As filed with the Securities and Exchange Commission on May 5, 2004

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2004

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 [X]  No [ ]

     Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes [ ]  No [X]

The number of shares of Common Stock outstanding as of April 16, 2004 was 13,761,182.

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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 and its consolidated subsidiaries (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.

Loss per Share

The basic net loss per share presented in the accompanying financial statements is computed using weighted average common shares outstanding. Diluted net loss per share generally includes the effect, if dilutive, of potential dilution that could occur if securities or other contracts to issue common stock (e.g. stock options) were exercised and converted to common stock. Because of the reported net losses, the effect of including potentially dilutive securities is anti-dilutive and therefore they have been excluded. If stock options had been included, shares used in the diluted loss per share calculation would have increased by 310 thousand shares.

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 pro forma amounts in the following table. The assumptions included in the fair value calculations for the current quarter and 2003 are expected life of 3 years, interest rate of 2%, expected volatility of 111% and 121%, respectively and dividend yield of 0.

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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):

In the quarter ended March 31, 2004, the Company delivered products pursuant to a contract with a customer in the Middle East. The contract provides for aggregate installment payments totaling $3.9 million to be made over 5 quarters, the first installment of $1.8 million being due on March 31, 2004. In accordance with Statement of Position 97-2, “Software Revenue Recognition,” the Company will recognize revenue only as amounts become due and as such, the Company recognized the initial amount due of $1.8 million as revenue in the third quarter ending March 31, 2004. This amount is included in billed receivables at March 31, 2004. Future installments due in each of the next 4 quarters will be recognized as they become due, assuming no issues related to their collectibility are present.

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 March 31, 2004, approximately 29% of the Company’s billed accounts receivable was older than ninety days and was primarily comprised of international customers who have traditionally taken longer to pay. At December 31, 2003, 47% of the Company’s billed accounts receivable was older than ninety days. The Company recorded a provision for doubtful accounts of $197 thousand and $90 thousand during the nine months ending March 31, 2004 and 2003, respectively. Included in billed receivables at March 31, 2004 are balances due from five international customers comprising 54% of the total balances and one of these customers accounted for 33%.

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NOTE 3 — INVENTORY

Inventory consists of the following (in thousands):

Inventory write-off’s during the nine months ended March 31, 2004 and 2003 were $90 thousand in each period.

NOTE 4 — DEFERRED CONTRACT COSTS

As discussed in Note 2, during the quarter we delivered to a customer in the Middle East a large order that has payment terms that extend beyond one year. The company is deferring the recognition of revenue until the due date of the installment payments in accordance with Statement of Position 97-2. Accordingly we have deferred the related costs associated with the future installment payments and we will recognize revenue and the related costs on the due date of the payment. It is anticipated that all the revenue and expense will be recognized over the next four quarters. We expect to recognize revenue of $780 thousand and expense of $276 thousand during the fourth quarter of fiscal 2004 based on the installment payments due date.

NOTE 5 — STOCKHOLDERS’ EQUITY

During the nine months ended March 31, 2004, the Company issued 33,528 shares of common stock under the Employee Stock Purchase Plan, 17,383 shares of common stock from the exercise of stock warrants, 139,905 shares of common stock through the exercise of stock options issued under the Omnibus Stock Plan and 3,774,406 shares in conjunction with the merger with i3 Mobile, Inc.

The foreign currency translation charge results from the timing difference of the translation of transactions between the United Kingdom, Australia, Canada and the United States.

NOTE 6 — MERGERS AND ACQUISITIONS

On December 5, 2003, 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. ACE*COMM accounted for the Merger as a financing transaction and recorded the issuance of its common stock at the negotiated value and i3 Mobile’s cash on hand net of 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 Non-monetary Transaction Involves Receipt of Productive Assets of a Business. As such, no goodwill resulted from this transaction.

On February 12, 2004, ACE*COMM completed its previously announced acquisition of the operations support systems solutions business assets of Intasys from Mamma.com, Inc. pursuant to an Asset Purchase Agreement by and among ACE*COMM, Mamma.com and certain subsidiaries of ACE*COMM and Mamma.com dated January 27, 2004, as amended. This acquisition was accounted for as a purchase and, as such, the accompanying financial statements include the results of operations from the acquisition date forward. The Company paid $2.0 million for the purchase of the intellectual property (including in process research and development), customers, fixed assets and transaction related expenses for Intasys. There is an additional $250 thousand of consideration to be paid based upon certain earn out provisions of the asset purchase agreement to be determined over the next year.

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In accordance with FAS 141, the Company allocated the purchase price of the Intasys assets as follows (in thousands):

The tax benefits associated with the future tax deductions associated with this acquisition have been fully reserved due to doubt as to whether they will be realized. Upon release of the valuation allowance associated with these tax benefits in the future, the related tax benefit will be applied first against recorded intangible assets.

NOTE 7 — INCOME TAXES

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

NOTE 8 — SEGMENT INFORMATION

The Company is managed as one segment and results are measured based on revenue type and not business unit. However, we do not measure operating profit by revenue source. The following table reflects revenues by type and geographic location:

The Company purchased the OSS assets of Intasys in February 2004, accordingly, the results of Intasys’s OSS revenues have been included for the first time in the Company’s results of operations for approximately one-half of the most recent quarter.

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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 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™ and Operations Support Systems 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 acquisition of the assets of Intasys Billing Technologies in the quarter ending March 31, 2004, ACE*COMM now offers Intasys’ line of wireless OSS products and has commenced 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.

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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 March 31, 2004, ACE*COMM had four customers generating $150,000 or more in revenue during the period (“Major Customers”) representing approximately 52.3% of total revenue. ACE*COMM’s largest customer during the three months ended March 31, 2004 was GIZA Systems whose purchases represented approximately 38% of total revenue. During the three months ended March 31, 2003, ACE*COMM had five Major Customers representing approximately 58% of total revenue. ACE*COMM’s largest customer during the three months ended March 31, 2003 was Siemens AG representing approximately 17% of total revenue. The average revenue earned per Major Customer was $641 thousand and $277 thousand, respectively, for the three months ended March 31, 2004 and 2003.

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. The recent acquisition of i3 Mobile and the purchase of the assets of Intasys are results of this strategy During the past three fiscal years and first nine 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. 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 Mediation™ solutions outside of North America and to acquire revenues by expanding its customer base and product offerings through acquisition. During the current quarter, ACE*COMM increased its revenues from outside of North America, in particular from the Middle East and Europe as a result of a previously announced order from Telecom Egypt and the purchase of the assets of Intasys. Results of the quarter showed significant revenue and results of operations improvement excluding the one time charge for in process research and development.

We expect continued improvement in revenues and results of operations in our fourth quarter as a result of the inclusion of revenues from Intasys for a full quarter and the future revenues generated by the order from Telecom Egypt. ACE*COMM will continue on its strategic long term plans to increase its revenue through acquisitions.

On December 5, 2003, 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. ACE*COMM accounted for the Merger as a financing transaction and recorded the issuance of its common stock at the negotiated value and i3 Mobile’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 Non-monetary Transaction Involves Receipt of Productive Assets of a Business. As such, no goodwill resulted from this transaction.

On February 12, 2004, ACE*COMM completed its previously announced acquisition of the operations support systems solutions business assets of Intasys from Mamma.com, Inc. pursuant to an Asset Purchase Agreement dated January 27, 2004. The Company paid $2.0 million for the purchase of the intellectual property, customers, fixed assets and transaction related expenses for Intasys. There is up to an additional $250 thousand of consideration to be paid based upon certain earn out provisions of the asset purchase agreement to be determined over the next year.

In accordance with FAS 142, the Company has allocated the purchase price based on an economic valuation of the purchased assets. Based upon this valuation, we have recorded an intangible asset of $845 thousand which will be amortized over sixty months related to the purchased customers and technology of Intasys. Additionally, we have taken a charge of $1.2 million in the current quarter associated with the purchase of in process research and development.

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.

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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.

Operational Support Systems revenue is recognized on a monthly basis based upon the number of telephone subscribers of our customers.

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.

When our contracts contain extended payment terms, we defer recognition of revenue until amounts become due pursuant to payment schedules. We correspondingly defer a proportionate amount of contract cost which will be matched against the deferred revenue when recognized. Should management make the determination that previously deferred revenue will not be recognized, the corresponding amount of deferred contract cost will be charged to expense at that time.

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 Nine months ended March 31, 2004 compared to Three and Nine Months ended March 31, 2003. The above reflects the results of operations from the purchase of the Intasys OSS assets in February 2004. Previous periods do not include the revenue of Intasys.

Revenue

Revenue for the three months ended March 31, 2004 (“third quarter of fiscal year 2004”) and March 31, 2003, was $4.8 million and $2.4 million, respectively, reflecting an increase of $2.4 million or 100%. Revenue for the nine months ended March 31, 2004 and March 31, 2003 was $9.7 million and $10.5 million, respectively, reflecting a decrease of $.8 million or 8%.

Revenue growth depends, in part, on the overall demand for the Company’s product-based solutions and on sales to large customers. 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 nine months ended March 31, 2004 as compared to the prior period reflects continuing weak industry-specific and general economic conditions negatively impacting demand for the Company’s products and services, primarily in North America. The increase for the most recent three month period as compared to the corresponding period last year reflects sales under a large contract with a customer in the Middle East of $1.8 million and revenues from the Intasys OSS business acquired in mid-February of $957 thousand.

Revenue from sales to telecommunications and Internet service providers increased 131% from $1.3 million to $3.0 million for the three months ended March 31, 2004, and represented 62% of total revenue. The increase in revenue during the three months ended March 31, 2004 results from the revenues from the delivery to Telecom Egypt. Revenue from sales to telecommunications and Internet service providers decreased 26% from $7.3 million to $5.4 million for the nine months ended March 31, 2004 and represented 55% of total revenue. The decline is primarily the result of a decline in orders due to reduced demand in North America and China.

Revenue from sales to enterprises decreased 23.5% from $1.1 million to 891 thousand for the three months ended March 31, 2004 and represented approximately 18% of total revenue. Revenues declined during the quarter primarily as a result of a continued decline in purchases from two of the Company’s primary customers and reduced demand, reflecting continuing weak conditions in the telecommunications sector. Revenue from sales to enterprises decreased 47.7% from $6.5 million to $3.4 million for the nine months ended March 31, 2004 and represented approximately 34.5% of total revenue. The decline in

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revenues is primarily the result of the decline in revenues from the U.S. Army and the U.S. Air Force as they approach the end of their purchases under our existing contracts.

Revenue from sales of Operations Support Systems was $973 thousand for the three months ended March 31, 2004 due to the purchase of the assets from Intasys in February 2004, and represents 20% of total revenue.

Backlog was $10.4 million, including $2.6 related to the asset purchase from Intasys, as of March 31, 2004, 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 $2.9 million of the backlog at March 31, 2004, 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.

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 $2.1 million for the three months ended March 31, 2004 and 2003 representing 44.1% and 89.0% of total revenue for each period, respectively. The decrease in the cost of sales as a percentage of revenue is primarily the result of fixed costs being spread out over an increase in sales during the quarter. Cost of revenue was $5.4 and $5.8 million, respectively, for the nine months ended March 31, 2004 and 2003, representing 55.8% and 54.6% of total revenue for each period, respectively.

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 $2.5 million and $2.0 million, respectively, during the three months ended March 31, 2004 and 2003, representing 52.3% and 84.3% of total revenue for each period. The decrease as a percentage of revenue results from increased sales during the quarter while continuing to effectively monitor and control expenses. The increase of $500 thousand was primarily the result of the inclusion of SG&A expenses associated with the purchased assets of Intasys which included on going selling, general and administrative activities. SG&A expenses were $6.4 million and $6.2 million, respectively, for the nine months ended March 31, 2004 as compared to the prior year and increased $200 thousand or 3.2%. The increase was primarily the result of the operations purchased from Intasys, offset by continued efforts to reduce expenses.

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 $400 thousand and $108 thousand during the three months ended March 31, 2004 and 2003, respectively, and represented 8.3% and 4.6% of total revenue for each period, respectively. Research and development expenses were $621 thousand and $201 thousand during the nine months ended March 31, 2004 and 2003, respectively, and represented 6.4% and 1.9% of total revenue for each period, respectively. Research and development expenses increased $292 thousand or 270% during the three months ended March 31, 2004, as compared to the prior corresponding period. Research and development expenses increased $420 thousand or 209% during the nine ended March 31, 2004, 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 nine month periods were primarily due to the purchase of Intasys and their corresponding research and development expenses which amounted to approximately $300,000 since the acquisition date.

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During the next several quarters, these expenses are expected to continue at or above the current levels as we complete the development of the Intasys product, expand development of ACE*COMM products and integrate the new products into our product lines.

Liquidity and Capital Resources

As of March 31, 2004 and June 30, 2003, ACE*COMM’s primary sources of liquidity were cash and cash equivalents of $4.5 million and $1.6 million, respectively. Cash and cash equivalents increased by 181% from June 30, 2003 to March 31, 2004, and comprised 33% and 19% of total assets as of March 31, 2004 and June 30, 2003, respectively. The net increase is due to the cash acquired on a consolidated basis in the merger with i3 Mobile, Inc. less the cash used to purchase the assets of Intasys. Working capital was $5.5 million at March 31, 2004, as compared to $3.9 million at June 30, 2003. Working capital increased $1.6 million or 41% during the nine months ended March 31, 2004, primarily as a result of proceeds from common stock issued related to the i3 Mobile, Inc. merger netted with the costs of acquiring the assets of Intasys and their operating results, and deferred contract costs.

ACE*COMM recognized a net provision for doubtful accounts of $197 thousand and $90 thousand during the nine months ending March 31, 2004 and 2003, respectively. At March 31, 2004, approximately 29% of the Company’s billed accounts receivable was older than ninety days and was primarily comprised of international customers. One international customer comprised 29% of the Company’s accounts receivable at March 31, 2004. This customer is an existing customer of the Company and the entire amount due is current. Additionally, accounts receivable from the asset purchase of Intasys resulted in a larger than normal accounts receivable balance due to the timing of the purchase within the quarter. 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 $3.0 million and $2.2 million in cash during the nine months ended March 31, 2004 and 2003, respectively due to the net operating loss and the purchase of the assets of Intasys. Cash declined $2.1 million from the previous quarter as we purchased the assets of Intasys and we purchased materials associated with the order for Telecom Egypt. These purchases were offset by collections in accounts receivable.

Net cash used for investing activities was $1,063 thousand and $64 thousand, respectively, during the nine months ended March 31, 2004 and 2003. The increase in cash outflows for investing activities during these periods is due to the purchase of assets related to Intasys, including $845 thousand for contract value and $130 thousand for fixed assets.

ACE*COMM’s financing activities generated cash of on a consolidated basis of $7.0 million and $1.4 million during the nine months ended March 31, 2004 and 2003, respectively. The positive cash flow from financing activities during the nine months ended March 31, 2004 is the result of the merger with i3 Mobile, Inc which was accounted for as a financing.

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 March 31, 2004, there were borrowings of $1.425 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 March 31, 2004, the interest rate being charged to ACE*COMM was 6.75% and available borrowing capacity was $364 thousand. During the quarter, the Bank and the Company agreed to new covenants and amended its borrowing agreement. Financial covenants under the Agreement with the Bank require ACE*COMM to maintain certain minimum income from operations and cash balance. This agreement expires on August 10, 2004. As of March 31, 2004 ACE*COMM was in compliance with these covenants.

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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 $334 thousand at March 31, 2004 with $223 thousand secured under ACE*COMM’s line of credit with the Bank and $111 thousand secured with certificates 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.

ACE*COMM is continuing to manage its expenses to conserve cash and maintain adequate liquidity. It has no significant commitments for capital expenditures at March 31, 2004. 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 March 31, 2004 which includes the commitments associated with the asset purchase of Intasys:

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.

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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.

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. Six customers represented 62% of ACE*COMM’s gross trade receivables balance as of March 31, 2004, with five international customers representing 57% of ACE*COMM’s gross trade receivables balance as of March 31, 2004. 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”.

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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 $5.2 million or about 53% for the first nine 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 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.

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PART II: OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

(b)		Reports on Form 8-K
		During the period covered by this report, ACE*COMM filed the following reports on Form 8-K:

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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.

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