As filed with the Securities and Exchange Commission on February 10, 2004

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended December 31, 2003.

OR

For the transition period from __________ to _________

Commission file number 0-21059

ACE*COMM CORPORATION

301-721-3000
(Registrant’s telephone number, including area code)

     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 registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes o No þ

     The number of shares of Common Stock outstanding as of December 31, 2003 was 13,719,191.

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ACE*COMM CORPORATION
INDEX

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PART I. FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

ACE*COMM CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

The accompanying notes are an integral part of these consolidated financial statements.

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ACE*COMM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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ACE*COMM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by ACE*COMM Corporation (the “Company”) in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial statements and pursuant to the rules of the Securities and Exchange Commission for Quarterly Reports on Form 10-Q. Accordingly, certain information and footnotes required by US GAAP for complete financial statements have been omitted. It is the opinion of management that all adjustments considered necessary for a fair presentation have been included, and that all such adjustments are of a normal and recurring nature. Operating results for the periods presented are not necessarily indicative of the results that may be expected for any future periods. For further information, refer to the audited financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2003.

Use of estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Significant estimates inherent in the preparation of the accompanying financial statements include: management’s forecasts of contract costs and progress toward completion, which are used to determine revenue recognition under the percentage-of-completion method; estimates of allowances for doubtful accounts receivable and inventory obsolescence; and tax valuation allowances.

Recently Issued Accounting Pronouncements

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” This Interpretation clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires an enterprise to consolidate a variable interest entity if that enterprise will absorb a majority of the entity’s expected losses, is entitled to receive a majority of the entity’s expected residual returns, or both. FIN 46 also requires disclosures about unconsolidated variable interest entities in which an enterprise holds a significant variable interest. Application of FIN 46, as revised in December 2003, is required for financial statements of public entities that have interest in variable interest entities, or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public companies for all other types of entities is required in financial statements for periods ending after March 15, 2004. The Company does not expect the adoption of FIN 46 to have a material effect on its financial statements.

Stock Based Compensation

The Company generally applies Accounting Principles Board (APB) Opinion No. 25, ''Accounting for Stock Issued to Employees’’, and related interpretations in accounting for stock options and presents pro forma net income and earnings per share data as if the accounting prescribed by Statement of Financial Accounting Standards No. 123, ''Accounting for Stock Based Compensation’’ had been applied. The Company also applies the provisions of FIN 44, “Accounting for Certain Transactions Involving Stock Compensation”, as required when modifications and other provisions cause the application of variable accounting which calls for the periodic measurement of compensation expense based on the difference in the exercise price and the underlying value of the related stock.

Had compensation cost been recognized based on the fair values of options at the grant dates consistent with the provisions of SFAS No. 123, the Company’s net (loss) income and basic and diluted net (loss) income per common share would have been changed to the following pro forma amounts:

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*All awards refers to awards granted, modified or settled in fiscal periods beginning after December 15, 1994 — awards for which the fair value was required to be measured under Statement 123.

NOTE 2 — ACCOUNTS RECEIVABLE

Accounts receivable consists of the following (in thousands):

Unbilled receivables include costs and estimated profit on contracts in progress that have been recognized as revenue but not yet billed to customers under the provisions of specific contracts. Substantially all unbilled receivables are expected to be billed and collected within one year. At December 31, 2003, approximately 47% of the Company’s billed accounts receivable was older than ninety days and was primarily comprised of international customers. The Company recorded a provision for doubtful accounts of $90 and $60 during the six month periods ended, December 31, 2003 and 2002. Included in billed receivables at December 31, 2003 are balances due from three international customers comprising 26.4%, 10.7% and 10.0%, respectively, of the total balances. One of these customers also comprises 9.4% of unbilled receivables at December 31, 2003.

NOTE 3 — STOCKHOLDERS’ EQUITY AND MERGER

During the six months ended December 31, 2003, the Company issued 23,344 shares of common stock under the Employee Stock Purchase Plan, 17,383 shares of common stock from the exercise of stock warrants, 118,188 shares of common stock through the exercise of stock options issued under the Omnibus Stock Plan and 3,772,836 share in conjunction with the merger with i3 Mobile, Inc.

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During the three months ended December 31, 2003, the Company repurchased 20,000 shares of common stock from a former executive officer at $2.40 per share.

During the twelve month period ending on September 16, 2002, the Company conducted a Stock Repurchase program repurchasing a total of 48,872 shares of common stock at an average per share price of $0.84.

On December 5, 2003, after several months of negotiations, and due diligence, ACE*COMM consummated its acquisition of i3 Mobile, Inc. under a merger agreement executed in September 2003. The acquisition was effected through the issuance of approximately 3.8 million of shares of ACE*COMM’s common stock based on a formula valuing ACE*COMM’s common stock at market value at the time of mailing of the proxy statement, less a discount, and valuing i3 Mobile at an amount equal to its cash, net of specified liabilities and commitments at the mailing date.

ACE*COMM accounted for the Merger as a financing transaction and in doing so recorded the issuance of its common stock at the negotiated value and i3Mobile’s cash on hand and liabilities assumed. Because i3 Mobile ceased all revenue producing operations in March 2003 and the Company has no intention to revive i3 Mobile’s business subsequent to the Merger, the Merger does not possess the characteristics of a business combination found in Regulation S-X and Financial Accounting Standard No. 141, Business Combinations, and EITF Issue 98-3 Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets of a Business. As such, no goodwill resulted from this transaction.

The following table summarizes the assets and liabilities recorded in connection with the merger:

NOTE 4 — INCOME TAXES

The Company is in a net operating loss carry forward position. A valuation allowance offsets all net deferred tax assets.

NOTE 5 — SUBSEQUENT EVENTS

On January 28, 2004, ACE*COMM announced the purchase of the assets of Intasys Billing Technologies from Mamma.com. The Company will pay $1.48 million plus an additional amount of up to $250,000 based upon an earn out for the intellectual property, customers, and fixed assets of Intasys. The transaction is expected to close in February.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

This Report contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company, some or all of which may involve risk and uncertainty. ACE*COMM often introduces a forward-looking statement by such words as “anticipate,” “plan,” “projects,” “continuing,” “ongoing,” “expects,” “management (or the Company) believes,” or “intend.” Investors should not place undue reliance on these forward-looking statements, which involve estimates, assumptions, risks and uncertainties that could cause actual results to vary materially from those expressed in this Report or from those indicated by one or more forward-looking statements. The forward-looking statements speak only as of the date on which they were made, and the Company undertakes no obligation to update any of the forward-looking statements. In evaluating forward-looking statements, the risks and uncertainties investors should specifically consider include, but are not limited to, demand levels in the relevant markets for the Company’s products, the ability of the Company’s customers to make timely payment for purchases of its products and services, the risk of additional

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losses on accounts receivable, success in marketing the Company’s products and services internationally, the effectiveness of cost containment strategies, as well as the various factors contained in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2003, and in subsequent reports filed with the Securities and Exchange Commission, including the matters set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Additional Factors Affecting Future Operating Results,” as well as others matters presented in this Report.

Overview

ACE*COMM delivers enterprise telemanagement applications and advanced Convergent Mediation™ solutions to wired and wireless voice, data, and Internet communications providers. ACE*COMM’s solutions are tailored to each customer’s needs and consist of hardware, software and related services that enable the capture, security, validation, correlation, augmentation, and warehousing of data from network elements and the distribution of this data in appropriate formats to OSS (“Operations Support Systems”) and BSS (“Business Support Systems”) operations. ACE*COMM’s solutions also provide for centralized management and security of enterprise networks. After completing the proposed acquisition of the assets of Intasys Billing Technologies in the quarter ending March 31, 2004, ACE*COMM will offer Intasys’ line of wireless OSS products and will commence integrating the Intasys technologies into ACE*COMM’s convergent mediation products.

ACE*COMM derives revenues primarily from the sale of its products, including hardware and software, and related services. ACE*COMM enters into formal arrangements that provide for single or multiple deliverables of hardware, software and services. These arrangements are formalized by either a simple purchase order or by more complex contracts such as development, reseller or master agreements. These arrangements are generally U.S. dollar denominated and typically have an aggregate value of several thousand to several million dollars and vary in length from 30 days to several years, as in the case of master agreements. Agreements spanning several years are normally implemented in smaller statements of work or orders that are typically deliverable within three to twelve months. Our customers, including resellers, do not possess the right of return or exchange.

More frequently, ACE*COMM is entering into multiple element arrangements that do not involve significant modification or customization of the related software. In these instances, ACE*COMM allocates revenue to each element of the arrangement based on objective evidence of the element’s fair value.

When an agreement provides for significant modification or customization of software, or when ACE*COMM system integration and product development are essential to the functionality of the software, revenues related to the software licenses and services are aggregated and the combined revenues are recognized on a percentage-of-completion basis. Revenue recognized using the percentage-of-completion method is based on the estimated stage of completion of individual contracts determined on a cost or level of effort basis. Any hardware or post-contract customer support provided for under the terms of the agreement is unbundled. Hardware revenue is recognized upon delivery, which usually occurs upon transfer of title, and post-contract customer support is recognized ratably over the term of the arrangement.

Most of ACE*COMM’s professional services are delivered in conjunction with ACE*COMM’s solutions and are sometimes essential to the functionality of other elements of the arrangement. However, ACE*COMM does sell unbundled services; and, in these instances, ACE*COMM generally recognizes revenue as the services are performed.

Revenue for a given period typically reflects products delivered or services performed during the period with respect to relatively large financial commitments from a small number of customers. During the three months ended December 31, 2003, ACE*COMM had three customers generating $150,000 or more in revenue during the period (“Major Customers”) representing approximately 31.4% of total revenue. ACE*COMM’s largest customer during the three months ended December 31, 2003, was Northrop Grumman, an international systems integrator whose purchases represented approximately 8.9% of total revenue. During the three months ended December 31, 2002, ACE*COMM had six Major Customers representing approximately 70% of total revenue. ACE*COMM’s largest customer during the three months ended December 31, 2002, was a supplier who delivers advanced U.S. technologies to the communication sectors of China and whose purchases represented approximately 24% of total revenue. The average revenue earned per Major Customer was $253 thousand and $475 thousand, respectively, for the three months ended December 31, 2003 and 2002.

During the past three fiscal years and first six months of fiscal year 2004, ACE*COMM has experienced significant net losses from operations, primarily due to reduced demand from its North American telecommunications customers. Management expects this lower demand to continue in the foreseeable future. To offset the effects of the current lower North American demand, ACE*COMM continues to target sales efforts toward what it believes to be a growing market for its Convergent

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Mediation™ solutions outside of North America. To date ACE*COMM has experienced an increase in revenue from outside of North America, in particular China, but to date the increase has not been sufficient to offset the decline in revenues from the North American market. ACE*COMM announced in October, 2003 the award of a significant order relating to the Telecom Egypt project, which is expected to have a positive impact on revenues and results of operations in the quarter ending March 31, 2004 and following quarters.

To counteract the pressure on revenues from the prolonged downturn in demand in the telecommunications industry, ACE*COMM has been pursuing a growth strategy designed to expand its product line and areas of distribution. In December 2002, ACE*COMM entered into an initial agreement with a new investor focused on distribution in China, and has since been pursuing a strategic distribution relationship with this new partner.

On December 5, 2003, after several months of negotiations, and due diligence, ACE*COMM consummated its acquisition of i3 Mobile, Inc. under a merger agreement executed in September 2003. The acquisition was effected through the issuance of approximately 3.8 million of shares of ACE*COMM’s common stock based on a formula valuing ACE*COMM’s common stock at market value at the time of mailing of the proxy statement, less a discount, and valuing i3 Mobile at an amount equal to its cash, net of specified liabilities and commitments at the mailing date.

ACE*COMM accounted for the Merger as a financing transaction and in doing so recorded the issuance of its common stock at the negotiated value and i3Mobile’s cash on hand and liabilities assumed. Because i3 Mobile ceased all revenue producing operations in March 2003 and the Company has no intention to revive i3 Mobile’s business subsequent to the Merger, the Merger does not possess the characteristics of a business combination found in both Regulation S-X and Financial Accounting Standard No. 141, Business Combinations, and EITF Issue 98-3 Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets of a Business. As such, no goodwill resulted from this transaction.

The following table summarizes the assets and liabilities recorded in connection with the merger:

On January 28, 2004, ACE*COMM announced another step forward in its growth plan with the signing of an agreement to purchase the assets of Intasys Billing Technologies from Mamma.com. We will pay $1.48 million plus an additional amount of up to $250,000 based upon an earn out for the intellectual property, customers, and fixed assets of Intasys. The transaction is expected to close in February. Intasys’ wireless OSS products and services will complement ACE*COMM’s convergent mediation offerings in the international telecom service sector. After completion of the transaction we will offer Intasys’ OSS product line of CRM, mediation, billing, e-commerce and electronic bill postings and presentment.

The strategic arrangement regarding distribution in China and acquisitions of i3 Mobile and Intasys Billing Systems are expected to help ACE*COMM expand its revenues, product line and geographic presence. ACE*COMM plans to pursue additional acquisitions or other strategic arrangements as well as the expansion of its sales and marketing efforts to increase revenues outside the North American market. ACE*COMM also expects to focus for the next several months on integrating the acquired companies, training sales personnel on new products, contacting existing customers about cross selling opportunities and finding new customers for its expanded product line.

Despite these recent acquisitions, ACE*COMM continues to be focused on keeping the organization streamlined to meet its objectives, conserve cash and control expenses. During the past three fiscal years the number of full time employees has been reduced by approximately 53%. This reduction was designed to reduce costs without materially impacting ACE*COMM’s ability to maintain its historical levels of customer involvement and technological innovation, especially in areas of focus such

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as China. Additionally, ACE*COMM has significantly reduced other operating expenses such as rent, travel, consulting and professional fees. The result of these cost reduction measures has been a significant decline in the amount of the losses sustained in each of the last three fiscal years. ACE*COMM has also been applying this approach in its proposed acquisition of Intasys Billing Technologies, with immediate measures to reduce overhead, streamline the organization and keep that division operating profitably.

Critical Accounting Policies

ACE*COMM’s significant accounting policies are more fully described in the notes to the financial statements included in its most recent Form 10-K filing. However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations or require the application of significant judgment by our management. The following is a brief discussion of these critical accounting policies:

Revenue Recognition

ACE*COMM derives revenues primarily from products, where a combination of hardware, proprietary licensed software, and services are offered to customers. These products are typically formalized in a multiple element arrangement involving application of existing software capabilities or modification of the underlying software and implementation services. ACE*COMM’s software licenses to end-users generally provide for an initial license fee to use the product in perpetuity.

More frequently, ACE*COMM is entering into multiple element arrangements that do not involve significant modification or customization of the related software. In these instances, ACE*COMM recognizes revenue in accordance with AICPA Statement of Position 97-2, “Software Revenue Recognition,” and allocates revenue to each element of the arrangement based on objective evidence of the element’s fair value based on internal price listings developed by ACE*COMM. Revenue for software licenses in these instances is recognized upon delivery (i.e., transfer of title), when a signed agreement exists, the fee is fixed and determinable, and collection of the resulting receivable is probable. The amount allocated to ACE*COMM’s maintenance contracts is recognized ratably over the term of the respective maintenance period.

In situations when ACE*COMM’s products involve significant modification or customization of software, or when ACE*COMM’s systems integration and product development are essential to the functionality of the software, revenues relating to the software licenses and services are aggregated and the combined revenues are recognized on a percentage-of-completion basis. The hardware revenue on these contracts is recognized upon transfer of title, which generally occurs at the same time the licensed software is delivered. Revenue recognized using the percentage-of-completion method is based on the estimated stage of completion of individual contracts determined on a cost or level of efforts basis.

Our revenue recognition policy takes into consideration the creditworthiness of the customer in determining the probability of collection as a criterion for revenue recognition. The determination of creditworthiness requires the exercise of judgment, which affects our revenue recognition. If a customer is deemed to be not creditworthy, all revenue under arrangements with that customer is recognized only upon receipt of cash. The creditworthiness of such customers is re-assessed on a regular basis and revenue is deferred until cash is received.

Allowance for Bad Debts

The allowance for doubtful accounts is established through a charge to general and administrative expenses. This allowance is for estimated losses resulting from the inability of our customers to make required payments. It is an estimate and is regularly evaluated by us for adequacy by taking into consideration factors such as past experience, credit quality of the customer, age of the receivable balance, individually and in aggregate, and current economic conditions that may affect a customer’s ability to pay. The use of different estimates or assumptions could produce different allowance balances. Our customer base is highly concentrated in the telecommunications and Internet service provider industries. Several of the leading companies in these industries have filed for bankruptcy. In addition, we have experienced delays in receiving payment from certain of our international customers. If collection is not probable at the time the transaction is consummated, we do not recognize revenue until cash collection. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

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Results of Operations

The following table shows the percentage of revenue of certain items from ACE*COMM’s statements of operations:

Three and Six months ended December 31, 2003 compared to Three and Six Months ended December 31, 2002.

Revenue

Revenue for the three months ended December 31, 2003 (“second quarter of fiscal year 2004”) and December 31, 2002, was $2.4 million and $4.1 million, respectively, reflecting a decrease of $1.7 million or 41%. Revenue for the six months ended December 31, 2003 and December 31, 2002 was $4.9 million and $8.2 million, respectively, reflecting a decrease of $3.3 million or 40%.

Revenue growth depends, in part, on the overall demand for the Company’s product-based solutions. Because ACE*COMM’s sales are primarily to telecommunication and Internet service providers and enterprises, its ability to generate revenue also depends on specific conditions affecting those providers and on general economic conditions. The decrease in revenue during the three and six month periods ended December 31, 2003 from the prior corresponding periods reflects continuing weak industry-specific and general economic conditions negatively impacting demand for the Company’s products and services.

Revenue from sales to telecommunications and Internet service providers decreased 48% from $2.5 million to $1.3 million for the three months ended December 31, 2003, and represented 55.5% of total revenue. Revenue from sales to enterprises decreased 31.3% from $1.6 million to $1.1 million for the three months ended December 31, 2003 and represented approximately 44.3% of total revenue. Revenue from sales to telecommunications and Internet service providers decreased 40% from $4.0 million to $2.4 million for the six months ended December 31, 2003, and represented 49.2% of total revenue. Revenue from sales to enterprises decreased 40.5% from $4.2 million to $2.5 million for the six months ended December 31, 2003 and represented approximately 50.4% of total revenue.

Backlog was $9.1 million as of December 31, 2003, compared to $4.3 million as of June 30, 2003. ACE*COMM defines backlog as future revenue from signed contracts or purchase orders for delivery of hardware and software products and services to be provided to customers generally within one year. ACE*COMM has experienced fluctuations in its backlog at various times. It anticipates that $3.5 million of the backlog at December 31, 2003, will be recognized during fiscal year 2004. Although ACE*COMM believes that its entire backlog consists of firm orders, ACE*COMM’s backlog as of any particular date may not be indicative of actual revenue for any future period because of the possibility of customer changes in delivery schedules and delays inherent in the contracting process.

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Cost of Revenue

ACE*COMM’s cost of revenue consists primarily of direct labor costs, direct material costs and allocable indirect costs. The expenses for services provided by certain alliance partners in connection with the installation and integration of ACE*COMM’s products may also be included.

Cost of revenue was $1.7 million and $1.9 million, respectively, for the three months ended December 31, 2003 and 2002, representing 71.2% and 46.0% of total revenue for each period, respectively. Cost of revenue was $3.3 and $3.6 million, respectively, for the six months ended December 31, 2003 and 2002, representing 67.4% and 44.6% of total revenue for each period, respectively. Cost of revenue decreased $200 thousand, or 10.5%, during the three months ended December 31, 2003, as compared to the prior corresponding period. Cost of revenue decreased $300 thousand, or 8.3%, during the six months ended December 31, 2003, as compared to the prior corresponding period. The decrease in cost is due to a decrease in material costs resulting from reduced hardware sales as a percentage of total sales. The increase in the cost of sales percentage of revenue is the result of fixed costs coupled with the significant decline in sales.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses consist of costs to support ACE*COMM’s sales and administrative functions. Sales expenses consist primarily of salary, commission, travel, trade show, bid and proposal, and other related selling and marketing expenses required to sell ACE*COMM’s product-based solutions to target markets. General and administrative expenses consist of unallocated costs related to information systems infrastructure, facilities, finance and accounting, legal, human resources and corporate management.

SG&A expenses were $2.1 million and $2.0 million, respectively, during the three months ended December 31, 2003 and 2002, representing 86.2% and 49.8% of total revenue for each period, respectively. SG&A expenses were $3.7 million and $4.2 million, respectively, for the six months ended December 31, 2003 as compared to the prior year. SG&A expenses increased $100 thousand or 5% in the three months ended December 31, 2003 as compared to the prior corresponding period. SG&A expenses decreased $500 thousand or 11.9% in the six months ended December 31, 2003 as compared to the prior year. The decreases in SG&A expenses and as a percentage of total revenue, in the six month period as compared to the prior year, were primarily the result of a continuing effort to reduce expenses, including Company and employee initiated reductions in labor costs.

Research and Development Expenses

Research and development (R&D) expenses consist of personnel costs and the associated infrastructure costs required to support the design and development of the Company’s product-based solutions.

Research and development expenses were $92 thousand and $55 thousand during the three months ended December 31, 2003 and 2002, respectively, and represented 3.8%and 1.4% of total revenue for each period, respectively. Research and development expenses were $221 thousand and $93 thousand during the six months ended December 31, 2003 and 2002, respectively, and represented 4.5% and 1.1% of total revenue for each period, respectively. Research and development expenses increased $37 thousand or 67.3% during the three months ended December 31, 2003, as compared to the prior corresponding period. Research and development expenses increased $128 thousand or 137.6% during the six months ended December 31, 2003, as compared to the prior corresponding period. The increases in research and development expenses as a percentage of total revenue, in the current three and six month periods were primarily due to an increase in personnel resources applied to research and development efforts on the Net Plus 6 product. ACE*COMM was selective in approving new projects and, in some instances, discontinued projects that were not related to the development of Convergent MediationTM solutions. We expect that R&D expenses will increase moderately from the current level during the remainder of fiscal year 2004.

Liquidity and Capital Resources

As of December 31 and June 30, 2003, ACE*COMM’s primary sources of liquidity were cash and cash equivalents of $6.6 million and $1.6 million, respectively. Cash and cash equivalents increased by 418.1% from June 30 to December 31, 2003,

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and comprised 52% and 19% of total assets as of December 31 and June 30, 2003, respectively. The increase is due to the cash acquired on a consolidated basis in the merger with i3 Mobile, Inc.

Working capital was $7.8 million at December 31, 2003, as compared to $3.9 million at June 30, 2003. Working capital increased $3.9 million or 100% during the six months ended December 31, 2003, primarily as a result of proceeds from common stock issued related to the i3 Mobile, Inc. merger.

ACE*COMM recognized a net provision for doubtful accounts of $90 thousand and $60 thousand during the six months ended December 31, 2003 and 2002, respectively. At December 31, 2003, approximately 47% of the Company’s billed accounts receivable was older than ninety days and was primarily comprised of international customers. ACE*COMM expects that international telecommunication and internet service providers will continue to take longer to make payments during fiscal 2004.

ACE*COMM’s operating activities used $1.3 million and $1.2 million in cash during the six months ended December 31, 2003 and 2002, respectively due to the net operating loss.

Net cash used for investing activities was $10 thousand and $121 thousand, respectively, during the six months ended December 31, 2003 and 2002. The decrease in cash outflows for investing activities during these periods is due largely to the completion of a Company-wide software upgrade to existing computer equipment.

ACE*COMM’s financing activities generated cash of on a consolidated basis of $6.4 million and $1.4 million during the six months ended December 31, 2003 and 2002, respectively. The positive cash flow from financing activities during the six months ended December 31, 2003 is the result of the merger with i3 Mobile, Inc.

ACE*COMM has the ability to borrow up to $3.5 million under its Loan and Security Agreement (the “Agreement”) with Silicon Valley Bank (the “Bank”). As of December 31, 2003, there were borrowings of $840 thousand outstanding under this Agreement. The amount outstanding bears interest at the Bank’s prime rate plus 2 percent per annum, but no less than 4.75%. As of December 31, 2003, the interest rate being charged to ACE*COMM was 6.75% and available borrowing capacity was $133 thousand. Financial covenants under the Agreement with the Bank require ACE*COMM to maintain a certain minimum tangible net worth and cash balance. As of December 31, 2003 ACE*COMM was not in compliance with these covenants. The Bank has granted the Company a ten day waiver until February 14, 2004. The Company and the Bank are working on new covenants.

ACE*COMM has issued standby letters of credit for security deposits for office space and to guarantee service contracts as summarized in the following table. The letters of credit total approximately $367 thousand at December 31, 2003 with $355 thousand secured under ACE*COMM’s line of credit with the Bank and $12 thousand secured with a certificate of deposit.

Under the terms of its office lease, ACE*COMM maintains a letter of credit which names the landlord as the sole beneficiary and which may be drawn on by the landlord in the event of a monetary default by ACE*COMM. The letter of credit required under the lease for the majority of fiscal year 2004 is $135 thousand and decreases annually through fiscal year 2008 to $92 thousand. As of the date of this filing, ACE*COMM was not subject to any draw against this letter of credit by the landlord.

ACE*COMM maintains a letter of credit per the lease terms for its Canadian office. This letter of credit also names the landlord as the sole beneficiary and may be drawn on by the landlord in the event of a monetary default by ACE*COMM. The letter of credit required is $28 thousand for the life of the lease through June 30, 2006. As of the date of this filing, ACE*COMM was not subject to any draw against this letter of credit by the landlord.

ACE*COMM also maintains customer related letters of credit to support specific terms and conditions of customer orders.

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ACE*COMM is continuing to manage its expenses to conserve cash and maintain adequate liquidity. It has no significant commitments for capital expenditures at December 31, 2003. ACE*COMM believes that existing consolidated cash balances reflecting completion of the i3 Mobile merger, cash flow from operations, and the availability of credit under its agreement with the Bank will support ACE*COMM’s working capital requirements for the next twelve months, based on ACE*COMM’s current expectations as to anticipated revenue, expenses and cash flow.

The following table summarizes contractual obligations and commitments as of December 31, 2003:

Additional Factors Affecting Future Operating Results

This quarterly report on Form 10-Q and the other documents we file with the SEC contain forward looking statements that are based on current expectations, estimates, forecasts and projections about the industries to which we supply solutions and in which we operate, our beliefs and our management’s assumptions. In addition, other written or oral statements that constitute forward-looking statements may be made by or on behalf of us. Words such as ‘expects,’ ‘anticipates,’ ‘targets,’ ‘goals,’ ‘projects,’ ‘intends,’ ‘believes,’ ‘seeks,’ ‘estimates,’ variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have the intention or obligation to update publicly any forward-looking statements after the distribution of this Report on Form 10-Q, whether as a result of new information, future events, changes in assumptions, or otherwise.

The following items are representative of the risks, uncertainties and assumptions that could affect the outcome of the forward-looking statements.

Because of our reliance on significant customers and large orders, any failure to obtain a sufficient number of large contracts could have a material adverse effect on our revenues for one or more periods

A significant portion of our revenue comes from large financial commitments by a small number of customers, including both telecommunications carriers and large enterprises. We expect to continue to depend on a limited number of customers in any given period for a significant portion of our revenue and, in turn, to be dependent on their continuing success and positive financial results and condition. If we fail to continue to receive orders from such customers, or if any one or more of these customers suffers a downturn, our financial results will suffer.

     Unless economic conditions improve, our results of operations may not return to prior levels

The current economic environment remains volatile. If the current uncertainty and negativity in the economic climate in the U.S. and the rest of the world continues, our customers — and our business and financial results — will continue to be adversely affected.

     The adverse conditions in the telecommunications industry are materially and adversely affecting us

Our business and financial results are highly dependent on the telecommunications industry and the capital spending of our customers. Over the past three years capital spending by telecommunication companies has decreased and may continue to decrease in the near future. Various reports have attributed the decrease in spending to the decline in the telecommunications industry in particular and economic conditions in general. Telecommunications products and services have increasingly becoming commodities that cannot easily be distinguished with intense competition in the development of new technology or other features and increasing competition from smaller but rapidly developing alternative carriers. The reduction of spending by companies in the telecommunication industries has caused, and may continue to cause, a significant reduction in ACE*COMM’s revenues.

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     Continuing market consolidation may reduce the number of potential customers for our products

The North American communications industry has experienced significant consolidation. In the future, there may be fewer potential customers requiring operations support systems and related services, increasing the level of competition in the industry. In addition, larger, consolidated communication companies have strengthened their purchasing power, which could create a decline in our pricing structure and a decrease of the margins we can realize. These larger consolidated companies are also striving to streamline their operations by combining different communications systems and the related operations support systems into one system, reducing the number of vendors needed. The continuing industry consolidation may cause ACE*COMM to lose more customers, which would have a material adverse effect on ACE*COMM’s business, financial condition and results of operations.

     Unless we continue to maintain existing strategic alliances and develop new ones, our sales will suffer

Our results could suffer further if we are unable to maintain existing and develop additional strategic alliances with leading companies that provide telecommunications services or that manufacture and market network equipment. If we are not able to maintain or develop these strategic alliances, we will not be able to expand our distribution channels and provide additional exposure for our product offerings. These relationships can take significant periods of time and work to develop, and may require the development of additional products or features or the offering of support services we do not presently offer.

     Many of our telecommunications customers involve credit risks for us

Many of our customers present potential credit risks, and we are dependent on a small number of major customers. The majority of our customers are in the telecommunication services industry and government sector, or are in the early stages of development when financial resources may be limited. Seven customers represented 60% of ACE*COMM’s gross trade receivables balance as of December 31, 2003, with one international customer representing 34% of ACE*COMM’s gross trade receivables balance as of December 31, 2003. Because we depend on a small number of major customers, and many of our customers present potential credit risks for different reasons, our results of operations could be adversely affected by non-payment or slow-payment of receivables. We have also experienced significant losses for doubtful accounts. For a more detailed discussion of doubtful accounts please read the section labeled “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Allowance for Bad Debts”.

We are increasingly subject to the risks and costs of international sales, and failure to manage these risks would have an adverse effect on us

A substantial portion of our revenues are derived from international sales and are therefore subject to the risks of conducting business overseas, including the general economic conditions in each country, the overlap of different tax structures, the difficulty in managing resources in various countries, changes in regulatory requirements, compliance with a variety of foreign laws and regulations, and longer payment cycles. ACE*COMM derived approximately $7.7 million, or about 56% of its total revenue, from customers outside of the United States for fiscal year 2003 and approximately $1.6 million or about 33% for the first six months of 2004. To the extent that we have increased our international revenue sources over the last three years, the impact of the risks related to international sales could have an increasing larger effect on our financial condition as a whole.

     Failure to manage risks of potential acquisitions would have an adverse effect on us

We intend to investigate and pursue potential business combinations as one of the ways of growing our business during a difficult period. However, acquisitions must be conducted very carefully or there can be adverse consequences. In particular, failure to identify risks of potential acquisition targets or inability to correctly evaluate costs of combining business or technologies could cost us significant resources, dilution to our stockholders or loss of valuable time.

Failure to estimate accurately the resources necessary to complete fixed-price contracts would have an adverse effect on our bottom line

Our failure to accurately estimate the resources required for a project or a failure to complete contractual obligations in a manner consistent with the projected plan may result in lower than expected project margins or project losses, which would negatively impact operating results. Our sales are typically formalized in agreements that include customization of the

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underlying software and services. These agreements require projections related to allocation of employees and other resources. Additionally, we may fix the price of an arrangement before the final requirements are finalized. On occasion, we have and may be required in the future to commit unanticipated additional resources to complete projects, and the estimated fixed price may not include this unanticipated increase of resources. If our original projections are not met, project losses may occur that would have a negative impact on our operating results.

Inability to forecast revenue accurately may result in costs that are out of line with revenues, leading either to additional losses or downsizing that may not have been necessary

We may not be able to accurately forecast the timing of our revenue recognition due to the difficulty of anticipating compliance with the accounting requirements for revenue recognition and to the fact that we historically have generated a disproportionate amount of our operating revenues toward the end of each quarter. Our operating results historically have varied from fiscal period to fiscal period. Accordingly, our financial results in any particular fiscal period are not necessarily indicative of results for future periods.

Item 3. Quantitative and Qualitative Disclosures about Market Risk
None

Item 4. Controls and Procedures

ACE*COMM’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of ACE*COMM’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) (the “Exchange Act”) as of the end of the period covered by this report. Based upon that evaluation, ACE*COMM’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that ACE*COMM’s disclosure controls and procedures are effective in timely alerting them to any material information relating to ACE*COMM and its subsidiaries required to be included in ACE*COMM’s Exchange Act filings.

There were no significant changes in ACE*COMM’s internal controls over financial reporting during the fiscal year that materially affected, or are reasonably likely to materially affect, ACE*COMM’s internal controls over financial reporting.

PART II: OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits
Exhibit 31.1		Certification of Chief Executive Officer
Exhibit 31.2		Certification of Chief Financial Officer
Exhibit 32		Certifications Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

				ACE*COMM CORPORATION
DATE February 10, 2004		By		/s/George T. Jimenez
				George T. Jimenez
				Chief Executive Officer
				/s/Steven R. Delmar
				Steven R. Delmar
				Chief Financial Officer
				(Principal Financial Officer)