SECURITIES AND EXCHANGE COMMISSION

Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

Commission File Number 0-13898

Veramark Technologies, Inc.

(585) 381-6000

Securities to be registered pursuant to Section 12(b) of the Act : NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.10 Par Value

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ       NO o

Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). YES o      NO þ

     The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 28, 2005 was $13,725,446.

     The number of shares of Common Stock, $.10 par value, outstanding on February 28, 2005 was 8,668,954.

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DOCUMENTS INCORPORATED BY REFERENCE

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Table of Contents

FORWARD-LOOKING STATEMENTS

In addition to historical information, certain sections of this Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Act”), that discuss the Company’s beliefs, expectations or intentions or those pertaining to the Company’s operations, markets, products, services, price and performance. Forward-looking statements and the success of the Company, generally involve numerous risks and uncertainties such as trends of the economy, including interest rates, income tax laws, governmental regulations, legislation and those risk factors discussed elsewhere in this report and the Company’s filings under the Act. The Company cannot guarantee that any forward-looking statement will be accurate, although the Company believes that it has been reasonable in its expectations and assumptions. Forward-looking statements are subject to the risks identified in “Issues and Risks” and elsewhere in this report. Readers are cautioned not to place undue reliance on forward-looking statements and are advised to review the risks identified in “Issues and Risks” and elsewhere in this report. The Company has no obligation to update forward-looking statements.

PART I

Item 1 Business

Veramark Technologies, Inc. (the “Company” or “Veramark”), was originally incorporated under the name MOSCOM Corporation in New York in January 1983 and reincorporated in Delaware in 1984. The Company’s name was changed to Veramark Technologies, Inc. on June 15, 1998.

For more than 20 years, Veramark (www.veramark.com) has set the industry standard for telecom spend management solutions by delivering technological excellence, application experience and process expertise. Our focus on convergence in the communications market has resulted in a broad portfolio of products and services that allow enterprises to measurably reduce communications expenses, optimize network performance, increase productivity, and improve enterprise security. Our solutions are fully compatible with IP-telephony, traditional PBX, and Centrex environments.

Veramark’s totally web-based software architecture leverages leading edge technology to consistently deliver enterprise spend management solutions that are easy-to-use, install and maintain. The company’s leadership position is demonstrated by relationships with telecom’s elite – Avaya®, Cisco Systems®, EADS Telecom North America, Nortel Networks®, NEC America®, SBC®, Sprint®, and others – and an installed base of nearly 100,000 customers that range from the Fortune 500, to the public sector, and small businesses.

All of Veramark’s products and services are made and provided by personnel in the United States.

Products and Services

VeraSMART®

          Our new and evolving enterprise-level software solution, VeraSMART®, is a highly modular solution that takes advantage of its totally web-based design to quickly and effectively deliver business-critical information to the people who need it. The modularity of the system allows clients

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to purchase the modules they need today, while providing an option to expand the system through future purchases as needed.

          Released in the second quarter of 2003, VeraSMART 1.0 delivered SMART Directory, the suite’s core module, and SMART Call Accounting. This version was the Company’s initial offering for the large enterprise market and effectively harnessed the speed and flexibility of Veramark’s totally web-based “endeavor” architecture. VeraSMART 1.0 provided enterprise clients with unprecedented ability to see and control their telecommunications usage expenses.

          The VeraSMART 2.0 software, released in the third quarter of 2004, brought even more ease and power to enterprise cost management. VeraSMART 2.0 featured enhancements to SMART Directory and SMART Call Accounting, as well as introducing three new modules: SMART Allocation, SMART Invoice Management and SMART Online Directory. Each new module was designed to expand the VeraSMART platform beyond management of telecom use, to include the costs of telecom assets, infrastructure, fixed costs, and ultimately wireless device costs; presenting a more robust management tool to enterprise customers. The SMART Online Directory solution, a natural extension of the SMART Directory core, allows large enterprise customers to put frequently needed contact information (extension number, cell phone or pager numbers, email and traditional mailing addresses, and more) on the desktop of any network connected user, effectively expanding the applications’ appeal and more tightly linking it to the day-to-day operations of the enterprise. VeraSMART 2.0 also introduced EZ-Share™, Veramark’s exclusive data configuration and export solution, which facilities much tighter integration of VeraSMART into enterprise back-office systems, like general ledgers and enterprise resource management systems.

          VeraSMART 3.0, generally available since January 2005, is the most current release of Veramark’s enterprise platform. In addition to providing numerous enhancements to the existing suite of modules, VeraSMART 3.0 introduced Electronic Billing Format (EBF) which allows customers to electronically import third-party product and service invoices, thereby streamlining the spend management process.

     Today’s VeraSMART consists of these modules:

	•	SMART Directory, the central repository for personnel and organization data. It provides a complete personnel profile that includes location and affiliation to cost centers within the corporate structure. It also provides the tools for system-wide configuration, security, reports, and database/system-wide diagnostic utilities.
	•	SMART Online Directory, which provides quick, customizable desktop access to key contacts and personnel information contained in the SMART Directory module. Corporate users can maintain their own phone listings, which may consist of any company entries plus personal numbers they might wish to add.
	•	SMART Allocation, which allows the user to accurately distribute fixed charges on a one-time, recurring and pro-rated basis for equipment, services, and more to any individual or group. Because it has the ability to distribute any charges, it can provide a complete picture of all telecom costs.

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•

SMART Invoice Management, which allows the allocation of outside vendor charges by individual, logical functional group or customized distribution list. SMART Invoice Management gives you the power to track and analyze all your communications costs, helping you prevent overpayments, while identifying areas for potential savings. Electronic Billing Format (EBF) gives you the ability to import third-party vendor invoices, saving you valuable time and assuring an unprecedented degree of accuracy.

          Veramark will continue the cadenced release process of VeraSMART, with a goal to release new functionality twice annually through 2007. Functionality currently being considered for the VeraSMART platform include: Work Order/Trouble Ticket Management, Asset/Inventory Management, and Cable Management.

eCAS™

          Veramark’s totally web-based eCAS™ Call Accounting software system connects to business telephone systems (PBXs, IP-PBXs, Key Systems, etc.) to collect, store, and rate information on every telephone call made or received.

          The primary appeal of eCAS is that clients using the software can significantly reduce, through heightened awareness and proactive management, their telecommunications costs. As a result, the cost of an eCAS system can generally be recovered through direct expense reduction in less than one year. In addition, eCAS, addresses the problem of theft of telephone service through PBX “hacking” and employee abuse, estimated to exceed $1 billion annually. Using dynamic user-defined criteria, that is generally indicative of fraud/abuse, clients are immediately alerted to potential problems and are able to take corrective action to minimize loss.

          In today’s business climate, in addition to telecom costs, issues like productivity and security are top of mind concerns. Veramark’s eCAS gives small and mid-size businesses a cost-effective method to measure productivity, improve business security, reduce fraud, and optimize network utilization. By capturing statistical details on every incoming and outgoing call, and delivering that information to the desktop as easy-to-use reports, eCAS delivers essential information to management, while retaining employee privacy, because the actual content of phone conversations is not captured.

          Common business drivers for Veramark’s eCAS software include:

•	Improving business security through alarms and reports that identify called parties or incoming calls that can threaten employees or the entire organization (e.g. bomb threats);

•	Evaluating employee productivity and detecting unauthorized use of company phones for personal calls or 900 numbers;

•	Traffic analysis used to optimize network performance and better project network capacity requirements, and to determine the best long distance carrier plans based on usage trends;

•	Detecting fraudulent use of the phone system by hackers.

•	Producing revenues by reselling phone services to third-parties (e.g., tenants); and

•	Allocating telephone expense to specific cost centers or clients based on actual use;

          In early 2005, Veramark released eCAS version 3.0. Highlights of the new version included numerous security enhancements, the option to use network authentication and the option to send

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data using Secure Socket Layers (SSL), and scheduling tools for database backups. The software is installed on the client’s network and is accessed entirely through a standard Internet browser, such as Microsoft Internet Explorer or Netscape Navigator. This architecture allows clients to administer the system from virtually anywhere, without the added cost and inconvenience of additional client software. The system’s high-performance reporting engine delivers all reports electronically to the Internet browser or via email, allowing the user to readily view and manipulate the information and apply it for understanding cost, usage, security, and productivity trends.

          The eCAS system collects and processes call records from up to 100 different remote locations and can be deployed in business environments that range from 20 to 10,000 extensions. Avaya, their distributors, and resellers sell a private label version of the eCAS system.

          Clients running eCAS software with multiple locations have the option to use Veramark’s Pollable Storage Unit (PSU). The PSU is a solid-state buffer box that collects call record data from circuit-switched PBXs and Key Systems and stores the data until polled by the call accounting system. Veramark’s Service Bureau clients use these devices extensively. In 2004, Veramark introduced a new, network ready version of the PSU, and retired its predecessor. With the advent of IP-communications networks, Veramark anticipates a lesser need for PSU’s over the coming year.

Outsourced Solutions Group

          For companies that recognize the benefits of telecom spend management, but lack the means or desire to utilize internal staff and equipment to perform it, Veramark’s Outsourcing team provides completely hosted or partially hosted (e.g., Application Service Provider) solutions. Using the same expense management software developed by Veramark for licensing, Veramark can remotely poll, process, and report on telecommunications activity and data, then provide comprehensive reports and analysis to remote clients in a variety of formats. Outsourced Solution customers can access their data remotely and securely by Internet login, email, fax, or CD-ROM. Clients that opt for outsourced solutions generally sign multi-year contracts and pay for services monthly based total call records processed and delivery of other value-added services.

Professional Services and Maintenance

          To varying degrees, all of the Company’s products offer an opportunity to provide professional services to customers on a fee basis. These sales typically include installation, implementation, and training services, and often include software customization and data conversion services. The majority of active users of Veramark’s products pay annual maintenance fees, which entitle them to post warranty support via telephone or modem as well as new software service pack releases. Annual fees for maintenance range from 15–20% of the original software license fee, depending upon the hours and priority of support and whether a distributor plays an intermediary support role.

Marketing and Sales

          Veramark’s marketing and sales personnel are located at its headquarters in Pittsford, New York, and 9 locations throughout the United States.

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          Veramark has separate marketing and distribution strategies for its enterprise and SME markets. Because of the size and complexity of its enterprise platform, Veramark’s marketing and distribution strategy for VeraSMART is focused primarily on direct sales. On the other hand, the strategy for its SME product, eCAS, is founded on building mutually beneficial relationships with companies that have established distribution networks. The natures of these relationships vary, depending on the product and market. Some sell privately labeled, customized products developed and manufactured by Veramark to their defined specifications, while others resell Veramark-labeled products.

          A partial listing of companies privately labeling or reselling Veramark products follows:

          Telecommunications Equipment Manufacturers

•

Avaya

          Distributors

	•	Graybar
	•	Jenne Communications
	•	ScanSource/Catalyst Telecom
	•	Sprint/North Supply
	•	Westcon Group/Voda One

          Telephone Service Providers

	•	SBC
	•	Cincinnati Bell

New Product Development

          Veramark is currently pursuing several opportunities to expand its telemanagement lines and to offer products for related markets.

          Software development costs, meeting recoverability tests, are capitalized in accordance with Statement of Financial Accounting Standards No. 86 when technological feasibility has been established for the software. The costs capitalized are amortized on a product-by-product basis over its estimated life, or the ratio of current revenues to current and anticipated revenues from such software, whichever provides the greater amortization. The Company periodically records adjustments to write down certain capitalized costs to their net realizable value.

Backlog

          At December 31, 2004, Veramark had a backlog of $1,651,569, all of which is expected to be recognized as revenue during 2005. Backlog as of December 31, 2003 was $968,859. Backlog is not deemed to be a material indicator of 2005 revenues.

          The Company’s policy is to recognize orders only upon receipt of purchase orders.

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Competition

          The telecommunications management industry is highly competitive and highly fragmented. The number of domestic suppliers of telemanagement systems for business users is estimated to exceed 100 companies. The vast majority of those are regional firms with limited product lines and limited sales and development resources. Several competitors are established companies that are able to compete with Veramark on a national and international basis.

          There are fewer competitors in the market for large-scale telemanagement systems for telephone service providers, although several existing competitors are substantially larger than Veramark and may be able to devote significantly more resources to product development and marketing.

          With respect to all of Veramark’s products, some competing firms have greater name recognition and more financial, marketing, and technological resources than Veramark. Competition in the industry is based on price, product performance, breadth of product line, and customer service. Veramark believes its products are priced competitively based upon their performance and functionality. We also believe that our services organization effectively and efficiently differentiates Veramark from that of competition. However, Veramark does not strive to be consistently the lowest priced supplier in its markets. Historically, prices for application software have declined rapidly in the face of competition. Increased competition for the Company’s software products could adversely affect the Company’s sales volume and profits.

Employees

          As of February 28, 2005 Veramark employed 91 full-time personnel. Veramark’s employees are not represented by any labor unions.

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Item 2 Properties

          The Company’s principal administrative office and manufacturing facility is located in a one-story building in Pittsford, New York. Veramark presently leases approximately 65,000 square feet of the building, of which approximately 8,600 square feet is currently sub-let. The term of the lease expires on October 31, 2007.

          The Company also occupies 3,819 square feet of a building in Westlake Village, California, pursuant to a lease that expires on March 31, 2007.

Item 3 Legal Proceedings

          There are no material pending legal proceedings to which the Company is a party or of which any of its property is the subject.

Item 4 Submission of Matters to a Vote of Security Holders

          None.

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PART II

Item 5 Market for the Registrant’s Common Stock and Related Stockholder Matters

          Veramark Common Stock, $0.10 par value, is traded on the Over The Counter Bulletin Board (OTCBB) (symbol: VERA.OB). As of the opening of business on June 3, 2002, the Company’s Common Stock was no longer listed on the NASDAQ Small Cap Market. The following quotations are furnished by NASDAQ through the OTCBB for the periods indicated. The quotations reflect inter-dealer prices that do not include retail markups, markdowns or commissions and may not represent actual transactions.

Quarters Ended

     As of February 28, 2005, there were 561 holders of record of the Company’s Common Stock and approximately 1,955 additional beneficial holders.

     The Company last paid a dividend on common stock in January 1996. No dividend is planned for 2005.

Item 6 Selected Financial Data

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Item 7 Management’s Discussion and Analysis of Results of Operations and Financial Condition

Results of Operations

          Management’s Discussion and Analysis contains statements that are forward-looking. Such statements are identified by the use of words like “plans,” “expects,” “intends,” “believes,” “will,” “anticipates,” “estimates” and other words of similar meaning in conjunction with, among other things, discussions of future operations, financial performance, the Company’s strategy for growth, product development, regulatory approvals, market position and expenditures. Forward-looking statements are based on management’s expectations as of the date of this report. The Company cannot guarantee that any forward-looking statement will be accurate, although the Company believes that it has been reasonable in its expectations and assumptions. Forward-looking statements are subject to the risks identified in “Issues and Risks” and elsewhere in this report. Readers are cautioned not to place undue reliance on forward looking statements and are advised to review the risks identified in “Issues and Risks” and elsewhere in this report. The Company has no obligation to update forward-looking statements.

2004 Compared with 2003

OVERVIEW

          For the quarter ended December 31, 2004, Veramark’s sales of $3,012,683 increased 8% from the third quarter of 2004, and 6% from sales of $2,844,153 for the same quarter of 2003. Sales for the fourth quarter of 2004 were the highest quarterly sales achieved since the second quarter of 2002. Veramark recorded a net income of $416,047, or $0.04 per diluted share, for the quarter ended December 31, 2004, versus a net income of $465,935, or $0.05 per diluted share for the fourth quarter of 2003.

          For the twelve months ended December 31, 2004, Veramark’s sales were $11,035,966, or 4% less than sales of $11,463,867 for the twelve months ended December 31, 2003. The Company incurred a net loss of $113,560, or $0.01 per share for the year ended December 31, 2004 as compared to a net income of $294,934, or $0.03 per diluted share for the year ended December 31, 2003.

          Despite modest decreases in total sales and net income for 2004 as compared to 2003, management is pleased with the progress made during 2004 to improve the Company’s long-term strategic objectives. The continuing focus on the development of the Company’s VeraSMART® product line, the next generation enterprise-level product offering replacing the Quantum Series®, has gone exceedingly well in management’s opinion and has been the catalyst for the increased sales achieved for the second half of 2004 as opposed to the first six months of the year. In April 2003, the Company suspended further sales of the Quantum product line in order to focus its efforts on accelerating further development of VeraSMART, despite the short-term negative effects that decision would have on sales and cash flows. VeraSMART 1.0 was released late in the second quarter of 2003, VeraSMART 2.0 in June of 2004, and VeraSMART 3.0 was released the first week of January, 2005.

          Primarily as a result of these development efforts we incurred, as expected, a net cash outflow (which totaled approximately $543,000 for the full year ended December 31, 2004).

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However the Company did generate a net positive cash inflow of approximately $272,000 for the fourth quarter ended December 31, 2004, primarily as a result of increased sales of VeraSMART. With the latest version of VeraSMART now available, though we expect to realize positive cash flows throughout 2005, we will continue to keep a careful watch on current order and sales levels, as well as operating expenses.

          During 2004 the Company capitalized approximately $1,279,000 of software development costs attributable to the VeraSMART product, encompassing product releases 2.0 and 3.0. During 2003 the Company capitalized approximately $682,000 of developments costs. Capitalized development costs are amortized over five years and charged to cost of sales.

SALES

          Sales of VeraSMART® for the quarter ended December 31, 2004 increased 181% from the same quarter of 2003 and accounted for 23% of total sales for the quarter. VeraSMART sales for the full year ended December 31, 2004, increased 264% from the level achieved for 2003, accounting for 12% of total sales for the year. During the fourth quarter of 2004, the Company installed ten new VeraSMART systems spanning a wide range of markets to include state and local governmental units, financial institutions, health care and the defense industry. Included among these installations were Allina Healthcare, McChord Air Force Base, Ameriquest, the U.S. Department of Labor, the Commonwealth of Massachusetts and Cendant Mortgage.

          Veramark still derives revenue from VeraSMART’s predecessor, the Quantum Series®, primarily in the form of ongoing maintenance contracts. Revenues from the Quantum Series, as expected, decreased 29% and 28%, respectively, for the three and twelve months ended December 31, 2004 as compared to 2003. The decrease results from a reduction in the renewal of maintenance contracts by existing Quantum customers due to the gradual phase-out of Quantum Series.

          Overall, the combined sales from enterprise-level product solutions, encompassing both VeraSMART and the Quantum Series, increased 18% for the quarter ended December 31, 2004 versus the same quarter of 2003, but decreased 2% for the twelve months ended December 31, 2004, as compared to the prior year, as a result of the decline in the Quantum Series maintenance revenues referred to above.

          For both the quarter and year ended December 31, 2004, our sales of eCAS call accounting and telemanagement products were negatively impacted by Avaya Inc.’s early 2004 purchase of Expanets, formerly a significant channel of distribution for the Company. Though the Company was able to generate additional sales to other existing channels of distribution and make inroads with several new channels, sales of call accounting products and services declined by 1% for the quarter ended December 31, 2004, and 4% for the year ended December 31, 2004, as compared with the same periods of 2003.

          Veramark also realized increased sales through its Outsourced Management group for 2004, as opposed to 2003. These increases totaled 42% and 19% for the quarter and year ended December 31, 2004 versus the same periods a year ago. By utilizing Veramark’s outsourcing capabilities, companies were able to realize the benefit of controls on the telemanagement costs without the need to make significant investments in equipment or staff.

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COST OF SALES

          The Company earned gross margins (defined as net sales less cost of sales) of 86% and 84% for the three and twelve months ended December 31, 2004. This compared with gross margins of 87% and 85% for the same three and twelve month periods of 2003. The slightly lower margins for 2004 reflect an increase in amortization costs associated with the development costs previously capitalized for VeraSMART versions 1.0 and 2.0. The amortization of VeraSMART 3.0 will commence in the first quarter of 2005, but we do not expect overall gross margins, as a percentage of sales, to change significantly as a result.

ENGINEERING AND SOFTWARE DEVELOPMENT

          Net engineering and development expenses for the year ended December 31, 2004 of $1,415,000 decreased significantly from the $1,819,889 of engineering and development expenses incurred for 2003. This decrease is entirely the result of a higher percentage of engineering expenses being capitalized in 2004, when compared to 2003.

          The following chart summarizes the gross expenditures incurred for engineering and development costs, costs capitalized, the resulting net engineering and development expenses charged against income, and the amortization costs charged to cost of sales for the years ended December 31, 2004 and 2003.

          As was the case in 2004, we will continue to apply the majority of our development efforts in 2005 on expansion of the VeraSMART product line. The next release of VeraSMART is currently scheduled for availability in mid 2005.

Selling, General and Administrative Expenses

          For the year ended December 31, 2004, selling, general and administrative (SG&A) expenses were $7,975,746. This represents an increase of 4% from the SG&A expenses incurred of $7,666,338 for the year ended December 31, 2003. Total SG&A expenses encompass four functional areas of our corporate structure. Those four areas are Marketing and Product Management, Direct Sales, Sales Support and Service, and Corporate Administration. A breakdown of expenses by functional area for 2004 versus 2003 follows:

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          Though we were able to maintain a stable employment base throughout 2004, with employment at December 21, 2004 totaling 99 employees versus 102 a year earlier, total SG&A costs did increase from the prior year. The increase in expense was primarily incurred in the marketing and direct sales areas to support product launch activities required of the VeraSMART 2.0 and 3.0 product releases. Additionally, we felt it necessary to reinstate pay cuts, in place over the last two years, to retain valuable and experienced employees.

2003 Compared with 2002

          The Company’s overall performance in 2003 represented a significant improvement in a number of key areas, both financial and operational, from results realized over the prior 3 years. Despite the necessity to maintain static staffing levels throughout 2003 the Company was able to continue its investment in a number of key product development projects essential to the Company’s long–term growth plans. These projects included major upgrades to the eCAS™ call accounting product line, as well as the initial release of a new enterprise level product platform, VeraSMART®. The Company intends that future releases of the VeraSMART software, currently under development, will continue to expand its inherent functionality and eventually replace the Company’s current Quantum Series® enterprise class product.

          We were also able to maintain and slightly improve our liquidity position, generating a positive cash flow from operations for 2003 of just under $100,000. This increase was achieved by closely monitoring staffing levels, discretionary spending, carefully analyzing capital expenditures and the streamlining of operations throughout the organization. We remain free of any bank debt as of December 31, 2003 and do not anticipate a need for borrowing in the near future. Management believes that, given its current cash position, level of operating expenses, and projections for 2004 revenues, adequate sources of capital are in place to meet its objectives throughout 2004 and beyond, subject to continued improvement of the economy generally and enterprise capital spending specifically.

          While we are encouraged by the year’s results, we remain cautious in the face of current economic conditions. While positive signs have emerged in certain segments of the economy, there has not been a consistent and sustainable upward trend in capital spending throughout our markets. Customers continue to hold back on their capital spending and continue to delay upgrades to their systems whenever and wherever possible. As the Company doesn’t typically generate large backlogs, its financial results and short-term cash flows are heavily dependent on current market conditions and order rates. Over the last two quarters of 2003 in particular, the weekly order intakes have varied significantly from month to month, a situation, which makes long term forecasting and strategic planning difficult.

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          For both the three and twelve months ended December 31, 2003, the Company achieved an increase in net sales of 3% from the same three and twelve months ended December 31, 2002. Net sales of $2,844,153 for the three months ended December 31, 2003, compared with net sales of $2,761,933 for the same three months of 2002, and net sales of $11,463,867 for the year ended December 31, 2003 increased from $11,141,507 for the prior year.

          The Company reported net income of $465,935, or $0.05 per diluted share for the quarter ended December 31, 2003, which compared with a net loss of $413,415, or a loss of $0.05 per share for the quarter ended December 31, 2002. For the year ended December 31, 2003, the Company generated net income of $294,934 or $0.03 per diluted share, representing a significant improvement from the net loss of $2,008,443, or $0.24 per share, for the year ended December 31, 2002. This improvement in the Company’s annual net income resulted from a combination of factors, including:

	•	An increase in sales of approximately $322,000.
	•	A reduction in cost of sales of approximately $591,000, primarily resulting from a reduction in amounts of previously capitalized software costs amortized and charged to cost of sales.
	•	A decrease of approximately $1,385,000 in operating expenses, of which $682,000 represents the capitalization of software development costs associated with the VeraSMART 2.0 enterprise product. There were no development costs capitalized in 2002.

          The increase in net sales for both the three and twelve months ended December 31, 2003, as compared to the same three and twelve months of the prior year resulted from increased sales of the Company’s core call accounting and telemanagement products and services. Net sales of call accounting and telemanagement products increased 8% and 14% for the three and twelve months ended December 31, 2003 from 2002 results for the same periods, primarily due to increased sales of the Company’s eCAS product line, still believed to be the only totally web-based product of its kind on the market two years after its initial launch.

          The increase in net sales of core call accounting products, however, was partially offset by a decrease in net sales of our enterprise-level product offerings, repeating a pattern that we have experienced over the past several years. Sales of the Company’s enterprise products decreased 4% and 12% for the three and twelve months ended December 31, 2003, as compared to the same three and twelve months ended December 31, 2002. The decline, particularly in sales of the Company’s Quantum Series product line, which is being phased out by the Company and replaced by the VeraSMART software solution, reflects the continued reluctance of customers to increase capital spending and to delay upgrades to their systems and networks until economic conditions stabilize. Despite the decline in enterprise sales during 2003, we remain optimistic about our new VeraSMART enterprise product platform. The initial version of the product, VeraSMART 1.0, was released late in the second quarter of 2003, and accounted for 9% of fourth quarter revenues. Although we recognize that overall enterprise capital spending has been slow to resume, current economic forecasts reflect slow but steady improvement in enterprise spending during 2004 and we believe we are well positioned with the VeraSMART software solution to take full advantage of this recovery. Since the beginning of this year, we have seen a quantitative increase in the number of requests for proposals for larger enterprise solutions. For the year ended December 31, 2003, sales of enterprise-level products accounted for 33% of the Company’s total sales.

          Revenues generated from the Company’s Service Bureau operations continue to increase, up 10% for 2003 versus 2002. By opting for an outsourced solution to meet their telemanagement

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needs, customers can reap the benefits of managed telemanagement services without having to utilize internal staff and equipment and the inherent costs that creates. While still relatively modest in terms of current revenues, the Company continues to promote its capability to provide outsourced telemanagement solutions to those that recognize the benefits of telemanagement, but lack the means or desire to utilize internal staff or equipment to perform it. Using the same telemanagement tools developed for software customers, the Company can remotely poll, process, and report on telecommunications activity and data. Service Bureau customers can access standard, as well as customized, reports by e-mail, fax, web or CD-ROM. Customers typically sign multi-year contracts and pay for services monthly, based on the number of call records processed. In early 2004 the Company reached terms with the Lockheed Martin Aeronautics Company, of the Lockheed Martin Corporation, to provide outsourced call accounting applications with services beginning in the first quarter of 2004. In addition to Lockheed Martin, current Service Bureau clients include Prudential Insurance, Travelers, and Fleet Bank.

          The Company continues to recognize an increasing proportion of its revenues from a variety of post sale activities that include maintenance and support, installation services, training and customization. For the year ended December 31, 2003, these post sale activities accounted for 63% of the Company’s total sales, as compared with 60% of total sales for the year ended December 31, 2002.

          Gross profit margins, as determined by subtracting cost of sales from total net sales, improved in 2003 as compared with 2002, primarily due to a reduction in amortization expenses charged to cost of sales for development costs capitalized in prior years. For the year ended December 31, 2003, amortization expense totaled $454,707, as compared to $915,102 for the year ended December 31, 2002. For the year ended December 31, 2003, the Company earned a gross profit margin of $9,758,902, or 85% of sales, up 10% from the gross profit margin of $8,845,080, or 79% of sales, for the year ended December 31, 2002.

          Despite the difficulties encountered in the last several years, principally due to the general economic conditions that caused enterprise capital spending of our customers to decrease significantly, we continue to move forward with new development projects. During 2003, the Company remained committed to investing development resources in both eCAS and VeraSMART products. Although pleased with the progress eCAS has made since its introduction in 2002, the Company sees new opportunities for this solution in the small to mid-sized marketplace. The Company also believes that the ongoing development efforts on the VeraSMART platform, which, when complete will be the next generation replacement of the current Quantum Series® enterprise product suite, will provide a distinct competitive advantage in the large enterprise market. Additionally, the expansion of the VeraSMART platform should broaden outsourced services capabilities, a key growth area for the Company.

          For the year ended December 31, 2003, we realized a decrease in net engineering and development expenses, as compared with 2002, reflecting the capitalization of development costs related to the development of the VeraSMART enterprise platform. The table below summarizes the Company’s engineering and development efforts for 2003, as compared with 2002, detailing gross spending, costs capitalized, amounts amortized, and the overall impact on the Company’s Statements of Operations for the years ended December 31, 2003 and 2002.

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          For the year ended December 31, 2003, the Company incurred selling, general, and administrative expenses of $7,666,338, a reduction of 4% from selling, general, and administrative expenses of $8,002,936 incurred for the year ended December 31, 2002. The Company was able to reduce operating expenses, while maintaining employment levels through the careful monitoring of discretionary spending in the areas of salaries and benefits, travel, and facility costs. A breakdown of expenses incurred by function for 2003 versus 2002 follows:

          We continue to monitor operating expenses carefully, as well as search for additional operating efficiencies. As of December 31, 2003, the Company employed 102 full-time employees versus 101 employees at December 31, 2002.

Liquidity and Capital Resources

          At December 31, 2004, Veramark’s total cash position, consisting of cash in the bank and short-term investments, totaled $1,103,257. At December 31, 2003, the Company’s total cash position was $1,645,926. The overall decline in our cash position was, to a large extent, anticipated by management and consistent with the strategic decision to suspend further sales of the Quantum product line and focus on accelerating development of the VeraSMART product line made in 2003. The Company experienced net cash outflows of approximately $194,000, $417,000 and $203,000 respectively, for each of the first three quarters of 2004. During the fourth quarter of 2004, this trend was reversed, with a net positive cash flow of approximately $272,000 being generated, largely as a result of the increased sales of VeraSMART.

          Accounts receivable of $1,276,204 at December 31, 2004, decreased by approximately $49,000 from the December 31, 2003 balance of $1,324,794. We continue to experience an excellent credit history with our customers, the result of which has been a reduction in the reserve

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required for potential bad debts from $65,000 at December 31, 2003 to $24,000 at December 31, 2004.

          Prepaid expenses of $109,809 at December 31, 2004 declined from $130,509 at December 31, 2003. The decrease was attributable to a reduction in the prepaid portion of the Company’s Directors and Officers Liability policy resulting from a reduction in premium paid for coverage in 2004, as compared with 2003.

          The cost value of property and equipment at December 31, 2004 of $5,740,535, decreased from $5,833,354 at December 31, 2003. During 2004 Veramark purchased $142,283 of new capital equipment and disposed of $235,102 of out of service or obsolete equipment. The Company realized a gain of $1,983 on the disposal of this equipment.

          The asset value of Capitalized Software increased from $1,817,438 at December 31, 2003 to $2,518,482 at December 31, 2004. The increase reflects the capitalization of $1,278,900 of software development cost in 2004, all attributable to VeraSMART 2.0 and 3.0, and the amortization of $577,856 of previously capitalized development costs in connection with the development of eCAS and VeraSMART 1.0.

          Pension and related assets of $2,778,482 at December 31, 2004 increased $266,635 from the December 31, 2003 balance of $2,511,847, due to an increase in the cash surrender value of company-owned life insurance policies. The death benefit and current cash values of these policies are intended to fund future SERP obligations. At December 31, 2004, the cash surrender values of these policies totals approximately $2,214,000. We also have the ability to access the cash surrender values to fund current operations of the business should that ever become necessary.

          Accounts payable of $298,063 at December 31, 2004 increased $85,403 from the December 31, 2003 total of $212,660, but is comparable with the levels of the accounts payable reported for the first three quarters of 2004. There have been no changes of significance in our payment practices.

          Accrued compensation and related taxes includes the value of salaries and wages payable at year-end, as well as an accrual for vacation time and commission’s payable at December 31, 2004. The increase from $491,848 at December 31, 2003 to $557,805 at December 31, 2004 reflects an increase in commissions due our salespeople and an increase in salaries and wages payable at year end due to the timing of Company payrolls.

          Deferred revenues decreased from $2,918,337 at December 31, 2003 to $2,572,120 at December 31, 2004 due to the gradual phase out of maintenance contracts associated with the older generation Quantum Series. We expect that with increased sales of VeraSMART, Quantum’s successor product, that we will begin to see an increase in new maintenance contracts and services in 2005 and therefore a resulting increase in deferred revenues during the second half of the year. Deferred revenues represent services such as training, installation, and maintenance and support services for which the Company has billed customers, but for which it has not yet performed the actual services. All services currently deferred, are expected to be provided over the next twelve months, and recorded as sales revenue at the time those services are actually rendered.

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          Other accrued liabilities of at December 31, 2004 of $187,977, decreased from $209,364 at December 31, 2003. The decrease results from lower year end provisions for legal and accounting fees and sales taxes due a number of states on current sales.

          As of December 31, 2004, the Company has an accumulated pension obligation of $4,439,398, up from $4,009,849 at December 31, 2003. Refer to Note 7, Benefit Plans, of Notes to Consolidated Financial Statements, referenced later in this document.

          Stockholders equity, at December 31, 2004 of $1,453,393, declined slightly from $1,508,687 at December 31, 2003. The decrease includes the 2004 net loss of $113,560, offset by proceeds received by the Company of approximately $71,000 from the exercise of employee stock options and the purchase of 24,938 shares of Company Stock by employees through a company sponsored Employee Stock Purchase Plan.

Off Balance Sheet Arrangements

          Pension Obligations - The Company sponsors a non-qualified, unfunded, Supplemental Executive Retirement Plan (SERP), which provides certain key employees with a defined pension benefit. The Company believes that the SERP is an important part of its compensation package, necessary for the recruitment and retention of qualified employees.

          The SERP is not encumbered by the coverage and benefit restrictions imposed on qualified plans by the IRS. In addition, the Company generally is not required to comply with non-discrimination rules imposed on qualified plans under ERISA.

          Unfunded means that the Company has not set aside any particular assets to satisfy its SERP liabilities. Accordingly any assets the Company may have available to satisfy SERP liabilities are subject to claims by the Company’s creditors.

          Recovery of 100% of projected SERP costs is designed through a program of Company-owned life insurance (COLI). Recovery for the imputed time value of the money, plus all costs associated with the COLI premium payments, and benefit obligations, are included in this program. The Company currently owns 14 separate life insurance contracts on selected current and former employees, not all of who will ultimately qualify for participation in the plan. The cumulative death benefit attached to these policies is $10.2 million dollars and is not included in the Company’s Consolidated Balance Sheet as of December 31, 2004.

          The cash surrender values of these policies at December 31, 2004 totaled approximately $2,214,000 and are included in the Company’s consolidated balance sheets under the caption of “Pension and Related Assets.”

          The projected future pension benefits expected to be paid under this plan are as follows, assuming retirement at 65 and a life expectancy of 80 years for all participants:

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          The net present value of these projected pension obligations at December 31, 2004, totals $3,874,562, and is included in the liability section of the Company’s consolidated balance sheets under the caption under “Pension Obligation.”

          Lease Obligations – The Company leases current manufacturing and office facilities and certain equipment under operating leases, which expire at various dates through 2008. Rent expense under all operating leases (exclusive of real estate taxes and other expenses payable under the leases) was approximately $ 470,000, $558,000, and $615,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Minimum lease payments as of December 31, 2004 under operating leases are as follows:

          Purchase Commitments – The Company has no purchase commitment contracts in place as of December 31, 2004.

Critical Accounting Policies

          The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. The most significant of these involving difficult or complex judgments in 2004 include:

	•	Revenue recognition
	•	Capitalization of software development costs
	•	Allowance for Doubtful Accounts
	•	Pension liability

          In each situation, management is required to make estimates about the effects of matters or future events that are inherently uncertain.

          The Company’s overall policies with regard to revenue recognition are set forth in Note 1 of the Consolidated Financial Statements — Description of Business and Summary of Significant Accounting Policies. As noted therein, the Company recognizes revenue in accordance with SOP 97-2, “Software Revenue Recognition,” and related interpretations. Our software licensing with customers typically have terms and conditions that are described in signed orders. Revenue from

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perpetual licenses is recognized upon delivery of the licensed product, provided that acceptance has occurred and a signed contractual obligation has been received, the price is fixed and determinable, and collectibility of the receivable is probable.

          Service revenues consist principally of software installation, implementation, upgrades, and customer training, as well as software maintenance agreements that include both customer support and the right to upgrades. The Company estimates the value of post-contract customer support sold together with perpetual licenses by reference to published price lists which generally represent the prices at which customers could purchase renewal contracts for such services. Revenue from maintenance contracts is recognized ratably over the term of the contract, usually one year. Revenue from training, support and other services is recognized as the services are performed.

          The Company believes its revenue recognition policies are appropriate, in all circumstances, and that its policies are reflective of complexities arising from customer arrangements involving such features as maintenance, warranty agreements, license agreements, and other normal course of business arrangements.

          As set forth in Note 1, the Company capitalizes software development costs when technological feasibility has been established for the software in accordance with SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” Such capitalized costs are amortized on a product-by-product basis over their economic life or the ratio of current revenues to current and anticipated revenues from such software, whichever provides the greater amortization. The Company periodically reviews the carrying value of capitalized software development costs and impairments are recognized in the results of operations when the expected future undiscounted operating cash flow derived from the capitalized software is less than its carrying value. Should the Company inaccurately determine when a product reaches technological feasibility or the economic life of a product, results could differ materially from those reported. Veramark uses what it believes are reasonable assumptions and where applicable, established valuation techniques in making its estimates.

          The Company maintains allowances for doubtful accounts for estimated losses resulting from the potential inability of its customers to make required payments. Management specifically analyzes accounts receivable, historical bad debts, credit concentrations and customer payment terms when evaluating the adequacy of the allowance for doubtful accounts.

          As set forth in Note 7 – Benefit Plans, the Company sponsors an unfunded Supplemental Executive Retirement Program (“SERP”), which is a nonqualified plan that provides certain key employees a defined pension benefit. In order to properly record the net present value of future pension obligations a number of assumptions are required to be made by Company’s management. These assumptions include years of service, life expectancies, and projected future salary increases for each participant. In addition, management must make assumptions with regard to the proper long-term interest and liability discount rates to be applied to these future obligations.

          Should the Company need to alter any of these assumptions, there is the potential for significant adjustments to future projected pension liabilities.

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Accounting Pronouncements

1)

In December 2003, the Securities and Exchange Commission (“SE