SecProbe.io

<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.txt
<TEXT>
<PAGE>

May 27, 2005

VIA EDGAR AND OVERNIGHT MAIL

Mr. Larry Spirgel
Assistant Director
U.S. Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Mail Stop 0407
Washington, DC  20549

RE:         APPLIED INNOVATION INC. (AI OR THE COMPANY) RESPONSE TO YOUR LETTER
            DATED APRIL 28, 2005
            FILE NO. 000-21352

Dear Mr. Spirgel:

Below you will find in italics each of your questions as posed in your letter
dated April 28, 2005, followed by our corresponding responses. In your letter,
you asked us to provide revised disclosures for incorporation into future
filings as well as additional support in certain areas. The proposed disclosures
are based on information currently available as of the date of this letter.
Included as part of this letter are the following attachments:

      -     Attachment A - Revised MD&A

      -     Attachment B - Revised Footnotes to the Financial Statements

      Management's Discussion and Analysis of Financial Condition and Results of
      Operations

      Application of Critical Accounting Policies

1.    You have identified eight critical accounting policies, several of which
      are not materially different from your accounting policy disclosures
      presented in Note 1 to your financial statements. Your critical accounting
      estimate disclosures should supplement, not duplicate, your accounting
      policies, and they should provide greater

<PAGE>

      insight into the quality and variability of information regarding your
      financial condition and operating performance. Below, please find several
      policy specific comments for you to consider as you review all of your
      critical accounting policies in response to this comment.

            -     Revenue Recognition - Your current disclosures provide your
                  accounting policy for revenue recognition. However, it is not
                  clear if the accounting estimates or assumptions used in the
                  determination of revenue are material due to the levels of
                  subjectivity and judgment necessary to account for highly
                  uncertain matters or the susceptibility of such matters to
                  change and if the impact of the estimates and assumptions are
                  material to your financial condition or operating performance.

            -     Allowance for Doubtful Accounts - It is not clear which
                  estimates or assumptions in your determination of the
                  allowance for doubtful accounts are material. In your
                  analysis, you should address the questions that arise once the
                  critical accounting estimate or assumption has been identified
                  by analyzing, to the extent material, such factors as how you
                  arrived at the estimate, how accurate the estimate or
                  assumption has been in the past, how much the estimate or
                  assumption has changed in the past, and whether the estimate
                  or assumption is reasonably likely to change in the future.

            -     Intangible Asset and Goodwill - You state that goodwill and
                  intangible assets are reviewed for recoverability annually or
                  more frequently if certain events occur or circumstances
                  change. However, you have not identified any estimates or
                  assumptions that you believe are material and critical to your
                  financial condition or operating performance. If the impact of
                  estimates and assumptions is material, you should present an
                  analysis of the uncertainties involved in applying a principle
                  at a given time or the variability that is reasonably likely
                  to result from its application over time. For example, with
                  respect to your goodwill impairment test, you should consider
                  a discussion indicating if the difference between the carrying
                  value and fair value of your reporting units is material to an
                  investor and how sensitive the estimates, including long-term
                  revenue and cash flow projections, discount rate, terminal
                  values, are to change.

            Refer to section V of the Commission's Interpretive Release on
            Management's Discussion and Analysis of Financial Condition and
            Results of Operation which is located on our website at:
            http://www.sec.gov/rules/interp/33-8350.htm, analyze those critical
            accounting policies you have disclosed and those you have not
            disclosed and in future filings, revise accordingly to discuss
            estimates and assumptions that bear the risk of change and provide
            sensitivity analysis and other material quantitative information to
            indicate the impact that other reasonably likely assumptions would
            have on your results of operations, statement of position and cash
            flows and whether the estimate/assumption is likely to change in the
            future. In your response, please provide us with your proposed
            revised disclosures.

                                       2
<PAGE>

RESPONSE:

Please see Attachment A for the revised MD&A disclosure regarding application of
critical accounting policies.

      Financial Statements and Supplementary Data

      Note 1. Summary of Significant Accounting Policies

2.    Revenue Recognition

      You state that you sell some products under bill and hold arrangements.
      Please tell us how you evaluated SAB Topic 13.3 (a) in your determination
      to recognize revenue for products held on a customer's behalf. Expand your
      accounting policy in Note 1 of your financial statements to clarify how
      you meet the criteria for revenue recognition. Also revise your critical
      accounting policy disclosure, if applicable.

RESPONSE:

While the applicable requirements, as further described below, are analyzed for
any potential bill and hold arrangements, such bill and hold transactions are
rare for Applied Innovation. The most recent bill and hold transaction recorded
by the Company was included in the consolidated statement of operations for the
year ended December 31, 2000. Because the consolidated statements of operations
for the years ended December 31, 2004, 2003 and 2002 as shown in the Form 10-K
for the fiscal year ended December 31, 2004 include no bill and hold
transactions, we believe it is appropriate to remove the bill and hold
transactions reference in the revenue recognition policy in Note 1 of the
consolidated financial statements. For the same reason, we believe the critical
accounting policy disclosure does not need to be revised to include discussion
of possible future bill and hold arrangements. We will revisit the need for
disclosure at each reporting date in the event Applied Innovation has a bill and
hold transaction in the future.

Our current accounting policy states that, in certain limited circumstances,
customers may direct the Company to sell products under bill and hold
arrangements. In such instances, Applied Innovation considers the guidance set
forth in Staff Accounting Bulletin (SAB) No. 104 - "Revenue Recognition" and,
more specifically, Section 3 of the SAB, "Delivery and Performance". In
addition, the Company also considers the factors listed in Section 3 of SAB
Topic 13.3 (a), as well as other factors that may impact revenue recognition.
The factors considered to ensure revenue is recognizable include: (i) risk of
ownership has passed to buyer; (ii) we have obtained a written, fixed commitment
from the customer, typically in the form of a purchase order; (iii) the buyer
has instructed us to "bill and hold" in writing and has a substantial business
purpose; (iv) there is a fixed delivery schedule, reasonable and consistent with
the business purpose; (v) the Company has not retained any specific performance
obligations; (vi) the goods are complete, tested, boxed and ready for shipment;
(vii) the goods are segregated from the

                                       3
<PAGE>

Company's other inventory so as not to be used to fill other customer orders;
(viii) billing, credit and payment terms are standard; (ix) risk of loss in the
event of a decline in market value has passed to the customer; and (x) custodial
risks are insurable or insured. We also consider any past experience with bill
and hold transactions and whether additional extended procedures are necessary
to ensure there are no exceptions to the customer's commitment to accept and pay
for the goods. Applied Innovation will record revenue on such bill and hold
transactions only if all appropriate requirements have been satisfied.

Please see Attachment B for the revised accounting policy for revenue
recognition - product sales to be included in Note 1.

      Note 11. Income Taxes

3.    Tell us how you applied SFAS 109 in assessing the need for a valuation
      allowance against your deferred tax asset. Refer to guidance provided by
      the Division of Corporate Finance on financial reporting matters, which is
      located on our website at:
      http://www/sec.gov/divisions/corpfin/guidance/cfactfaq.htm#P198_34687.
      Noting your history of operating losses, disclose if the asset's
      realization is dependent on material improvements over present levels of
      consolidated pre-tax income, material changes in the present relationship
      between income reported for financial or tax purposes, or material asset
      sales or other non-routine transactions. Discuss the uncertainties
      surrounding realization of your deferred tax asset and describe these
      assumed future events, quantified to the extent practicable, in your MD&A.
      Also describe in MD&A the tax planning strategies that you refer to in
      Note 11.

RESPONSE:

At December 31, 2004, management assessed the need for a valuation allowance
against its deferred tax assets. The assessment was based on guidance contained
in Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (FAS 109).

Applied Innovation had a net deferred tax asset (DTA), before valuation
allowance, of $3.2 million at December 31, 2004, up from $2.1 million at the end
of the prior year. With the exception of the deferred tax asset resulting from
the Ohio net operating loss (NOL) of $504,000 that was fully reserved, the
Company believed that the remaining DTA was realizable, and accordingly, no
further valuation allowance was necessary. Components of the DTA included the
following:

                                       4
<PAGE>

COMPONENTS OF NET DEFERRED TAX ASSET (IN MILLIONS)

<TABLE>
<CAPTION>
                                           VALUATION
         COMPONENT               GROSS     ALLOWANCE        NET
----------------------------    -------    ---------     ---------
<S>                             <C>        <C>           <C>
Federal NOL                     $ 1.362     $     --    $   1.362
Federal R&E credit                 .263           --         .263
Ohio NOL                           .504       ( .504)          --
State NOL (other than Ohio)        .276           --         .276
Other deferred tax assets          .925           --         .925
Deferred tax liabilities          (.149)          --        (.149)
                                -------     --------     ---------
Total net deferred tax asset    $ 3.181    ($   .504)    $  2.677
                                =======    =========     ==========
</TABLE>

Our analysis of the recoverability of the DTAs was comprised of two major
components: 1) DTAs other than those associated with Ohio NOLs, and 2) DTAs
associated with Ohio NOLs. Discussion of each component follows.

DTAs Other Than Those Associated with Ohio NOLs
-----------------------------------------------

Per FAS 109, the realization of DTAs depends on whether the Company will have
sufficient taxable income of an appropriate character within the carryback and
carryforward periods permitted by the tax law for utilization of the deductible
amounts and carryforwards.

Further, FAS 109 indicates that all available evidence, both positive and
negative, should be identified and considered in making a determination as to
whether it is more likely than not that all or some portion of the deferred
asset will not be realized. In applying the more likely than not criterion,
positive evidence of sufficient quality and quantity must exist to counteract
negative evidence in order to support a conclusion that, based on the weight of
all available evidence, a valuation account is not needed.

Based on FAS 109, AI must support the recoverability of its deferred tax assets
by addressing all of the available evidence, including addressing questions such
as:

      -     Does negative evidence exist regarding the recoverability of the
            DTAs?

      -     If so, is there sufficient positive evidence to counteract the
            negative evidence?

Per FAS 109, evidence of successive losses is considered negative evidence, or
evidence that all or a portion of the DTAs may not be recovered. Since AI posted
losses in 2002, 2003 and 2004, sufficient positive evidence must be presented to
overcome the negative evidence of successive losses. (As a caveat, although AI
has three years of losses, the NOLs are not three years old. On the federal
level, AI received the benefit of all of the 2002 and the majority of the 2003
losses by carrying them back to prior profitable years.)

AI believes that the DTAs are recoverable through future taxable income within
the carryforward periods prescribed by tax law, based on consideration of the
NOL amounts

                                       5
<PAGE>

and carryforward periods in the various tax jurisdictions. Many positive points
of evidence exist to support this belief.

      -     AI's recent losses were due in large part to the dramatic slow down
            of the telecom industry. This industry is not depressed in the
            long-term and is expected to return to growth in the near-term.

      -     AI has been profitable for most of its existence, and as a result of
            its profitable history, has built a retained earnings balance of $36
            million.

      -     AI sells quality products at strong margins to telecommunications
            companies including the Regional Bell Operating Companies, domestic
            wireless service providers and other large domestic and foreign
            phone companies.

      -     Despite a weak start in the first half of 2004, AI experienced a
            profitable second half of the year as spending with AI by the large
            telecommunications companies rebounded relative to the first half of
            the year. Overall industry expectations are that capital spending by
            the major domestic telecommunications companies will stabilize or
            increase in 2005.

      -     AI management is willing to take measures to cut costs as necessary.
            Annual cost reductions of approximately $3 million were expected as
            a result of the October 2004 restructuring event and implementation
            of additional cost reduction measures. The reduction in operating
            expenses lowers the revenue threshold necessary for the Company to
            return to profitability.

As an additional potential source of future taxable income and an available tax
strategy, AI could sell its land and building and generate taxable income to
help recover the DTAs. Based on comparison of estimated market values to
carrying