change in control of the Company.

LIMITATION ON LIABILITY OF DIRECTORS

The Charter provides that a director will not be personally liable for
monetary damages to the Company or its stockholders for breach of fiduciary duty
as a director, except to the extent such exemption for liability or limitation
thereof is not permitted under Maryland law, including liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for paying a dividend or
approving a stock repurchase in violation of Section 2-311 of the Maryland
Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit.

While the Charter provides directors with protection from having to pay
monetary damages for breaches of their duty of care, it does not eliminate such
duty. Accordingly, the Charter will have no effect on the availability of
equitable remedies such as an injunction or rescission based on a director's

45
<PAGE>
breach of his or her duty of care. The provisions of the Charter described above
apply to an officer of the Company only if he or she is a director of the
Company and is acting in his capacity as director, and do not apply to officers
of the Company who are not directors.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Charter provides that the Company shall indemnify its currently acting
and its former officers and directors against any and all liabilities and
expenses incurred in connection with their services in such capacities to the
maximum extent permitted by Maryland law, as from time to time amended. The
Charter further provides that the right to indemnification shall also include
the right to be paid by the Company for expenses incurred in connection with any
proceeding arising out of such service in advance of its final disposition to
the fullest extent permitted by Maryland law.

The Charter further provides that the Company may, by action of its Board of
Directors, provide indemnification to such of the employees and agents of the
Company and such other persons serving at the request of the Company as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, or other enterprise to such extent and to
such effect as is permitted by Maryland law and the Board of Directors shall
determine to be appropriate.

The Company expects to purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee, or agent of the Company, or
is or was serving at the request of the Company as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust, or other
enterprise against any expense, liability, or loss incurred by such person in
any such capacity or arising out of his status as such, whether or not the
Company would have the power to indemnify him against such liability under
Maryland law.

The Charter provides that (i) the Board of Directors may, by by-law,
resolution or agreement, make further provision for indemnification of
directors, officers, employees and agents and (ii) no amendment, modification or
repeal of the Charter, nor the adoption of any additional provision of the
Charter or the By-laws nor, to the fullest extent permitted by Maryland law, any
amendment, modification or repeal of law shall eliminate or reduce the effect of
the provisions in the Charter limiting liability or indemnifying certain persons
or adversely affect any right or protection then existing thereunder in respect
of any acts or omissions occurring prior to such amendment, modification,
repeal, or adoption.

CERTAIN TRANSACTIONS

In connection with the purchase of certain assets by the Company at its
inception, Mr. Jimenez, the Company's President loaned $150,000 to the Company
to assist in financing the acquisition. The note bears interest at the federal
short-term rate established periodically by the U.S. Treasury. Principal is
payable upon demand and interest is paid quarterly. The outstanding loan balance
was $78,572 at June 30, 1996 and will be entirely repaid out of proceeds of this
offering. See "Use of Proceeds."

During fiscal years 1994, 1995 and 1996, the Company purchased voice
processing systems totaling approximately $1,036,000, $62,000, and $212,000,
respectively, from Microlog Corporation ("Microlog"), a company whose Board of
Directors included Mr. Jimenez, the Company's President, and Graham Hartwell, a
former Director of the Company. Mr. Jimenez resigned from Microlog's Board of
Directors in January 1994. Mr. Hartwell retired from the Company's Board of
Directors in December 1995. The Company expects to continue to do business with
Microlog on terms no less favorable to the Company than could be obtained from
an unaffiliated third party.

The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All further transactions, including loans, between
the Company and its officers, directors, principal shareholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors and will
continue to be, in the judgment of such a majority, on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.

46
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of June 30, 1996, and as adjusted to reflect
the sale of shares offered hereby, by (i) each stockholder known by the Company
to be a beneficial owner of more than five percent of the Common Stock, (ii) the
Selling Stockholder, (iii) each of the Company's directors, (iv) each of the
Named Executive Officers and (v) all directors and executive officers of the
Company as a group. Except as indicated in the footnotes to this table, the
Company believes that the persons and entities named in the table have sole
voting and investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where applicable.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(1) AFTER OFFERING(1)
---------------------------- NUMBER OF ---------------------------
NUMBER OF SHARES BEING NUMBER OF
NAME AND ADDRESS (2) SHARES PERCENT OFFERED SHARES PERCENT
- ------------------------------------------------- --------------- ----------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C>
CEO Venture Fund II.............................. 1,530,950(3) 29.9% 230,000 1,300,950 17.6%
1950 Old Gallows Road
Vienna, Virginia 22182
George T. Jimenez................................ 2,453,562(4) 46.3% 0 2,453,562 32.4%
S. Joseph Dorr................................... 689,634(5) 13.2% 0 689,634 9.2%
Dr. Thomas V. Russotto........................... 191,696(6) 3.7% 0 191,696 2.6%
Paul G. Casner, Jr............................... 27,000(7) * 0 27,000 *
Gary P. Golding.................................. 2,628(8) * 0 2,628 *
Gilbert A. Wetzel................................ 18,000(9) * 0 18,000 *
All directors and executive officers as a group
(9 persons)..................................... 3,417,260(10) 61.5% 0 3,417,260 43.7%
</TABLE>

- ------------------------
* Less than 1% of the outstanding Common Stock.

(1) The number of shares of Common Stock outstanding prior to this offering
includes (i) 3,590,451 shares of Common Stock outstanding as of June 30,
1996, (ii) 1,530,950 shares issuable by the Company upon the conversion of
all outstanding shares of Class C Preferred Stock which will occur
automatically upon completion of this offering and (iii) shares issuable by
the Company pursuant to options held by the respective person or group which
may be exercised within 60 days after June 30, 1996. Beneficial ownership is
determined in accordance with the rules of the Commission and generally
includes voting or investment power with respect to securities. All of these
shares are subject to lock-up restrictions until 180 days after the date of
this Prospectus. See "Shares Eligible for Future Sale."

(2) Unless otherwise indicated, the address is c/o ACE*COMM Corporation, 209
Perry Parkway, Gaithersburg, Maryland 20877.

(3) Includes 1,484,546 shares held by CEO Venture Fund II of which 230,000 are
being offered hereby, 21,888 shares held by William R. Newlin, 21,888 shares
held by James Colker and 2,628 shares held by Gary P. Golding. Colker and
Newlin Management Associates II ("CNMA II"), as the general partner of CEO
Venture Fund II, exercises voting and investment power with respect to the
1,484,546 shares held by CEO Venture Fund II. Messrs. Colker and Newlin, as
managing general partners of CNMA II, exercise shared voting and investment
power with respect to these shares and Mr. Golding, E.R. Yost, and G.F.
Chatfield, as general partners of CNMA II, exercise shared investment power
with respect to these shares. CNMA II and Messrs. Colker, Newlin, Golding,
Yost and Chatfield disclaim beneficial ownership of the shares held by CEO
Venture Fund II other than to the extent of its or his individual
partnership interest.

(4) Includes 182,952 shares issuable upon the exercise of options that are
exercisable within 60 days.

47
<PAGE>
(5) Includes 120,555 shares issuable upon the exercise of options that are
exercisable within 60 days.

(6) Includes 69,588 shares issuable upon the exercise of options that are
exercisable within 60 days.

(7) Includes 18,000 shares issuable upon the exercise of options that are
exercisable within 60 days.

(8) Does not include 1,484,546 shares held by CEO Venture Fund II of which Mr.
Golding is a general partner.

(9) Includes 13,500 shares issuable upon the exercise of options that are
exercisable within 60 days.

(10) Includes 431,510 shares issuable upon the exercise of options that are
exercisable within 60 days.

DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon the completion of this offering, the Company will be authorized to
issue 45,000,000 shares of Common Stock, $.01 par value, and 5,000,000 shares of
undesignated Preferred Stock, $.01 par value.

COMMON STOCK

As of June 30, 1996, there were 3,590,451 shares of Common Stock outstanding
held of record by 26 stockholders. As of June 30, 1996, options to purchase an
aggregate of 1,073,704 shares of Common Stock were also outstanding of which
options to purchase 938,704 shares were then exercisable. See "Management --
Amended and Restated Omnibus Stock Plan." After giving effect to the conversion
of all outstanding shares of Class C Preferred Stock into 1,530,950 shares of
Common Stock and the sale of 2,270,000 shares of Common Stock by the Company in
this offering, there will be 7,391,401 shares of Common Stock outstanding
(7,766,401 shares if the Underwriters' over-allotment option is exercised in
full).

The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders and have cumulative voting rights with
respect to the election of directors. Subject to the prior rights of holders of
Preferred Stock, if any, the holders of Common Stock are entitled to receive
such dividends, if any, as may be declared from time to time by the Board of
Directors in its discretion from funds legally available therefor. Upon
liquidation or dissolution of the Company, the remainder of the assets of the
Company will be distributed ratably among the holders of Common Stock after
payment of liabilities and the liquidation preferences of any outstanding shares
of Preferred Stock. The Common Stock has no preemptive or other subscription
rights and there are no conversion rights or redemption or sinking fund
provisions with respect to such shares. All of the outstanding shares of Common
Stock are, and the shares to be sold in this offering will be, fully paid and
nonassessable.

PREFERRED STOCK

The Board of Directors has the authority to issue the Preferred Stock in one
or more series and to fix the price, rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting a series or the designation of
such series, without any further vote or action by the Company's shareholders.
The issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of delaying, deferring or preventing a change in control of the
Company without further action by the shareholders and may adversely affect the
market price of, and the voting and other rights of, the holders of Common
Stock. The Company has no current plans to issue any shares of Preferred Stock.
Upon consummation of this offering, the conversion of the Class C Preferred
Stock and the redemption of the Class B Preferred Stock, there will be no
Preferred Stock outstanding.

BUSINESS COMBINATIONS

Maryland law prohibits certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity

48
<PAGE>
securities) between a Maryland corporation and an Interested Stockholder.
"Interested Stockholders" are all persons (a) who beneficially own 10% or more
of the voting power of the corporation's shares or (b) an affiliate or associate
of the corporation who, at any time within the two-year period prior to the date
in question, was an Interested Stockholder or an affiliate or an associate
thereof. Such business combinations are prohibited for five years after the most
recent date on which the Interested Stockholder became an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative vote
of at least (a) 80% of the votes entitled to be cast by all holders of voting
shares of the corporation, and (b) 66 2/3% of the votes entitled to be cast by
all holders of voting shares of the corporation other than voting shares held by
the Interested Stockholder, or an affiliate or associate of the Interested
Stockholder, with whom the business combination is to be effected, unless, among
other things, the corporation's stockholders receive a minimum price (as defined
under Maryland law) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Stockholder for its
shares. These provisions of Maryland law do not apply, unless the corporation's
charter or by-laws provide otherwise, to a corporation that on July 1, 1983 had
an existing Interested Stockholder, unless, at any time thereafter, the Board of
Directors elects to be subject to the law. The Company has adopted such a
resolution, which has the effect of making the law applicable to the Company,
except with respect to certain business combinations involving persons who were
Interested Stockholders as of the date of this Prospectus, or their affiliates,
which include CEO Venture Fund II and George T. Jimenez. These provisions of
Maryland law would not apply, however, to business combinations that are
approved or exempted by the Board of Directors of the corporation prior to the
time that any other Interested Stockholder becomes an Interested Stockholder. A
Maryland corporation may adopt an amendment to its charter electing not to be
subject to the special voting requirements of the foregoing legislation. Any
such amendment would have to be approved by the affirmative vote of at least 80%
of the votes entitled to be cast by all holders of outstanding shares of voting
stock and 66 2/3% of the votes entitled to be cast by holders of outstanding
shares of voting stock who are not Interested Stockholders. The Company has not
adopted such an amendment to its Charter.

CONTROL SHARE ACQUISITIONS

Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror or by officers or
directors who are employees of the corporation. Control shares are voting shares
of stock which, if aggregated with all other shares of stock previously acquired
by such a person, would entitle the acquiror to exercise voting power in
electing directors within one of the following ranges of voting power: (a) 20%
or more but less than 33 1/3%; (b) 33 1/3% or more but less than a majority; or
(c) a majority of all voting power. Control shares do not include shares of
stock an acquiring person is entitled to vote as a result of having previously
obtained stockholder approval. A control share acquisition means, subject to
certain exceptions, the acquisition of, ownership of, or the power to direct the
exercise of voting power with respect to, control shares.

A person who has made or proposes to make a "control share acquisition,"
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors to call a special meeting of
stockholders to be held within 50 days of demand therefor to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders' meeting.

If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as permitted by the statute,
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to voting
rights, as of the date of the last control share acquisition or of any meeting
of stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for "control shares" are approved at a stockholders'
meeting and the acquiror becomes entitled to vote a majority of the shares

49
<PAGE>
entitled to vote, all other stockholders may exercise appraisal rights. The fair
value of the stock as determined for purposes of such appraisal rights may not
be less than the highest price per share paid in the control share acquisition,
and certain limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of a "control share acquisition."

The control share acquisition statute does not apply to stock acquired in a
merger, consolidation or stock exchange if the corporation is a party to the
transaction, or to acquisitions previously approved or exempted by a provision
in the charter or by-laws of the corporation. The Company has adopted a
provision in its Charter exempting acquisitions by George Jimenez and his
respective associates provided any such acquisition does not cause them to
acquire more than 49.9% of the outstanding Common Stock in the aggregate.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Chase Mellon
Shareholder Services.

CERTAIN CHARTER AND BY-LAW PROVISIONS

The Company's Charter and By-laws will be amended as of the closing of this
offering and, as a result of such amendment, will contain several provisions
that may make the acquisition of control of the Company by means of a proxy
fight, open market purchases, tender offer, or otherwise more difficult. The
following is a summary of certain of these provisions. The forms of Charter and
By-laws, as amended, are filed as exhibits to the Registration Statement filed
with the Commission of which this Prospectus is a part, and the following
summary is qualified in its entirety by reference to such documents.

NUMBER OF DIRECTORS

The Charter and By-laws provide that the number of directors shall be fixed
from time to time by resolution adopted by a majority of the entire Board of
Directors, but may not consist of fewer than three or such lesser number of
stockholders, nor more than 11 members. The size of the Board of Directors has
initially been set at five members.

CLASSIFIED BOARD OF DIRECTORS

The Charter divides the Board of Directors into three classes, with one
class having a term of one year, one class having a term of two years, and one
class having a term of three years. Each class is to be as nearly equal in
number as possible. At each annual meeting of stockholders, commencing with the
annual meeting of stockholders to be held in 1997, directors will be elected to
succeed those directors whose terms have expired, and each newly elected
director will serve for a three-year term.

The classification of directors and the provisions in the Charter that limit
the ability of stockholders to increase the size of the Board of Directors,
together with the provisions in the Charter described below that limit the
ability of stockholders to remove directors and that permit the remaining
directors to fill any vacancies on the Board, will have the effect of making it
more difficult for stockholders to change the composition of the Board of
Directors. As a result, at least two annual meetings of stockholders may be
required for the stockholders to change a majority of the directors, whether or
not a change in the Board of Directors would be beneficial to the Company and
its stockholders and whether or not a majority of the Company's stockholders
believes that such a change would be desirable.

REMOVAL OF DIRECTORS AND FILLING VACANCIES

The Charter and By-laws provide that a director may be removed by
stockholders only "for cause" and with the approval of the holders of 80% of the
total voting power of all outstanding securities of the Company then entitled to
vote generally in the election of directors, voting together as a single class
at a special meeting of stockholders called for that purpose. (Article VI of the
Charter; Section 6).

50
<PAGE>
The Charter and By-laws provide that all vacancies on the Board of
Directors, including those resulting from an increase in the number of
directors, may be filled solely by a majority of the remaining directors even if
they do not constitute a quorum. If the vacancy occurs as a result of the
removal of a director, the stockholders may elect a successor at the meeting at
which such removal occurs. If the entire Board becomes vacant, any stockholder
may call a special meeting in order to elect directors. (Article II, Section 7
of the By-laws).

ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS

The By-laws establish advance notice procedures with regard to stockholder
proposals and the nomination, other than by or at the direction of the Board of
Directors or a committee thereof, of candidates for election as directors.
(Article I, Sections 11 and 12). These procedures require that a notice of
stockholder proposals and stockholder nominations for the election of directors
at any meeting of stockholders must be in writing, containing certain specified
information and received by the Secretary of the Company not less than 20 nor
more than 30 days prior to the meeting (or if less than 30 days' notice or prior
public disclosure of the date of the meeting is given, the notice of stockholder
proposals or nominations must be in writing and received by the Secretary of the
Company no later than the close of business on the tenth day following the day
on which notice of the meeting was mailed or public disclosure thereof was made,
whichever occurs first). The Company may reject a stockholder proposal or
nomination that is not made in accordance with such procedures.

LIMITATIONS ON CALLING STOCKHOLDER MEETINGS

The Charter and By-laws provide that special meetings of stockholders can be
called only by the Chairman of the Board of Directors, the President, the Board
of Directors, or by the Secretary at the request of holders of at least 25% of
all votes entitled to be cast. (Article I, Section 3 of the By-laws). These
provisions may have the effect of delaying consideration of a stockholder
proposal until the next annual meeting unless a special meeting is called by the
Board of Directors, the Chairman of the Board, the President, or the Secretary
of the Company upon the request of holders of a sufficient number of shares.

AMENDMENT OF CERTAIN PROVISIONS OF THE CHARTER AND BY-LAWS

The Charter of the Company provides that the affirmative vote of the holders
of at least 80% of the aggregate combined voting power of all classes of capital
stock entitled to vote thereon, voting as one class, is required to amend
certain provisions of the Charter, including those provisions relating to the
number, election and term of directors; the removal of Directors; the amendment
of the by-laws; the provision governing applicability of the Maryland Control
Share Act (Section 3-702 of the Maryland General Corporation Law); and the
supermajority voting requirements in the Charter. (Article VII, Section 1). The
Charter further provides that Board of Directors shall have the exclusive right
to make, alter, amend or repeal the By-laws. (Article VII, Section 5). These
requirements will have the effect of making more difficult any amendment by
stockholders, even if a majority of the Company's stockholders believe that such
amendment would be in their best interests.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no market for the Common Stock of the
Company. Sales of substantial shares of Common Stock in the public market
following this offering, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock prevailing from time to
time and could impair the Company's future ability to raise capital through an
offering of its equity securities. See "Risk Factors -- Shares Eligible for
Future Sale."

Upon completion of this offering, the Company will have approximately
7,391,401 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option.) Of these shares, the 2,500,000 shares sold
in this offering will be freely transferable without restriction or registration
under the Securities Act, except for any shares purchased by an existing
"affiliate" of the Company, as that term is defined under the Securities Act (an
"Affiliate"), which shares will be subject to the resale limitations of Rule 144
adopted under the Securities Act. The remaining 4,891,401

51
<PAGE>
outstanding shares of Common Stock which were issued by the Company in private
transactions not involving a public offering (and any shares issued upon the
exercise of stock options granted pursuant to the Stock Plan and the Directors
Stock Plan), are "restricted securities" for purposes of Rule 144 and may not be
resold in a public distribution, except in compliance with the registration
requirements of the Securities Act, pursuant to a valid exemption from
registration or pursuant to Rule 144. Of such shares, and without consideration
of the contractual restrictions described below, 378,705 shares would be
available for immediate sale in the public market without restriction pursuant
to Rule 144(k) and 4,205,989 additional shares would be available for immediate
sale subject to compliance with the restrictions of Rule 144. Beginning 90 days
after the date of this Prospectus, and without consideration of the contractual
restrictions described below, 213,998 additional shares would be eligible for
sale without restrictions in reliance upon Rule 701 promulgated under Securities
Act and 92,709 additional shares would be eligible for sale subject to
compliance with the restrictions of Rule 144.

The holders of 4,748,211 shares of Common Stock in the aggregate, including
each officer and director of the Company and the Selling Stockholder, have
agreed not to offer, pledge, sell, offer to sell, contract to sell, grant any
option to purchase, or otherwise transfer or dispose of, directly or indirectly,
any shares of Common Stock or any securities exercisable or exchangeable for, or
convertible into, shares of Common Stock for a period of 180 days after the date
of this Prospectus, without the prior written consent of Furman Selz LLC, on
behalf of the Underwriters. Furman Selz LLC may, in its sole discretion and at
any time without notice, waive the lock-up restrictions as to all or a portion
of the securities subject to lock-up agreements. Furman Selz LLC currently has
no plans to grant any such waivers. As a result of these contractual
restrictions and the provisions of Rules 144(k), 144 and 701, the restricted
shares will be available for sale in the public market as follows: (i) 89,189
shares will be eligible for immediate sale on the date of this Prospectus, (ii)
54,001 shares will be eligible for sale 90 days after the date of this
Prospectus and (iii) 4,748,211 shares will be eligible for sale 180 days after
the date of this Prospectus upon expiration of lock-up agreements.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted securities for at least two years
(including the holding period of any prior owner except an affiliate of the
Company) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of Common Stock then outstanding (which will equal approximately 73,914
shares immediately after this offering); or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding such sale,
subject to the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an Affiliate
at any time during the 90 days immediately preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least three years
(including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Subject to the
contractual restrictions described above, "144(k) shares" may therefore be sold
immediately upon the completion of this offering. Persons deemed to be
Affiliates must always sell pursuant to Rule 144, even after the applicable
holding periods have been satisfied.

The Commission has recently proposed amendments to Rule 144 that would
permit resales of restricted securities after a one-year, rather than a two-year
holding period, subject to compliance with the other provisions of Rule 144, and
would permit resale of restricted securities by non-Affiliates under Rule 144(k)
after a two-year, rather than a three-year holding period. If adopted, such
amendments could result in resales of restricted securities sooner than would be
the case under Rule 144 as currently in effect.

Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from

52
<PAGE>
the Company by its employees, directors, officers, consultants or advisors prior
to the date the issuer becomes subject to the reporting requirements of the
Exchange Act pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Commission has
indicated that Rule 701 will apply to typical stock options granted by an issuer
before it becomes subject to the reporting requirements of the Exchange Act,
along with the shares acquired upon exercise of such options (including
exercises after the date of this Prospectus). Securities issued in reliance on
Rule 701 are restricted securities and, subject to the contractual restrictions
described above, beginning 90 days after the date of this Prospectus, may be
sold by persons other than Affiliates subject only to the manner of sale
provisions of Rule 144 and by Affiliates under Rule 144 without compliance with
its two-year minimum holding period requirements.

At June 30, 1996, options to purchase 1,073,704 shares of Common Stock were
outstanding, of which options to purchase approximately 938,704 shares were then
vested and exercisable. Shortly after this offering, the Company intends to file
registration statements on Form S-8 under the Securities Act covering shares of
Common Stock reserved for issuance under the Company's stock plans. See
"Management -- Amended and Restated Omnibus Stock Plan." Shares of Common Stock
issued upon exercise of options under the registration statements on Form S-8
will be available for sale in the public market, subject to Rule 144 manner of
sale and volume limitations in the case of Affiliates and subject to the
contractual restrictions described above. Beginning 180 days after the date of
this Prospectus, approximately 681,373 shares issuable upon the exercise of
vested stock options will become eligible for sale in the public market, if such
options are exercised.

REGISTRATION RIGHTS

After this offering, the holders of 1,300,950 shares of Common Stock (the
"Registrable Securities") will be entitled to certain rights with respect to the
registration of such shares under the Securities Act. Under the terms of the
agreement between the Company and the holders of such Registrable Securities, if
the Company proposes to register any of its securities under the Securities Act,
either for its own account or for the account of other security holders
exercising registration rights, such holders are entitled to notice of such
registration and are entitled to include shares of such Common Stock therein.
Additionally, beginning six months after the date of this offering, holders of
the Registrable Securities are also entitled to certain demand registration
rights pursuant to which they may require the Company to file a registration
statement under the Securities Act at its expense with respect to their shares
of Common Stock, and the Company is required to use its best efforts to effect
such registration. Further, the holders of the Registrable Securities may
require the Company to file additional registration statements on Form S-3. All
of these registration rights are subject to certain conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in such registration.

53
<PAGE>
UNDERWRITING

Each of the Underwriters named below (the "Underwriters"), for which Furman
Selz LLC, Oppenheimer & Co., Inc. and Rodman & Renshaw, Inc. are acting as
representatives (the "Representatives"), has severally agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the Company
and the Selling Stockholder, and the Company and the Selling Stockholder have
agreed to sell to each of the Underwriters, the number of shares of Common Stock
set forth opposite its name below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------------------------------------- -----------
<S> <C>
Furman Selz LLC............................................................................ 825,000
Oppenheimer & Co., Inc. ................................................................... 825,000
Rodman & Renshaw, Inc. .................................................................... 180,000
Bear Stearns & Co. Inc. ................................................................... 50,000
Alex. Brown & Sons Incorporated............................................................ 50,000
Dillon, Read & Co. Inc. ................................................................... 50,000
Donaldson, Lufkin & Jenrette Securities Corporation........................................ 50,000
Hambrecht & Quist LLC...................................................................... 50,000
Lehman Brothers Inc. ...................................................................... 50,000
Morgan Stanley & Co. Incorporated.......................................................... 50,000
PaineWebber Incorporated................................................................... 50,000
Schroder Wertheim & Co. Incorporated....................................................... 50,000
Advest, Inc. .............................................................................. 20,000
Robert W. Baird & Co. Incorporated......................................................... 20,000
Cowen & Company............................................................................ 20,000
Dain Bosworth Incorporated................................................................. 20,000
Dominick & Dominick, Incorporated.......................................................... 20,000
Ferris, Baker Watts, Incorporated.......................................................... 20,000
McDonald & Company, Inc. .................................................................. 20,000
Needham & Company, Inc. ................................................................... 20,000
Piper Jaffray Inc. ........................................................................ 20,000
Wessels, Arnold & Henderson L.L.C. ........................................................ 20,000
Wheat First Butcher Singer, Inc. .......................................................... 20,000
-----------
Total.................................................................................. 2,500,000
-----------
-----------
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the shares of Common Stock listed above are subject to the approval
of certain legal matters by counsel and various other conditions. The
Underwriting Agreement also provides that the Underwriters are committed to
purchase all of the shares of Common Stock offered hereby, if any are purchased
(without consideration of any shares that may be purchased through the
Underwriters' over-allotment option).

The Representatives have advised the Company and the Selling Stockholder
that the Underwriters propose to offer the shares of Common Stock to the public
initially at the public offering price set forth on the cover of this Prospectus
and to certain dealers at such price less a concession not in excess of $0.27
per share. The Underwriters may allow, and such selected dealers may reallow, a
concession not in excess of $0.10 per share to certain other dealers. After the
initial public offering of the shares, the public offering price and other
selling terms may be changed by the Representatives.

Prior to the offering made hereby, there has been no public market for the
Common Stock. Accordingly, the initial public offering price for the Common
Stock will be determined by negotiation among the Company, the Selling
Stockholder and the Representatives. Among the factors to be considered are the
Company's results of operations and current financial condition, estimates of
the

54
<PAGE>
business potential and prospects of the Company, the market for the Company's
products, the experience of the Company's management, the economics of the
industry in general, the general condition of the equities market and other
relevant factors. There can be no assurance that any active trading market will
develop for the Common Stock or as to the price at which the Common Stock may
trade in the public market from time to time subsequent to the offering made
hereby.

The Company has granted the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the public offering price set forth on the
cover page of this Prospectus, less underwriting discounts and commissions. To
the extent the Underwriters exercise this option, each Underwriter will have a
firm commitment, subject to certain conditions, to purchase such number of
additional shares of Common Stock as is proportionate to such Underwriter's
initial commitment to purchase shares from the Company. The Underwriters may
exercise such option solely to cover over-allotments, if any, incurred in
connection with the sale of shares of Common Stock offered hereby.

The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.

The Company and the holders of 4,748,211 shares of Common Stock in the
aggregate, including each officer and director of the Company and the Selling
Stockholder, have agreed, subject to certain exceptions, not to offer, sell,
pledge, offer to sell, contract to sell, grant any option to purchase or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or securities exchangeable or exercisable for, or convertible into, shares
of Common Stock (other than, in the case of the Company, the granting of options
pursuant to the Stock Plan and the Directors Stock Plan) for a period of 180
days from the date of the Underwriting Agreement, without the prior written
consent of Furman Selz LLC, on behalf of the Underwriters.

The Representatives have informed the Company and the Selling Stockholder
that the Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.

The Company has been approved for listing of the Common Stock on the Nasdaq
National Market under the symbol "ACEC."

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by its counsel, Venable, Baetjer and Howard, LLP, Baltimore, Maryland.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Stroock & Stroock & Lavan, New York, New York.

EXPERTS

The financial statements as of June 30, 1996 and 1995, and for each of the
three years in the period ended June 30, 1996, included in the Prospectus have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

55
<PAGE>
ADDITIONAL INFORMATION

A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed by the Company with the
Commission, Washington, D.C. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
such Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office located at 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, the Northeast Regional Office located at 7 World Trade Center, 13th
Floor, New York, New York 10048, and the Midwest Regional Office located at
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois
60661-2511, and copies of all or any part thereof may be obtained from the
Public Reference Branch of the Commission upon the payment of certain fees
prescribed by the Commission. In addition, the Registration Statement may be
accessed electronically at the Commission's site on the World Wide Web located
at http://www.sec.gov.

The Company currently is not a reporting company. The Company intends to
furnish to its stockholders annual reports containing audited financial
statements and quarterly reports containing unaudited interim financial
information for each of the first three quarters of each fiscal year of the
Company.

56
<PAGE>
GLOSSARY OF TERMS

<TABLE>
<S> <C>
Architecture........................ A computer system architecture is a particular
methodology for bringing together and utilizing
selected computer hardware, systems software and
applications software to achieve an overall
objective.
Asynchronous Transfer Mode
(ATM)............................... A recently commercialized switching and transmission
technology that is one of a general class of packet
technologies that relay traffic by way of an address
contained within the first five bits of a standard
fifty-three bit-long packet or cell. ATM-based packet
transport was specifically developed to allow
switching and transmission of mixed voice, data and
video (sometimes referred to as "multi-media"
information) at varying rates. The ATM format can be
used by many different information systems, including
LANs.
Bandwidth........................... The range of frequencies or bit rates that can be
transmitted by a communications channel, a
transmission facility or a transmission medium.
Broadband........................... Broadband communications systems can transmit large
quantities of voice, data and video by way of digital
or analog signals. Examples of broadband
communication systems include DS-3 fiber optic
systems, which can transmit 672 simultaneous voice
conversations, or a broadcast television station
signal, that transmits high resolution audio and
video signals into the home. Broadband connectivity
is also an essential element for interactive
multimedia applications.
Carrier............................. In the telecommunications industry, one that
"carries" transmission capabilities over the
telecommunications network. A carrier that offers
telecommunications services to the public is subject
to regulation by federal and state regulatory
commissions.
Central Office...................... The switching centers or central switching facilities
of the local telephone companies.
CENTREX............................. CENTREX is a service that offers features similar to
those of a Private Branch Exchange (PBX), except the
equipment is located at the carrier's premises and
not at the premises of the customer. These features
include direct dialing within a given phone system,
direct dialing of incoming calls, and automatic
identification of outbound calls. This is a service
that local telephone companies can provide to a wide
range of customers who do not have the size or the
funds to support their own on-site PBX.
Client.............................. The client component of a client server system. It is
typically a personal computer with a graphical user
interface.
Client Server Architecture.......... A computer system architecture in which two
independent processes communicate via an established
protocol. The
</TABLE>

57
<PAGE>
<TABLE>
<S> <C>
client component makes requests to the server
component, which responds with information or
actions. The client component is typically the
"front-end" of the system and is operated by the end
user.
Digital............................. A method of storing, processing and transmitting
information through the use of distinct electronic or
optical pulses that represent the binary code digits
0 and 1. Digital transmission and switching
technologies employ a sequence of these pulses to
represent information as opposed to the continuously
variable analog signal. Digital transmission and
switching technologies offer a threefold improvement
in speed and capacity over analog techniques,
allowing much more efficient and cost-effective
transmission of voice, video and data.
Fiberoptic.......................... A technology in which light is used to transport
information from one point to another. Fiber is
immune to electrical interference and environmental
factors that affect copper wiring and satellite
transmission.
Frame Relay......................... Frame relay is a high speed data packet switching
service used to transmit data between computers.
Frame relay supports data units of variable lengths
at access speeds ranging from 56 kilobits to 1.5
megabits. This service is appropriate for connecting
LANs, but is not appropriate for voice and video
applications due to the variable delays which can
occur. Frame relay was designed to operate at high
speed on modern fiber optic networks.
Graphical User Interface............ A means of communicating with a computer by
manipulating graphical icons and windows (usually by
pointing and clicking a mouse) rather than using text
commands.
Hybrid Fiber Coaxial................ A telecommunications network composed of both fiber
and coaxial cable, typically used to deliver video
and/or voice services to residences.
ISO................................. International Standards Organization. An
international standards group that is concerned with
defining standards for data communication and network
management. Committees throughout the world
contribute to the ISO standards set forth.
Internet............................ The global system of networks interconnected by
TCP/IP (and IP-related protocols), which include over
30 million users from the private sector, educational
institutions, government, nonprofits, and
individuals. Internet users gain access to e-mail,
file transfer, remote log-in, gopher, news, World
Wide Web, and other related services.
Intranet............................ An organization's private network of its local area
networks which utilizes Internet data formats and
communications protocols, and which may use the
Internet's facilities as the backbone for network
communications.
</TABLE>

58
<PAGE>
<TABLE>
<S> <C>
Local Area Networks (LANs).......... The interconnection of computers for the purpose of
sharing files, programs and various devices such as
work stations, printers and high-speed modems. LANs
may include dedicated computers or file servers that
provide a centralized source of shared files and
programs.
Local Exchange Carrier.............. A company providing local telephone services.
Local Exchange Carrier Lines........ Local Exchange Carrier or local phone company
telephone lines used to supply telephone service to a
location. These lines are needed by all organizations
to handle local telephone traffic.
Object-Oriented..................... A form of software development that models the real
world through representation of "objects" or systems
that contain data as well as instructions that work
upon that data.
Operating System.................... A master control program for a computer that manages
the computer's internal functions and provides a
means for control of the computer's operation. An
operating system provides commonly used functions and
a uniform, consistent means for all software
applications to access the same machine resources.
Operations Support System (OSS)..... A computer-based system used by telecommunications
service providers to support operations activities.
An OSS does not provide telecommunications service
directly to customers, but supports
telecommunications service provider personnel in the
performance of their duties, such as billing, testing
lines and trunks or maintaining switching systems.
Personal Communications Service
(PCS)............................... A type of wireless telephone system that uses light,
inexpensive handheld sets and communicates via low
power antennas.
Protocols........................... A formal set of standards governing the establishment
of a communications link and controlling the format
and timing of transmissions between two devices.
Request for Proposal (RFP).......... The process of compiling a set of specifications for
any procurement (telephone system, telemanagement
system, voice mail, etc.) to clearly define all of
the requirements of said procurement. The RFP is then
distributed to all prospective vendors, so they may
respond in detail to the requirements and provide a
quotation for the project as defined within the RFP.
The goal of the RFP process is to procure the item(s)
that are detailed within the RFP.
Server.............................. Software that allows a computer to offer a service to
another computer. Other computers contact the server
program by means of matching client software. In
addition, such term means the computer on which
server software runs.
</TABLE>

59
<PAGE>
<TABLE>
<S> <C>
Simple Network Management Protocol
(SNMP).............................. A standard protocol that gathers management
information from network devices and provides a means
to set and monitor configuration parameters.
Switch.............................. A computer that accepts instructions from a caller in
the form of a telephone number. Like an address on an
envelope, the numbers tell the switch where to route
the call. The switch opens or closes circuits or
selects the paths or circuits to be used for
transmission of information. Switching is a process
of interconnecting circuits to form a transmission
path between users. Switches allow local carriers to
connect calls directly to their destination, while
providing advanced features and recording connection
information for future billing.
Transmission Control
Protocol/Internet Protocol
(TCP/IP)............................ A compilation of network- and transport-level
protocols that allows computers with different
architectures and operating system software to
communicate with other computers on the Internet.
World Wide Web...................... A network of computer servers that uses a special
communications protocol to link different servers
throughout the Internet and permits communication of
graphics, video and sound.
X.25................................ A protocol that defines the connection between a
terminal and the public packet-switching network for
computer to computer communications.
</TABLE>

60
<PAGE>
ACE*COMM CORPORATION
INDEX TO
FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Report of Independent Accountants..................................................... F-2

Balance Sheets at June 30, 1995 and 1996.............................................. F-3

Statements of Operations for the years ended June 30, 1994, 1995 and 1996............. F-4

Statements of Stockholders' Equity (Deficit) for the years ended June 30, 1994, 1995
and 1996............................................................................. F-5

Statements of Cash Flows for the years ended June 30, 1994, 1995 and 1996............. F-6

Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
ACE*COMM Corporation

In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of ACE*COMM
Corporation at June 30, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP

Washington, D.C.
July 17, 1996, except as to Note 11 which
is as of August 5, 1996.

F-2
<PAGE>
ACE*COMM CORPORATION
BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1996
---------- -----------
PRO FORMA
STOCKHOLDERS'
EQUITY AT
JUNE 30,
1996
----------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash...................................................... $ 189,903 $ 369,206
Accounts receivable, less allowance for doubtful accounts
of $10,000............................................... 4,702,740 8,643,871
Inventories............................................... 964,501 1,836,317
Prepaid expenses and other................................ 130,392 283,813
---------- -----------
Total current assets...................................... 5,987,536 11,133,207
Property and equipment, net................................. 1,168,648 1,305,844
Capitalized software development costs, net................. 1,007,910 1,393,067
Other assets................................................ 129,243 466,268
---------- -----------
Total assets............................................ $8,293,337 $14,298,386
---------- -----------
---------- -----------

LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current borrowings........................................ $4,301,544 $ 2,097,178
Accounts payable.......................................... 1,245,757 3,122,212
Accrued expenses.......................................... 290,905 1,036,684
Accrued compensation...................................... 430,596 1,010,922
Officer loan.............................................. 95,833 78,572
Deferred revenue.......................................... 997,077 1,890,103
---------- -----------
Total current liabilities................................. 7,361,712 9,235,671
Noncurrent borrowings....................................... 52,083 2,951,541
---------- -----------
Total liabilities....................................... 7,413,795 12,187,212
---------- -----------
Mandatorily redeemable Class C Preferred Stock, $5.14 par
value, 340,211 shares authorized, issued and outstanding... 2,121,733 2,261,627
---------- -----------
Contingencies
Stockholders' equity (deficit):
Class B Preferred Stock, $1.00 par value, 1,000 shares
authorized, issued and outstanding (1,000 shares
unaudited pro forma)..................................... 1,000 1,000 $ 1,000
Common stock, $.01 par value, 45,000,000 shares
authorized, 3,297,245 and 3,590,451 shares issued and
outstanding (5,121,401 shares unaudited pro forma)....... 32,972 35,905 51,214
Additional paid-in capital................................ 319,875 343,124 2,589,442
Stock subscriptions receivable............................ (5,900) -- --
Accumulated deficit....................................... (1,590,138) (530,482) (530,482)
---------- ----------- ----------
Total stockholders' equity (deficit)...................... (1,242,191) (150,453) $2,111,174
---------- ----------- ----------
Total liabilities, mandatorily redeemable preferred
stock and stockholders' equity (deficit)............... $8,293,337 $14,298,386
---------- -----------
---------- -----------
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE>
ACE*COMM CORPORATION
STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenue -- products and
services................................................. $14,522,681 $12,415,331 $19,983,182
----------- ----------- -----------
Costs and operating expenses:
Cost of products and services........................... 7,674,999 6,579,504 10,294,490
Selling, general and administrative..................... 5,472,776 6,048,700 7,292,533
Research and development................................ 572,652 1,044,968 956,950
----------- ----------- -----------
Total costs and operating expenses........................ 13,720,427 13,673,172 18,543,973
----------- ----------- -----------
Income (loss) from operations............................. 802,254 (1,257,841) 1,439,209
Interest income........................................... 3,455 -- --
Interest expense.......................................... (159,993) (334,805) (379,553)
----------- ----------- -----------
Income (loss) before income taxes......................... 645,716 (1,592,646) 1,059,656
Income taxes.............................................. -- -- --
----------- ----------- -----------
Net income (loss)......................................... $ 645,716 $(1,592,646) 1,059,656
----------- ----------- -----------
----------- ----------- -----------
Pro forma income per share (unaudited).................... $ 0.18
-----------
-----------
Shares used in computing pro forma income per share
(unaudited).............................................. 5,893,818
-----------
-----------
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE>
ACE*COMM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK
---------------------- RETAINED
COMMON STOCK ADDITIONAL STOCK EARNINGS
CLASS B -------------------- PAID-IN SUBSCRIPTIONS (ACCUMULATED
SHARES PAR VALUE SHARES PAR VALUE CAPITAL RECEIVABLE DEFICIT)
----------- --------- --------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993........... 1,000 $ 1,000 3,261,245 $ 32,612 $ 586,683 -- $ (643,208)
Accretion of preferred stock
dividends....................... -- -- -- -- (139,894) -- --
Net income for the year ended
June 30, 1994................... -- -- -- -- -- -- 645,716
----- --------- --------- --------- ----------- ------------ ------------
Balance, June 30, 1994........... 1,000 1,000 3,261,245 32,612 446,789 -- 2,508
Accretion of preferred stock
dividends....................... -- -- -- -- (139,894) -- --
Exercise of common stock
options......................... -- -- 36,000 360 12,980 $ (5,900) --
Net loss for the year ended June
30, 1995........................ -- -- -- -- -- -- (1,592,646)
----- --------- --------- --------- ----------- ------------ ------------
Balance, June 30, 1995........... 1,000 1,000 3,297,245 32,972 319,875 (5,900) (1,590,138)
Accretion of preferred stock
dividends....................... -- -- -- -- (139,894) -- --
Exercise of common stock
options......................... -- -- 293,206 2,933 163,143 (117,232) --
Payment of stock subscriptions
receivable...................... -- -- -- -- -- 123,132 --
Net income for the year ended
June 30, 1996................... -- -- -- -- -- -- 1,059,656
----- --------- --------- --------- ----------- ------------ ------------
Balance, June 30, 1996........... 1,000 $ 1,000 3,590,451 $ 35,905 $ 343,124 $ -- $ (530,482)
----- --------- --------- --------- ----------- ------------ ------------
----- --------- --------- --------- ----------- ------------ ------------

TOTAL
-----------
<S> <C>
Balance, June 30, 1993........... $ (22,913)
Accretion of preferred stock
dividends....................... (139,894)
Net income for the year ended
June 30, 1994................... 645,716
-----------
Balance, June 30, 1994........... 482,909
Accretion of preferred stock
dividends....................... (139,894)
Exercise of common stock
options......................... 7,440
Net loss for the year ended June
30, 1995........................ (1,592,646)
-----------
Balance, June 30, 1995........... (1,242,191)
Accretion of preferred stock
dividends....................... (139,894)
Exercise of common stock
options......................... 48,844
Payment of stock subscriptions
receivable...................... 123,132
Net income for the year ended
June 30, 1996................... 1,059,656
-----------
Balance, June 30, 1996........... $ (150,453)
-----------
-----------
</TABLE>

See accompanying notes to the financial statements.

F-5
<PAGE>
ACE*COMM CORPORATION
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------
1994 1995 1996
----------- --------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 645,716 $(1,592,646) $ 1,059,656
Adjustments to reconcile net income (loss) to net cash (used
for) provided by operating activities
Depreciation.............................................. 186,967 243,245 279,773
Amortization of capitalized software...................... 396,636 418,373 542,240
Changes in operating assets and liabilities
Accounts receivable....................................... (720,346) (338,074) (3,941,131)
Inventories............................................... (426,502) (165,704) (871,816)
Other assets.............................................. (674) (6,108) (490,446)
Accounts payable.......................................... (429,936) (169,129) 1,876,455
Accrued expenses.......................................... 154,651 190,254 745,779
Accrued compensation...................................... (12,195) (51,324) 580,326
Deferred revenue.......................................... 204,750 311,777 893,026
----------- --------- -----------
Net cash (used for) provided by operating activities........ (933) (1,159,336) 673,862
----------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment......................... (280,352) (522,076) (416,969)
Additions to capitalized software development costs......... (686,033) (473,158) (927,397)
Sales of short-term investments............................. 790,623 -- --
----------- --------- -----------
Net cash used for investing activities...................... (175,762) (995,234) (1,344,366)
----------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in line of credit.............................. 336,349 1,465,000 1,174,813
Other borrowings............................................ 182,129 1,144,376 185,539
Payments on debt............................................ (256,513) (419,653) (682,521)
Exercise of common stock options............................ -- 7,440 48,844
Payment of stock subscriptions receivable................... -- -- 123,132
----------- --------- -----------
Net cash provided by financing activities................... 261,965 2,197,163 849,807
----------- --------- -----------
Net increase in cash........................................ 85,270 42,593 179,303
Cash at beginning of year................................... 62,040 147,310 189,903
----------- --------- -----------
Cash at end of year......................................... $ 147,310 $ 189,903 $ 369,206
----------- --------- -----------
----------- --------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................... $ 160,839 $ 329,048 $ 375,052
----------- --------- -----------
----------- --------- -----------
Supplemental schedule of non cash financing activities:
Accretion of preferred stock dividends...................... $ 139,894 $ 139,894 $ 139,894
----------- --------- -----------
----------- --------- -----------
Exercise of common stock options............................ $ 90 $ 1,575
--------- -----------
--------- -----------
Notes received for exercise of common stock options......... $ 5,900 $ 117,232
--------- -----------
--------- -----------
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE>
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements. Actual
results could differ from those estimates.

PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)

If the offering contemplated by this Prospectus is consummated under the
terms presently anticipated, all of the Mandatorily Redeemable Class C Preferred
Stock (the "Class C Preferred Stock") will convert to shares of the Company's
Common Stock (the "Common Stock"). Pro forma stockholders' equity as of June 30,
1996, is adjusted for the conversion of Class C Preferred Stock into Common
Stock.

REVENUE RECOGNITION

The Company recognizes revenue principally under long-term contracts
involving significant production, modification or customization of hardware and
software using the percentage-of-completion method, based on performance
milestones specified in the contract, which fairly reflect progress toward
contract completion.

Revenue from maintenance and other postcontract customer support services is
recognized ratably over the term of the related agreements.

SIGNIFICANT CUSTOMERS

The Company extends credit to its customers in the normal course of
business. Three customers in the telecommunications industry represented
approximately 57%, 59% and 51% of revenues during 1994, 1995 and 1996,
respectively. Sales to Canada comprised approximately 16% and 11% of total
revenues in fiscal 1995 and 1996, respectively. Sales to Mexico comprised 29% of
the Company's revenues for fiscal 1996.

CAPITALIZED SOFTWARE DEVELOPMENT COSTS

The Company owns certain proprietary rights to computer software systems
that the Company has either developed or purchased and licensed to customers.
Purchased computer software and the related copyrights are capitalized at their
costs.

Research and development costs are expensed as incurred. However, computer
software development costs incurred after technological feasibility of a product
is established and until the product is available for release to customers are
capitalized. Capitalized software and purchased technology costs are amortized
on a product by product basis based on the greater of the ratio of current sales
to estimated total future sales or a straight-line basis over the remaining
estimated economic life of the product (no greater than three years) including
the current year.

F-7
<PAGE>
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORIES

Inventories, which consists principally of purchased materials to be used in
the production of finished goods, are stated at the lower of cost, determined on
the first-in, first-out (FIFO) method, or market.

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 related
equipment, fixtures and vehicles of seven years. Leasehold improvements are
amortized on a straight-line method over the shorter of the improvements'
estimated useful lives or related remaining lease terms.

INCOME TAXES

Effective July 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS No. 109) "Accounting for Income Taxes."
Previously, the Company used the deferred method for computing income taxes. The
adoption of SFAS No. 109 did not have a material impact on the Company's
financial position or results of operations.

Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of fixed and intangible
assets and revenue recognition for financial and income tax reporting. The
deferred tax assets and liabilities represent the future tax consequences of
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash, 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 the Company's bank credit
agreements approximate fair value because the interest rates on these
instruments change with market interest rates.

The Company believes that it is not practical to estimate a fair market
value different from the Class C Preferred Stock carrying value of $2,261,627 as
the security has numerous unique features including voting, redemption and
conversion rights and is not traded on an open market.

PRO FORMA NET INCOME PER SHARE

Historical net (loss) income per share is not considered relevant as it
would differ materially from pro forma net income per share given the
contemplated changes in the capital structure of the Company. Except as noted
below, pro forma net income per share is computed using the weighted average
number of shares of Common Stock, assuming conversion of Class C Preferred
Stock, and dilutive Common Stock equivalent shares from Common Stock options.
Common Stock equivalent shares are calculated using the treasury stock method.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83,
Common Stock and Common Stock equivalent shares issued by the Company at prices
below the public offering price during the twelve month period prior to the
proposed offering date (using the treasury stock method and an offering price of
$7 per share) have been included in the calculation as if they were outstanding
for all of 1996 regardless of whether they are dilutive.

F-8
<PAGE>
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. ACCOUNTS RECEIVABLE
Accounts receivable net of allowance for doubtful accounts of $10,000
consist of the following:

<TABLE>
<CAPTION>
JUNE 30,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Billed............................................. $3,685,109 $7,270,545
Unbilled........................................... 1,017,631 1,373,326
---------- ----------
$4,702,740 $8,643,871
---------- ----------
---------- ----------
</TABLE>

Unbilled receivables include costs and estimated earnings on contracts in
progress which 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.

3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:

<TABLE>
<CAPTION>
JUNE 30,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Computer equipment................................. $1,569,618 $1,931,382
Furniture and fixtures............................. 261,761 279,841
Vehicles........................................... 42,384 42,384
Leasehold improvements............................. 19,654 19,654
---------- ----------
1,893,417 2,273,261
Less accumulated depreciation and amortization..... (724,769) (967,417)
---------- ----------
$1,168,648 $1,305,844
---------- ----------
---------- ----------
</TABLE>

4. CAPITALIZED SOFTWARE DEVELOPMENT COSTS

<TABLE>
<CAPTION>
JUNE 30,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Capitalized software development costs............ $ 3,642,257 $ 4,567,817
Less accumulated amortization..................... (2,634,347) (3,174,750)
----------- -----------
$ 1,007,910 $ 1,393,067
----------- -----------
----------- -----------
</TABLE>

Amortization expense of capitalized software amounted to $396,636, $418,373
and $542,240 in 1994, 1995 and 1996, respectively.

F-9
<PAGE>
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. BORROWINGS
The Company's borrowings consist of the following:

<TABLE>
<CAPTION>
JUNE 30,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Bank line of credit, credit limit up to $2,500,000, due November
30, 1997, bearing interest at the bank's prime rate (8.25% at
June 30, 1996) plus 0.5%, collateralized by accounts receivable,
inventory and specific equipment. ............................... $ 2,500,000 $ 1,775,000
Bank line of credit, credit limit up to $1,000,000 ($1,350,000 at
June 30, 1995) due November 30, 1997, bearing interest at the
bank's prime rate (8.25% at June 30, 1996) plus 0.5%,
collateralized by accounts receivable, inventory and specific
equipment. ...................................................... 1,185,096 921,563
Bank line of credit, credit limit up to $1,000,000, due August 31,
1996, bearing interest at the bank's prime rate (8.25% at June
30, 1996) plus 1.25%, collateralized by inventory and accounts
receivable. ..................................................... -- 1,000,000
Bank line of credit, credit limit up to $750,000 due August 20,
1996, bearing interest at the bank's prime rate (8.25% at June
30, 1996) plus 0.5%, collateralized by accounts receivable,
inventory and specific equipment. ............................... -- 750,000
Installment notes, due in varying monthly installments through
June 2000, bearing interest at the bank's prime rate (8.25% at
June 30, 1996) plus 1%, collateralized by accounts receivable,
inventory and specific equipment. ............................... 571,999 550,073
Unsecured note payable for the purchase of technology and product
rights, principal due in quarterly installments of $10,417 plus
interest at 8% through April 1997. .............................. 93,750 52,083
Note payable to bank, due in monthly installments of $574
including interest at 13% through December 1995, collateralized
by a vehicle. ................................................... 2,782 --
----------- -----------
Total borrowings.................................................. 4,353,627 5,048,719
Less current portion.............................................. (4,301,544) (2,097,178)
----------- -----------
Noncurrent portion................................................ $ 52,083 $ 2,951,541
----------- -----------
----------- -----------
</TABLE>

Annual maturities of noncurrent borrowings are as follows:

<TABLE>
<S> <C>
1998............................................... $2,826,337
1999............................................... 88,933
2000............................................... 30,368
2001............................................... 5,903
----------
Total.......................................... $2,951,541
----------
----------
</TABLE>

On June 21, 1996, the Company entered into a loan agreement with one of its
banks. The Company can borrow up to $750,000 under this line of credit at a rate
of 0.5% over the bank's prime rate, payable monthly and the principal is due on
August 20, 1996. The agreement requires the Company to comply with certain
financial covenants.

F-10
<PAGE>
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. BORROWINGS (CONTINUED)
Effective May 29, 1996, the Company entered into new loan agreements with
its bank. The Company's $2,500,000 line of credit was extended to November 30,
1997. The new line bears interest payable monthly, at 0.5% over the bank's prime
rate and the principal is due November 30, 1997. In addition, a second
$1,350,000 line of credit was replaced with a revolving line of credit of
$1,000,000. This facility bears interest at 0.5% over the bank's prime rate,
payable monthly, and the principal is due on November 30, 1997. These new credit
facilities and installment notes with the same financial institution are secured
by accounts receivable and inventory certain of which are subordinated to the
security interests of the credit agreement described below, and the agreement
contains certain financial covenants.

Effective March 1, 1996, the Company entered into a credit agreement with a
bank to finance inventory for a foreign contract. The Company can borrow up to
$1,000,000 at 1.25% over the bank's prime rate. The agreement requires the
Company to comply with certain financial covenants. On behalf of the Company,
the U.S. Export-Import Bank guarantees to the bank 90% of the outstanding
balance, which is collateralized by the inventory and the foreign receivables
generated by the contract. This agreement expires on August 31, 1996.

6. TRANSACTIONS WITH RELATED PARTIES
In connection with the purchase of certain assets by the Company at its
inception, the Company's president loaned $150,000 to the Company to assist in
financing the acquisition. The note bears interest at the Federal short-term
rate established periodically by the U.S. Treasury (5.12% at June 30, 1996).
Principal and interest is paid quarterly. The outstanding loan balance totaled
$95,833 and $78,572 at June 30, 1995 and 1996, respectively.

During 1994, 1995 and 1996, the Company purchased inventories totaling
approximately $1,036,000, $62,000 and $212,000, respectively, from a company
whose Board of Directors included the Company's president and another member of
the Company's Board of Directors. The Company's president retired from the other
company's Board of Directors in January 1994. Accounts payable at June 30, 1995
and 1996 include approximately $125,000 and $32,000, respectively, which is
payable to this company.

7. RETIREMENT PLAN
The Company has a simplified-employee pension plan (SEPP) covering
substantially all employees. Under the SEPP, the Company makes contributions to
the plan subject to Company performance and the maximum contribution allowable
by the IRS. The contribution rate is set annually at the discretion of
management. Contributions made during 1994, 1995 and 1996, were approximately
$120,300, $0 and $0, respectively.

On April 1, 1994, the Company established a 401(k) plan. To be eligible,
employees must have completed six months of service and be at least 21 years of
age and be credited with 1,000 hours of service. Contributions made during 1994,
1995 and 1996 were approximately $0, $0 and $97,000, respectively.

F-11
<PAGE>
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES
Deferred tax assets (liabilities) are comprised of the following:

<TABLE>
<CAPTION>
JUNE 30,
-----------------------
1995 1996
---------- -----------
<S> <C> <C>
Tax assets:
Costs capitalized to inventory................... $ 134,572 $ 252,705
Accruals not deducted for tax.................... 55,368 88,356
Net operating loss carryforwards................. 1,203,675 939,917
Tax credit carryforwards......................... 251,283 291,738
Copyright and patents............................ 23,857 21,323
Other............................................ 3,963 4,017
---------- -----------
Gross deferred tax assets...................... 1,672,718 1,598,056
---------- -----------
Tax liabilities:
Income on contracts.............................. (333,297) (475,918)
Software costs deducted for tax.................. (393,137) (616,076)
Depreciation..................................... (163,829) (229,312)
Other............................................ (3,900) --
---------- -----------
Gross deferred tax liabilities................. (894,163) (1,321,306)
---------- -----------
Net deferred tax asset........................... 778,555 276,750
---------- -----------
Valuation allowance................................ (778,555) (276,750)
---------- -----------
Net deferred tax asset/(liability)................. $ -- $ --
---------- -----------
---------- -----------
</TABLE>

At June 30, 1995 and 1996, a valuation allowance was recorded for the full
value of net deferred tax assets, as management believes that it is more likely
than not that all or any portion of the net deferred tax assets will not be
realized.

In 1994, the provision for income taxes was comprised of a Federal and state
provision of $258,000, which was offset by a reduction in the valuation
allowance of the same amount. The change during 1995 in the valuation allowance
was largely attributable to the increase in net operating losses. In 1996, the
provision for income taxes was comprised of a Federal and state provision of
$457,000, which was offset by a reduction in the valuation allowance of the same
amount. In addition, the Company recorded a foreign tax credit of $44,000, which
increased the valuation allowance.

At June 30, 1996, the Company has available research credit carryforwards of
approximately $292,000 which are available to offset future income tax and
expire in years through 2007. The Company also has net operating loss
carryforwards for income tax purposes of approximately $2,410,000 which expire
in years through 2010. Ownership changes, as defined in the Internal Revenue
Code, may limit the amount of net operating loss carryforwards that can be
utilized annually to offset future taxable income or tax liability.

F-12
<PAGE>
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES (CONTINUED)
The total income tax provision (benefit) for each year varied from the
amount computed by applying the statutory U.S. Federal income tax rates to
income before income taxes as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision/(benefit) at statutory
rate...................................... $ 219,543 $(541,500) $ 360,283
State income taxes net of Federal
benefit................................... 32,286 (79,632) 48,956
Nondeductible expenses..................... -- 30,555 23,503
Other...................................... 5,981 12,433 24,574
Change in valuation allowance.............. (257,810) 578,144 (457,316)
--------- --------- ---------
Actual provision....................... $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>

9. MANDATORILY REDEEMABLE PREFERRED STOCK
On October 31, 1991, in connection with an investment agreement, the Company
sold 340,211 shares of Class C Preferred Stock at $5.14 per share. The Class C
Preferred Stock consisted of two series. Series 1 stock (211,727 shares)
provides voting rights equal to the same number of shares of Common Stock and
Series 2 stock (128,484 shares) provides no voting rights but, if elected by a
majority of the holders of the Class C Preferred Stock, will become voting
shares on a one-to-one basis.

Each share of Class C Preferred Stock may be converted into Common Stock at
any time by the holder. Additionally, the shares will be converted automatically
upon an underwritten, public offering of the Common Stock. The number of shares
of Common Stock into which the Class C Preferred Stock can be converted is
determined by a conversion price, as defined under the agreement. Currently, the
conversion price is $1.14 per share and if converted now, the shares would be
exchanged on a 4.5 to 1 basis. No dividends are payable with respect to any
converted shares. The Company has reserved 1,530,950 shares of Common Stock for
the purpose of conversion.

Any shares not converted by designated dates will be redeemed by the Company
as follows: one-third of the shares on September 15, 1995, one-half of the
remaining shares on September 15, 1996, and all the remaining shares on
September 15, 1997. The redemption price is equal to $5.14 per share plus
accrued dividends. In the case of redemption, the holders are entitled to
receive accrued dividends, at a semi-annual rate of four percent, from November
1, 1992. The Company also has the right to force redemption, if certain
triggering events occur, at a price of $5.14 per share plus accrued dividends
from November 1, 1992, calculated at an annual rate of twelve percent. As of
June 30, 1996, the Company had no right to force redemption. The holders of the
securities postponed the September 15, 1995 redemption until September 15, 1996.

Activity with respect to Class C Preferred Stock is as follows:

<TABLE>
<S> <C>
Balance, June 30, 1993............................. $1,841,945
Accretion of dividends............................. 139,894
----------
Balance, June 30, 1994............................. 1,981,839
Accretion of dividends............................. 139,894
----------
Balance, June 30, 1995............................. 2,121,733
Accretion of dividends............................. 139,894
----------
Balance, June 30, 1996............................. $2,261,627
----------
----------
</TABLE>

F-13
<PAGE>
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10. STOCKHOLDERS' EQUITY
All shares of Common Stock are subject to restriction upon resale. Shares
may only be offered to the Company for sale, and upon termination, employees
holding shares of Common Stock are subject to the Company's right or obligation
to repurchase all such shares at a price based on the stock purchase agreement.
As of June 30, 1996, the Company had no obligation to repurchase any shares held
by employees.

The Class B preferred stock contains no voting rights, bears no rights to
receive dividends, is nonconvertible, and is redeemable for $308,000 at the
option of the Company, or must be redeemed upon transfer of substantially all
assets or of majority control of the Company.

STOCK OPTIONS

Prior to the establishment of the Company's formal option plan, the Company
granted options to various employees for performance and hiring incentives.
Under this plan, 909,000 options were granted and 886,500 were exercised or
expired prior to 1994 with an option price of $.17 - $.62. During 1995, the
remaining 22,400 shares were exercised at a price of $.17. The Company no longer
issues options under this plan.

The Company has reserved 2,200,000 shares of Common Stock in connection with
a Board of Directors approved plan to grant nonqualified stock options to
officers and key employees and 200,000 shares of Common Stock in connection with
a plan to grant nonqualified stock options to the Company's nonemployee
directors. The exercise price on all options granted is equivalent to the fair
market value of the Company's Common Stock on the date of grant. Vesting of
employee options is determined by the Board of Directors and options vest either
immediately or over a one to two year period. Options expire upon the earlier of
the employee's termination or 3 to 5 years from the date of grant. Options for
directors vest 1,000 shares each year from the date of grant and expire the
earlier of 5 years from date of grant, 6 months upon resignation or immediately
upon removal for cause. The Company had exercisable options of 1,131,193,
1,187,407, and 938,704 as of June 30, 1994, 1995 and 1996, respectively. The
stock option plan also provides for the issuance of restricted stock, stock
appreciation rights and phantom stock options. As of June 30, 1994, 1995 and
1996, no restricted stock, stock appreciation rights or phantom stock options
had been granted. As of June 30, 1996, options available for granting were
478,372.

Information relating to all the plans is summarized as follows:

<TABLE>
<CAPTION>
SHARES PRICE
----------- --------------
<S> <C> <C>
Options outstanding, June 30, 1993.................... 824,495 $ .17 - .62
Granted............................................... 320,198 .41 - .83
----------- --------------
Options outstanding, June 30, 1994.................... 1,144,693 .17 - .83
Granted............................................... 107,199 .64 - .83
Exercised............................................. (36,000) .17 - .83
Expired............................................... (14,985) .41 - .83
----------- --------------
Options outstanding, June 30, 1995.................... 1,200,907 .41 - .83
Granted............................................... 714,711 .64 - 7.93
Exercised............................................. (293,206) .30 - .83
Expired............................................... (7,493) .62 - .83
----------- --------------
Options outstanding, June 30, 1996.................... 1,614,919 $ .41 - 7.93
----------- --------------
----------- --------------
</TABLE>

F-14
<PAGE>
ACE*COMM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. RECAPITALIZATION
On July 17, 1996, the Board of Directors approved a 4.5-for-one stock split,
to be effected in the form of a stock dividend to stockholders of record on
August 5, 1996. In addition, authorized shares of Common Stock were increased
from 6,292,000 to 45,000,000. The Board also authorized 5,000,000 shares of
undesignated preferred stock. All references in the financial statements to
number of shares, per share amounts and market prices of the Common Stock have
been retroactively restated to reflect the increased number of shares of Common
Stock outstanding.

12. CONTINGENCIES
As collateral for performance on a long-term contract and to a ceding
insurer, the Company entered into a bond on November 28, 1995 under which the
Company is contingently liable in the amount of $1,175,000. This bond is in
force until November 28, 1998.

At June 30, 1996, the Company had $200,000 outstanding under a letter of
credit agreement with a financial institution, which guarantees the Company's
performance to a vendor under a specific contract.

F-15
<PAGE>
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- --------------------------------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR ANY OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Use of Proceeds................................ 14
Dividend Policy................................ 14
Capitalization................................. 15
Dilution....................................... 16
Selected Financial Data........................ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business....................................... 25
Management..................................... 39
Certain Transactions........................... 46
Principal and Selling Stockholders............. 47
Description of Capital Stock................... 48
Certain Charter and By-Law Provisions.......... 50
Shares Eligible for Future Sale................ 51
Underwriting................................... 54
Legal Matters.................................. 55
Experts........................................ 55
Additional Information......................... 56
Glossary of Terms.............................. 57
Index to Financial Statements.................. F-1
</TABLE>

------------------------

UNTIL SEPTEMBER 7, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

2,500,000 SHARES

[LOGO]

COMMON STOCK

------------------

FURMAN SELZ

OPPENHEIMER & CO., INC.

RODMAN & RENSHAW, INC.

AUGUST 13, 1996

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