<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K

  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                  ACT OF 1934
                    FOR THE FISCAL YEAR ENDED JUNE 30, 1999

                                       OR

  [ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                         COMMISSION FILE NUMBER 0-21059

                              ACE*COMM CORPORATION
             (Exact name of registrant as specified in its charter)

<TABLE>
                    <S>                                                                                   <C>
                                               Maryland                                                           52-1283030
                    (State or other jurisdiction of incorporation or organization)                        (I.R.S. Employer I.D. No.)
                                       704 Quince Orchard Road
                                     Gaithersburg, Maryland 20878                                                   20878
                               (Address of principal executive offices)                                           (Zip Code)
</TABLE>

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

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

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

                                  Common Stock
                                 $.01 par value
                                (Title of class)

     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 requirement for the past 90 days.
YES |X|        NO [ ]

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

     As of August 31, 1999 the aggregate market value of the voting stock held
by non-affiliates of the registrant (i.e. persons who are not directors,
officers or affiliated therewith) was approximately $20,927,795 (4,783,496
shares of Common Stock at a closing price on the NASDAQ National Market of
$4.375 on such date). Outstanding as of August 31, 1999 were 8,882,818 shares of
Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Registrant's definitive Proxy Statement for its annual
meeting to be held on November 18, 1999 are incorporated by reference in Part
III.


                                      -1-
<PAGE>   2
                              ACE*COMM CORPORATION

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>           <C>                                                           <C>
                                     PART I
Item 1.       BUSINESS                                                        3

Item 2.       PROPERTIES                                                      9

Item 3.       LEGAL PROCEEDINGS                                               9

Item 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS             9

Item 4A.      EXECUTIVE OFFICERS OF THE REGISTRANT                            9

                                     PART II
Item 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
              STOCKHOLDER MATTERS                                             10

Item 6.       SELECTED FINANCIAL DATA                                         12

Item 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS                             14

Item 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                     21

Item 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
              ON ACCOUNTING AND FINANCIAL DISCLOSURE                          21

                                    PART III
Item 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT              21

Item 11.      EXECUTIVE COMPENSATION                                          21

Item 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
              AND MANAGEMENT                                                  21

Item 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                  22

                                     PART IV
Item 14.      EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
              FORM 8-K                                                        22
</TABLE>


                                      -2-
<PAGE>   3
                                     PART I

ITEM 1.    BUSINESS

     This Report contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
investors should specifically consider the various factors identified in this
Report which could cause actual results to differ materially from those
indicated by such forward-looking statements, including the matters set forth in
"Selected Financial Data", "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Additional Factors Affecting Future
Operating Results" and "--Year 2000".

GENERAL BUSINESS DEVELOPMENT

     ACE*COMM(R), incorporated in Maryland in 1983, develops, markets and
services Operations Support System ("OSS") hardware and software solutions for
data and voice networks operated by post, telephone and telegraph companies
("PTTs"), incumbent and competitive local exchange carriers ("CLEC"), national
and international long distance carriers, wireless carriers, Next Generation
Networks (NGN), and large enterprises operating internal networks. The Company's
product based solutions perform billing data collection and mediation, wholesale
billing, subscriber billing and customer care, network surveillance, alarm
processing and network traffic and business management functions. The Company's
fiscal year ends on June 30. Unless otherwise noted, all references to years in
this document are assumed to be fiscal.

PRODUCTS, SERVICES AND DISTRIBUTION

     Data Collection and Convergent Mediation

     The Company offers several products and solutions for the collection,
mediation and analysis and presentation of call data derived from networks
ranging from voice circuit switched networks, through data networks based on
X.25, frame relay, and Asynchronous Transfer Mode (ATM), to traditional switched
networks and the NGNs based on the Internet Protocol (IP). This collection of
capabilities is referred to as Convergent Mediation.

     DCMS(R) - DCMS, Distributed Call Measurement System, is a hardware and
software based microprocessor controlled product which collects call record data
from telephone switches and other network elements and electronically transmits
the data to a central location. The data is processed for such purposes as
billing, business analysis, traffic analysis and fraud management. The DCMS
eliminates magnetic tape storage units and manual data collection, reduces
processing costs, increases the accuracy of billing data and in turn, increases
revenue. A recent version of DCMS is called the Network Element Data Server
("NEDS") which provides the data on a real-time basis. The DCMS*PLUS(R) version
of DCMS is based on a low-cost technology platform and is targeted at carriers
in emerging economy countries. The new DCMS*POWER, based on PowerPC technology,
is used for IP collection and mediation as well as for other high-speed
protocols, These products can be adapted to support virtually all wireline and
wireless telephone switches.

     N*USAGE - N*USAGE is a software product data collection platform that
enables service providers who operate data networks, including X.25, frame relay
and IP, to collect billing data and charge their customers on a usage-sensitive
basis. N*USAGE includes a data collection front-end and a core processing engine
which also acts as a mediation platform. The front-end captures the data and
secures it on disk, verifies it then converts it to a normalized format. The
core processing engine then aggregates the billing and statistical data,
augments any external information and correlates and reformats the final data
before distributing it to billing, customer care or network management systems.
As more IP, ATM and frame relay network elements are incorporated into carrier
and enterprise networks, it will become increasingly important for network
operators to be able to bill customers based on actual usage.

     UPS-32(R) - UPS-32, Universal Polling System-32, is a software product
designed to control the collection and transmission and mediation of call detail
records transmitted by multiple DCMS units and similar equipment of other


                                      -3-
<PAGE>   4
vendors. UPS-32 collects call data from dispersed network element sites,
processes and formats the data on a customer-defined schedule, and distributes
the data to the customer's billing and/or operations center. The CANS(R),
Central Access Network Server version of UPS-32 collects, mediates, and
distributes network data in real time. The real-time collection and mediation of
network data by NEDS and CANS is increasingly important in NGNs.

     CDReZ is a new software package that assists telecommunications service
providers in managing their billing network data flow. It supports customer
service and provides data used in customer relationship management (CRM). CDReZ
is a fully data independent, flexible, user-defined tool used to pre-process
billing data before distributing the data to downstream OSS.

     Provisioning Gateway (APG) is a service activation gateway that can be used
by any Billing, Customer Care or Service Management system to activate and
manage subscribers and the services they use on multi-service networks. APG can
support multiple service providers sharing the same multi-service network.
Network interfaces can be adapted or created for any type of network element.
The addition of the APG, a message-oriented mediation solution, to both file and
real-time flow based mediation solutions adds another dimension of convergence
to our mediation product offerings.

     TREX*COMM(R) - TREX*COMM is a software based solution designed for local
exchange carriers who use carrier network facilities to provide customer
premises voice and data communication services for business customers, under a
service concept called CENTREX. TREX*COMM collects CENTREX call usage data from
remote switch sites and transfers it to the customers' data collection
equipment. Records can then be sorted by customer codes, group codes, or other
identifying data fields. Using standard protocols, customers can access the
TREX*COMM system to retrieve their data. Running on UNIX platforms and used in
conjunction with a data collection product, such as the DCMS, TREX*COMM makes
network information available to CENTREX subscribers to enable them to manage
and control their telecommunications costs.

     Data Warehousing and Business Support Systems

     N*VISION(TM) - N*VISION, the successor to the Company's RTMS(R), Real Time
Management System, was originally developed for use by international and long
distance carriers. N*VISION monitors network data in real-time and provides,
from a single database, information for subscriber and wholesale billing,
carrier settlements, fraud detection, subscriber management and network
management. The heart of N*VISION is a very large and flexible data warehouse.
N*VISION operates directly connected to network elements or employs the
Company's NEDS units to capture call records in real-time from remote network
elements. N*VISION processing software presents the data for analysis within
seconds of call completion through the use of a user-friendly Graphical User
Interface. N*Vision is increasingly used to collect, mediate, store, and process
data from NGNs utilizing ATM and IP technology.

     Surveillance, Alarm and Traffic Reporting

     ANMS(R) - ANMS, AMAT Network Management System, monitors the elements of a
billing network. ANMS is a software product that collects and reports on alarms
sent by DCMSs, UPS-32s and many other network components of the billing system
to assure that no billing data is lost or duplicated. In addition, ANMS serves
as a user interface and collects system logs from the network elements.

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


                                      -4-
<PAGE>   5
     Enterprise Network Management

     NetPlus(R) Voice and Data Network Management System - NetPlus is a family
of network management solutions consisting of five systems designed to automate
network operations and management functions for circuit-switched and IP-based
networks. These systems employ a network architecture and common database that
permit them to operate either independently or as an integrated whole. NetPlus
products are scaleable, providing flexibility to accommodate a broad range of
network sizes and multiple locations. The Company typically provides NetPlus
products as fully integrated hardware and software configurations. These systems
are intended to manage private voice and data networks for 1,000 to 50,000
users. These systems allow a network to automate tasks such as alarm processing,
connectivity tracking, automatic cable and channel assignment, creation of
subscriber and circuit records, inventory control, traffic surveillance and
management, work order and trouble ticket processing, directory assistance and
subscriber billing.

     Billing and Customer Care

     NetPlus PRO*VISION - NetPlus PRO*VISION is an integrated suite of software
applications that addresses the billing, customer care and OSS requirements of
new and emerging carriers. NetPlus PRO*VISION is an advanced, convergent (voice,
data, cable, long distance, etc.) management offering that performs automated,
integrated customer management, operations support and network maintenance
functions. NetPlus PRO*VISION consists of three major subsystems, employing a
network architecture and common database that permit them to operate
independently or as an integrated product. Support is offered for both
circuit-switched and IP-based network topologies. The product is continually
enhanced, through tailoring to specific customer needs. NetPlus PRO*VISION is
licensed for operation by network service providers and is operated in
ACE*COMM's data processing center to provide service bureau and outsource
services.

SERVICES

     The Company is increasingly asked to provide services to customers which
might involve the development of new products from funded customer research, or
adapt existing ACE*COMM products to the customer's specialized needs. In these
instances, the products of the Company may serve as a total or partial basis for
the customer requirements. Apart from custom product development, the Company
provides consulting, systems integration, facilities management, outsourcing,
service bureau, and a variety of on-going support services such as training and
installation. These service offerings allow a customer to choose the level of
technical and development involvement they want to take on internally, as
compared to the level that they want to outsource to ACE*COMM. It also allows
the customer to have an ongoing source of knowledge for future support and
developmental needs.

QUALITY

     The Company maintains an ISO 9000 standard Quality Management Program to
monitor the quality of its offerings and has an internal Quality Management
Committee to set quality objectives for the Company and a Quality Assurance
Department to implement and monitor compliance with the applicable procedures.

SALES AND MARKETING

     The Company sells product based solutions through direct sales and through
the Company's strategic alliance partners. See "Strategic Alliances and Other
Customers." At present, the Company is increasing its sales efforts through more
aggressive sales and marketing strategies. The Company is hiring additional
experienced, direct sales representatives and increasing the number of strategic
alliances by adding non-exclusive third party distribution channels and
alliances with new carriers, communications equipment manufacturers, computer
equipment manufacturers, software developers and telecom consultants, to market
the Company's products.

     The sales process for new contracts generally requires a significant
investment of time and money and takes from several months to several years.
This process involves senior executives, sales representatives and support
personnel and typically requires presentations, demonstrations, field trials,
and lengthy negotiations. The Company


                                      -5-
<PAGE>   6
spends significant time consulting with strategic partners and end users to
adapt its products to meet end user requirements. Through ongoing sales,
maintenance, training and systems analysis, the Company maintains contact with
its partners and end users to determine their evolving requirements for updates
and enhancements. Through these processes, the Company gains valuable industry
expertise, as well as the ability to identify emerging industry applications and
new sales opportunities.

STRATEGIC ALLIANCES

     To develop, market and distribute its product solutions effectively, the
Company has established strategic alliances with several large organizations:
Telecom equipment manufacturers, computer equipment manufacturers, telecom
systems integrators and other organizations (the "strategic alliance partners"
or "partners") to which the Company sells product and solutions for use by them
or their customers. The Company sells its products, systems and services through
direct sales and through the Company's strategic alliance partners. In 1999,
sales to strategic alliance partners comprised approximately 36% of revenue.
Each alliance is designed to do one or more of the following: develop products
designed to meet the needs of the partner or its customers, establish a joint
marketing relationship to include Company products in systems sold by the
partner, and create a reseller channel for the Company's products.

     A strategic alliance typically involves a formal agreement between the
Company and the strategic alliance partner, pursuant to which the parties agree
to develop and sell products to the partner for use by the partner, or by its
customers who are in such cases the end users of the Company's products. Each
agreement specifies the terms of the alliance, which may include parameters for
product development and product specifications, product pricing, the terms of
intellectual property ownership, and the responsibilities of each partner for
system integration, proposal drafting, sales and marketing. Once the products
are developed, the strategic alliance partner will issue specific orders to the
Company from time to time to purchase products, subject to the terms of the
overall agreement. The products are purchased and paid for by the partner either
for its own use or for resale to its customers directly or as part of a larger
system installation. Sales to a strategic alliance partner may vary from period
to period, depending on the timing of orders, which in turn may depend on a
number of factors, including the completion of the Company's product
development, the partner's marketing and sales efforts to its customers, the
timing of orders from the partner's customers, and various internal financial,
strategic and other factors specific to a partner or any of its customers.
Accordingly, sales to a partner in one period are not necessarily predictive of
sales to the partner in future periods.

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

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

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

-    GENERAL DYNAMICS GOVERNMENT SYSTEMS CORPORATION WORLDWIDE TELECOMMUNICATION
     ("GENERAL DYNAMICS GOVERNMENT SYSTEMS") - provides telephone systems at
     military facilities throughout the world. The Company, as a subcontractor
     to General Dynamics Government Systems for network management products,
     installs and supports NetPlus products at multiple military facilities.

-    SAMSUNG ELECTRONICS COMPANY, LIMITED, LG INFORMATION AND COMMUNICATIONS,
     LIMITED AND ILGIN CORPORATION - formed a consortium ("Korean Consortium")
     to provide a billing data collection system for Korea Telecom, the national
     carrier for the Republic of South Korea. The consortium has purchased
     significant quantities of the Company's products for installation in the
     Korea Telecom network.


                                      -6-
<PAGE>   7
CUSTOMER SUPPORT

     The Company believes that a high level of customer support is critical to
the Company's continuing success in developing relationships with its strategic
partners and end users. The Company offers technical customer support 24 hours
per day, seven days per week. Support is provided via telephone, remote login,
e-mail and, if necessary, on-site assistance. In addition, the Company has
established a World Wide Web site on the Internet to keep customers informed of
product developments. International customers are supported directly by the
Company or by local representatives that have been trained by the Company. These
representatives do not represent the Company exclusively. The Company also
conducts training classes for its strategic partners and other customers.

     The Company typically provides new customers with Customer Support under
warranty for a period ranging from one to 24 months. This can include 24 hour,
seven days per week support, replacement parts, software upgrades, and Year 2000
enhancements, when and if required. The Company also offers various levels of
continuing Customer Support after the initial warranty period expires through
Technical Support Agreements. In addition, the Company provides customers with
support on a time and materials basis.

BACKLOG

     The Company defines backlog as signed contracts or purchase orders for
delivery of hardware and software products and services generally within the
next year. Backlog at June 30, 1999, 1998 and 1997 was approximately $7.3
million, $11.2 million and $7.0 million, respectively. Backlog, as defined, does
not include contracts for hardware and software products which require the
further issuance of purchase orders.

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

COMPETITION

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

     The Company expects the continued growth of the traditional carrier market,
new and emerging carrier market, and the large enterprise network management
market to encourage new competitors to enter the markets in the future. The
Company believes that the principal competitive factors in these markets include
specialized project management capabilities and technical expertise, compliance
with industry quality standards and protocols, customer support, product
features such as adaptability, scaleability and flexibility, ability to
integrate with other products, functionality and ease of use, product
reputation, responsiveness to customer needs, and timeliness of implementation.
In the future, the Company will be required to respond promptly and effectively
to the challenges of technological change and its competitors' innovations.

     In the traditional carrier network products market, the Company's current
and prospective competitors include: (i) large carriers which internally develop
full system products for themselves, tailored to their particular
specifications, (ii) companies, such as Telesciences, Inc. ("TLSI"), Comptel and
CGI, Inc. ("CGI") that can supply individual billing data collection components
and (iii) vendors that supply product components, including Ericcson-Hewlett-
Packard


                                      -7-
<PAGE>   8
     Telecommunications ("EHPT"), IBM Corporation ("IBM"), Moscom Corporation
("Moscom"), Objective System Integrators, Inc. ("OSI") and CGI.

     In the new and emerging carrier market, the Company's current and
prospective competitors include (i) telecom equipment manufacturers that provide
network products such as Lucent and Ericsson, (ii) companies that provide
software applications for carriers, such as Stonehouse & Company ("Stonehouse")
and Metasolv, (iii) vendors that supply product components such as EHPT and IBM,
(iv) companies that provide billing and customer care applications such as Kenan
Systems, Scopus, and Clarify, and (v) companies that develop custom solutions
like AMS, Perot Systems and CSC.

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

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

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

RESEARCH AND PRODUCT DEVELOPMENT

     The Company's research and development efforts are focused on developing
new products to meet the growing needs of customers and on improving existing
products by incorporating new features and technologies. The Company believes
that the timely development of new products and enhancements is essential to
maintaining its competitive position in the marketplace. In its research and
development efforts the Company works closely with customers, end users and
leading technology vendors, in tailoring new features which are subsequently
incorporated into future versions of products available to all customers. The
Company continually reviews opportunities to license technologies from third
parties when appropriate based on timing and cost considerations.

     During the years 1999, 1998 and 1997, independent research and development
expenses were $1.6 million, $2.4 million and $1.5 million, respectively.

PROPRIETARY RIGHTS AND LICENSES

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

     The Company generally enters into confidentiality agreements with its
employees, consultants, customers and potential customers and limits access to,
and distribution of, its proprietary information. Use of the Company's software


                                      -8-
<PAGE>   9
products is usually restricted to specified locations and is subject to terms
and conditions prohibiting unauthorized reproduction or transfer of the software
products. The Company also seeks to protect its software, including the source
code, as a trade secret and as copyrighted work.

EMPLOYEES

     At June 30, 1999, the Company employed a total of 178 employees. None of
the Company's employees are represented by a labor union. The Company has
experienced no work stoppages and believes that its employee relations are good.

ITEM 2. PROPERTIES

     The Company leases space at five office locations: Gaithersburg, Maryland;
Frederick, Maryland, Montreal, Canada; Flemington, New Jersey; and Orlando,
Florida. The Company believes that its facilities are adequate for its current
needs and that suitable additional space will be available as required. The
Gaithersburg offices are the Company's corporate headquarters and are used for
product assembly, software and engineering development, professional services
and support. The following sets forth information concerning the Company's
Gaithersburg facilities:

<TABLE>
<CAPTION>
                                                                       CURRENT
LOCATION                      SQUARE FOOTAGE      LEASE EXPIRATION     ANNUAL RENT
--------                      --------------      ----------------     -------------------------------
<S>                           <C>                 <C>                  <C>
Gaithersburg, Maryland        38,427              November 30, 2003    $653,000 (subject to annual
                                                                       increases of approximately
                                                                       $21,000 and allocated
                                                                       operating costs each year)
</TABLE>


ITEM 3.    LEGAL PROCEEDINGS

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

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Company did not submit any matter to a vote of its security holders
during the fourth quarter of 1999.

ITEM 4A.   EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth the names, ages and positions of the current
executive officers of the Registrant.

<TABLE>
<CAPTION>
NAME                             AGE      POSITION
----                             ---      --------

<S>                              <C>      <C>
George T. Jimenez                63       Chief Executive Officer and Chairman of the Board
Gino O. Picasso                  43       President and Chief Operating Officer
S. Joseph Dorr                   52       Executive Vice President of Business Development
Dr. Thomas V. Russotto           54       Executive Vice President of Technology and Chief Technology Officer
James K. Eckler                  52       Executive Vice President of Finance and Administration
Loretta L. Rivers                42       Corporate Secretary
</TABLE>


                                      -9-
<PAGE>   10
     George T. Jimenez is the Chief Executive Officer of the Company and has
served as Treasurer and a Director of the Company since its inception in 1983.
From 1983 to September 1999, Mr. Jimenez also served as the President of the
Company.

     Gino O. Picasso joined the Company in September 1999 as President and Chief
Operating Officer. Prior to joining the Company and since 1994, Mr. Picasso
served as President of GE Capital Spacenet Service, Inc., a wholly owned
subsidiary of General Electric Company.

     S. Joseph Dorr has been a Vice President of the Company since 1983 and is
currently the Executive Vice President of Business Development. From 1983 to
1989, he also served as Corporate Secretary of the Company. From 1980 to 1983,
he served as Director of the Commercial Systems Division of the Company's
predecessor and from 1983 to 1989 was Director of the Network Management
Division.

     Dr. Thomas V. Russotto has been a Vice President of the Company since 1985
and is currently the Executive Vice President of Technology and Chief Technology
Officer. From 1988 to 1998, Dr. Russotto directed the Carrier Networks Division
and from 1983 to 1985 he served as Director of Product Development at the
Company.

     James K. Eckler joined the Company in October of 1998, and was named the
Executive Vice President of Finance and Administration in January 1999. Prior to
joining the Company, Mr. Eckler served as Interim CFO of a privately held
telecommunications systems integration firm, IMCI Technologies (March 1998 to
September 1998). Prior to that, Mr. Eckler was President of Eckler & Company, a
privately held management consulting firm specializing in electronic commerce,
payment systems, and logistics for global logistics companies (August 1996 to
March 1998). From the fall of 1994 to August 1996 he served as Vice President of
Corporate Development for TNT Logistics, a wholly-owned subsidiary of TNT Ltd.

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

     The term of each executive officer will expire at the next annual meeting
of the Board of Directors, which is scheduled to be held November 18, 1999.

                                     PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER
           MATTERS

COMMON STOCK PRICES

     The following table sets forth for the periods indicated the highest and
lowest bid prices for the shares of common stock reported on the Nasdaq National
Market.

<TABLE>
<CAPTION>
                                                                YEAR ENDED JUNE 30,
                         ---------------------------------------------------------------------------------------------
                                            1999                                             1998
                         --------------------------------------------     --------------------------------------------
                                 HIGH                     LOW                     HIGH                     LOW
                         -------------------     --------------------     -------------------     --------------------

<S>                       <C>                     <C>                     <C>                     <C>
1st Quarter                $        6.13           $        1.38           $        23.88          $        13.38
2nd Quarter                         6.94                    0.81                    24.63                   11.00
3rd Quarter                         8.38                    1.81                    14.38                    5.88
4th Quarter                         4.94                    2.19                     8.88                    5.06
</TABLE>

COMMON STOCKHOLDERS

     As of August 31, 1999, there were 8,882,818 shares outstanding and held by
75 shareholders of record.


                                      -10-
<PAGE>   11
DIVIDENDS

     The Company has never declared or paid cash dividends on the Common Stock.
The Company currently intends to retain earnings, if any, to finance the growth
and development of its business and does not anticipate paying cash dividends in
the foreseeable future. The future payment of cash dividends, if any, is also
within the discretion of the Board of Directors and will depend on the future
earnings, capital requirements, financial condition and future prospects of the
Company and such other factors as the Board of Directors may deem relevant.

PRIVATE PLACEMENTS

On March 31, 1999 the Company sold an aggregate of 4,296 shares of Common Stock
to non-affiliates pursuant to the Company's Employee Stock Purchase Plan, for an
aggregate of $11,411. The Company relied on Section 4 (2) of the Securities Act
of 1933 (the "Act") as an exemption from registration under the Act. The Company
expects to register under the Act the balance of the shares issuable under the
plan.


                                      -11-
<PAGE>   12
ITEM 6.    SELECTED FINANCIAL DATA

            The selected financial data presented below for each of the
Company's years in the five-year period ended June 30, 1999 and as of June 30,
1999, 1998, 1997, 1996, and 1995 are derived from the audited financial
statements of the Company.

<TABLE>
<CAPTION>
                                                                             YEAR ENDED JUNE 30,
                                          -------------------------------------------------------------------------------------
                                              1999               1998              1997            1996                1995
                                          -------------     -------------     -------------    -------------      -------------
                                                                 (IN THOUSANDS EXCEPT PER SHARE DATA)

<S>                                       <C>               <C>               <C>              <C>                <C>
STATEMENT OF OPERATIONS DATA:
Revenue                                   $   29,657        $   22,465        $   33,684       $   19,983         $   12,415
Cost of revenue                               13,765            13,325            17,627           10,836              6,579
                                          -------------     -------------     -------------    -------------      -------------
Gross profit                                  15,892             9,140            16,057            9,147              5,836

Selling, general and administrative           13,046            14,574            11,254            6,751              6,049
Research and development                       1,562             2,358             1,472              957              1,045
Provision for doubtful accounts                  812             2,455                 -                -                  -
                                          -------------     -------------     -------------    -------------      -------------
Income (loss) from operations                    472           (10,247)            3,331            1,439             (1,258)
Interest income                                 (185)             (247)             (347)               -                  -
Interest expense                                  39               117               156              379                335
                                          -------------     -------------     -------------    -------------      -------------

Income (loss) before income taxes                618           (10,117)            3,522            1,060             (1,593)
Income taxes                                       -              (898)              898                -                  -
                                          -------------     -------------     -------------    -------------      -------------
Net income (loss)                         $      618        $   (9,219)       $    2,624       $    1,060         $   (1,593)
                                          =============     =============     =============    =============      =============
Net income (loss) per share:

                Basic                     $       0.07      $    (1.06)       $     0.35       $     0.26         $    (0.53)
                                          =============     =============     =============    =============      =============
                Diluted                   $       0.07      $    (1.06)       $     0.32       $     0.18         $    (0.53)
                                          =============     =============     =============    =============      =============

Number of shares used in computing
net income (loss) per share

                Basic                          8,838             8,708             7,460            3,472              3,279
                                          =============     =============     =============    =============      =============
                Diluted                        8,931             8,708             8,152            5,829              3,279
                                          =============     =============     =============    =============      =============

<CAPTION>
                                                                                  JUNE 30,
                                          ------------------------------------------------------------------------------------
                                              1999              1998              1997             1996               1995
                                          ------------      ------------      ------------     ------------       ------------
                                                                             (IN THOUSANDS)

<S>                                       <C>               <C>               <C>              <C>                <C>
BALANCE SHEET DATA:
Cash and cash equivalents                 $    3,424        $    2,956        $    7,920       $      369         $     190
Working capital (deficit)                      7,959             5,978            17,864            1,897            (1,374)
Total assets                                  18,699            24,593            33,518           14,298             8,293
Total liabilities                              5,220            11,808            11,809           12,187             7,414
Mandatorily redeemable preferred stock             -                 -                 -            2,262             2,122
Stockholders' equity (deficit)                13,479            12,785            21,709             (150)           (1,242)
</TABLE>

The Company paid no dividend on its capital stock during any of the periods
reported above.


                                      -12-
<PAGE>   13
SELECTED QUARTERLY INFORMATION

     The following table presents certain unaudited statement of operations data
for each quarter of 1999 and 1998. These data have been derived from the
Company's unaudited financial statements and have been prepared on the same
basis as the Company's audited financial statements, which appear in this Annual
Report on Form 10-K. In the opinion of the Company's management, these data
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of such data. Such quarterly results are not
necessarily indicative of future results of operations. This information is
qualified by reference to, and should be read in conjunction with, the Company's
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K.

<TABLE>
<CAPTION>
                                                            FISCAL THREE MONTHS ENDED
                                          -----------------------------------------------------------------
                                                                        1999
                                          -----------------------------------------------------------------
                                            SEPT. 30,        DEC. 31,        MARCH 31,         JUNE 30,
                                              1998             1998             1999             1999
                                          --------------   --------------  ---------------  ---------------
                                                        (IN THOUSANDS EXCEPT PER SHARE DATA)

<S>                                       <C>              <C>             <C>              <C>
STATEMENT OF OPERATIONS DATA:
Revenue                                     $    6,723       $    7,528      $    7,254       $    8,152
Cost of revenue                                  3,083            4,276           3,082            3,324
                                          --------------   --------------  ---------------  ---------------
Gross profit                                     3,640            3,252           4,172            4,828

Selling, general and
        administrative                           3,175            2,591           3,481            3,799
Research and development                           360              225             429              548
Provision for doubtful accounts                     55              394             305               58
                                          --------------   --------------  ---------------  ---------------
Income (loss) from operations                       50               42             (43)             423
Interest income                                    (64)             (50)            (39)             (35)
Interest expense                                    25               14               3                -
                                          --------------   --------------  ---------------  ---------------
Income (loss) before income taxes                   89               78              (7)             458
Income taxes                                         -                -               -                -
                                          --------------   --------------  ---------------  ---------------
Net income (loss)                         $         89     $         78    $         (7)    $        458
                                          ==============   ==============  ===============  ===============

Net income (loss) per share:
          Basic                           $       0.01     $       0.01    $      (0.00)    $       0.05
                                          ==============   ==============  ===============  ===============
          Diluted                         $       0.01     $       0.01    $      (0.00)    $       0.05
                                          ==============   ==============  ===============  ===============

<CAPTION>
                                                              FISCAL THREE MONTHS ENDED
                                          -----------------------------------------------------------------
                                                                        1998
                                          -----------------------------------------------------------------
                                            SEPT. 30,         DEC. 31,        MARCH 31,        JUNE 30,
                                               1997             1997            1998             1998
                                          ---------------  ---------------  --------------   --------------
                                                         (IN THOUSANDS EXCEPT PER SHARE DATA)

<S>                                        <C>              <C>              <C>              <C>
STATEMENT OF OPERATIONS DATA:
Revenue                                     $    8,735       $    5,491       $    4,560       $    3,679
Cost of revenue                                  3,684            4,598            2,380            2,663
                                          ---------------  ---------------  --------------   --------------
Gross profit                                     5,051              893            2,180            1,016

Selling, general and
        administrative                           3,343            3,623            4,437            3,171
Research and development                           449              503              804              602
Provision for doubtful accounts                      -              340            1,000            1,115
                                          ---------------  ---------------  --------------   --------------
Income (loss) from operations                    1,259           (3,573)          (4,061)          (3,872)
Interest income                                    (86)             (67)             (56)             (38)
Interest expense                                    34               30               27               26
                                          ---------------  ---------------  --------------   --------------
Income (loss) before income taxes                1,311           (3,536)          (4,032)          (3,860)
Income taxes                                       512           (1,335)             823             (898)
                                          ---------------  ---------------  --------------   --------------
Net income (loss)                          $       799       $   (2,201)      $   (4,855)      $   (2,962)
                                          ===============  ===============  ==============   ==============

Net income (loss) per share:
          Basic                            $      0.09      $     (0.25)      $    (0.55)      $    (0.34)
                                          ===============  ===============  ==============   ==============
          Diluted                          $      0.09      $     (0.25)      $    (0.55)      $    (0.34)
                                          ===============  ===============  ==============   ==============
</TABLE>

     The Company's quarterly operating results have in the past and will in the
future vary significantly as a result of the timing of contract execution,
orders for products, and completion and delivery of significant product orders.
Large orders typically are preceded by long sales cycles and, accordingly, the
timing of such an order has been and will continue to be difficult to predict.
Certain orders are for products that require additional tailoring to customer
requirements and, accordingly, vary in timing of delivery. The failure to
obtain, or delays in the delivery of, one or more large orders, for any reason,
could have a material adverse effect on the Company's results of operations and
financial condition. The Company's results also vary based on the type and
quantity of products shipped, the timing of product shipments, the relative
revenue mix in a given period and the resulting margins. The variations may be
material.

     The timing of large orders depends on a variety of factors affecting the
capital spending decisions of the Company's customers, which in turn, can affect
the Company's quarterly operating results. These factors include changes in
governmental regulation, changes in the customers' competitive environment,
pricing policies by the Company or its competitors, personnel changes, demand
for the Company's products, the number, timing and significance of new product
and product enhancement announcements by the Company and its competitors, the
ability of the Company to develop, introduce and market new and enhanced
versions of its products on a timely basis, and the mix of direct and indirect
sales and general economic factors. In addition, in fiscal 2000, management
believes that its


                                      -13-
<PAGE>   14
customers' capital spending decisions will be affected by the diversion of
resources to Year 2000 issues and to related changes in their internal
operations.

     The Company's sales cycle, from initial contact to contract execution,
order and delivery, also varies substantially from customer to customer and from
project to project. The purchase of the Company's product based solutions
generally involves a significant commitment of customer capital and management
time. The sales cycle associated with the purchases of the Company's product
based solutions is subject to a number of additional significant risks,
including customers' budgetary constraints and internal acceptance reviews, over
which the Company has little or no control. The delivery cycle varies depending
on the extent to which the order requires tailoring to a customer's requirements
and the extent to which such requirements are fixed in advance or developed over
time.

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

     Based upon all of the foregoing, the Company believes that quarterly
revenue and operating results are likely to continue to vary significantly in
the future and that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance. Further, it is likely that in some future quarter the
Company's revenue or operating results will be below the expectation of public
market analysts and investors. In such event, the price of the Common Stock
could be materially adversely affected.

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

OVERVIEW

     The Company sells product based solutions and services to carriers and
enterprises, both through direct channels and through strategic alliance
partners, for delivery to end users in the United States and internationally.
Since June 1994, the Company, consistent with its strategic emphasis, has
derived significant revenue from sales of its data collection, network
surveillance, alarm and traffic reporting products to traditional carriers. The
Company expects such sales to continue as a significant percentage of its
revenue for at least the next several years. The balance of the Company's
revenue is derived from the sale of product based solutions and services to new
and emerging carriers and to enterprise customers, including agencies of the
U.S. Government.

     The Company's product based solutions and services are typically sold
pursuant to contracts having an aggregate value of several hundred thousand to
several million dollars. Contracts for the Company's data collection, network
surveillance, alarm and traffic reporting solutions typically require the
delivery of products, including hardware and licensed software, along with
installation, training and post contract support services. Contracts for billing
and customer care and enterprise network management solutions typically require
the Company to license, in perpetuity, software applications and provide for
hardware and services that include installation, training and post contract
support. Software, hardware and services sold pursuant to new and emerging
carrier and enterprise network contracts are separately priced. At the
expiration of the post contract support period, customers are offered the
opportunity to purchase additional support services.

     The Company derives revenues from hardware sales, services, and software
license fees. Revenue from hardware sales is recognized upon delivery. Revenue
from services consists of consulting, service bureau processing, system design
and analysis, customization and installation, training, support and maintenance
fees. Revenue from service bureau processing and consulting are recognized as
services are performed. Revenue from support and maintenance services are
recognized ratably over the term of the related agreement, generally one year.

     The Company's software licenses to end users generally provide for an
initial license fee to use the software in perpetuity. Under certain contracts,
the Company licenses the source code of its software to resellers for subsequent
modification and resale. Revenue from software licenses is recognized at the
time of delivery, provided that the Company has no remaining service
obligations, collectibility is considered probable and the fees are fixed and


                                      -14-
<PAGE>   15
determinable. Revenue from contracts with payment terms in excess of one year is
recognized to the extent of payments that are probable and due within one year.
Revenue related to obligations to provide post contract customer support without
charge is unbundled from the license and recognized ratably over the term of the
agreement. Where there are service obligations (such as, system design and
analysis, customization, installation and training) that are essential to the
functionality of the software delivered, revenue from software license fees and
services are recorded using the percentage-of-completion method, whereby revenue
is recognized based on the estimated stage of completion of individual contracts
determined on a cost or level of efforts basis.

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

     The Company defines backlog as signed contracts or purchase orders for
delivery of hardware and software products and services generally within the
next year. Backlog at June 30, 1999, 1998 and 1997 was approximately $7.3
million, $11.2 million and $7.0 million, respectively. Backlog, as defined, does
not include contracts for hardware and software products which require the
further issuance of purchase orders.

     The Company's revenue is typically concentrated among certain customers,
the largest of which in 1999 consisted of GTE, Samsung Electronics, and Winstar.
These customers represented approximately, 12.1%, 11.5%, and 10%, respectively,
of total revenue for the year ended June 30, 1999.

     Substantially all of the Company's revenue is derived from
dollar-denominated sales. In 1999, 59% of total revenue was generated from
domestic sales. Although the Company had significant sales in Asia (27% of total
revenue in 1999) and in Canada and Mexico (6% of total revenue in 1999), the
Company does not have significant foreign operations. The Company's customers
are usually contractually obligated to pay for product in U.S. dollars. All
products are shipped from the United States pursuant to terms of orders issued
by customers.

     The Company has experienced more favorable cash collections due to
aggressive collection efforts in 1999 compared to 1998. For 1999, days sales
outstanding [365/(annual sales/average of net accounts receivable at year end)]
was 102 days compared to 212 days in 1998 (representing a 52% decrease) and 134
days in 1997.

     The Company's cost of revenue consists of the cost of product engineering
and production, cost of customer support personnel, the costs of materials
purchased by the Company for incorporation into its products, amortization of
capitalized software development costs, warranty costs, inventory obsolescence,
and expenses for services provided by certain alliance partners in connection
with the installation and integration of the Company's products.

     Selling, general and administrative expenses consist of costs to support
the Company's sales and administrative functions. Included within these costs
are salaries, bonuses, sales commissions, benefits, travel expenses, and general
office administrative expenses (rent and occupancy, telephone and other office
supply costs) of the Company. It also includes promotional costs, recruitment
expenses, professional fees, outside services, and depreciation and
amortization.

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

     Certain prior year information has been reclassified to conform with
current year presentation.


                                      -15-
<PAGE>   16
YEARS ENDED JUNE 30, 1999 AND 1998

     Revenues. Total revenue increased 32% from $22.5 million in 1998 to $29.7
million in 1999. The increase of $7.2 million was principally due to an increase
in new and follow-on sales of products and services to U.S. new and emerging
carrier customers. Additionally, the Company experienced greater sales of
hardware and services relative to software sales.

     Revenue from sales to new and emerging carrier products and services
increased 116% or $7.0 million in 1999, an amount nearly equal to the total
increase in revenue, and represented 44% of total revenue compared to 27% of
total revenue in 1998. This increase is primarily a result of new and follow-on
sales of services. Revenues from enterprise network products and services
increased 46% or $2.3 million in 1999 and represented 24% of total revenue
compared to 22% of total revenue in 1998. This increase reflects stronger demand
from the U.S. government, resulting in part from the reinstatement of U.S. Air
Force orders which had been suspended in 1998. Revenue from traditional carrier
network products and services decreased 18% or $2.1 million in 1999 and
represented 32% of total revenue compared to 51% of total revenue in 1998.

     During 1999, the Company experienced a continuation of a trend for
customers, especially new and emerging carrier customers, to seek a higher level
of involvement by ACE*COMM in their business operations, including more systems
integration work, than previously experienced.

     Gross Margins for 1999, were 54% compared to 41% for 1998. The improvement
in the gross margin is primarily due to a change in the mix of revenue as
services increased in significance relative to lower margin hardware product
sales.

     Selling General and Administrative (SG & A) expenses for 1999 were $13.0
million compared to $14.6 million in 1998 (which represented 44% and 65% of
revenue in 1999 and 1998, respectively). The decrease in SG & A is primarily
attributable to a decrease in employment costs resulting from staff reductions
and other cost containment initiatives implemented throughout the year. The
decrease was partially offset by an increase in professional service fees.

     Research and Development expenses for 1999 were $1.6 million (5% of
revenue) compared to $2.4 million (10% of revenue) in 1998. The decrease of $0.8
million is primarily attributable to a high level of R & D personnel working on
revenue producing projects and a greater quantity of customer funded research
and development projects.

     Provision for Doubtful Accounts. The Company increased its allowance for
doubtful accounts receivable by $0.8 million, wrote off $2.8 million in
uncollectible accounts and reported recoveries of $0.4 million in fiscal 1999.
In fiscal 1998, the allowance for doubtful accounts was increased by $2.5
million and there were no write-offs or recoveries.

YEARS ENDED JUNE 30, 1998 AND 1997

     Revenues. Total revenue decreased 33% in fiscal 1998 to $22.5 million
compared to $33.7 million for 1997. The decrease of $11.2 million was caused by
several factors. First, the economic crisis in Korea and the Asia Pacific region
significantly reduced the amount of orders for the Company's DCMS hardware
products compared to the prior year. Second, the orders expected in 1998 from
the Company's continuing work as one of the subcontractors to the U.S. Air
Force, were indefinitely delayed in mid-1998. Finally, certain anticipated
orders were not placed until late in the fourth quarter of 1998 and had not been
completed by the end of the year.

     Revenue from traditional carrier network products decreased as a percentage
of total revenue from 65% of total revenue in 1997 to 51% of total revenue in
1998 primarily as a result of the decrease in sales to Korea. Revenue from
enterprise network products decreased from 25% of total revenue in 1997 to 22%
of total revenue in 1998 primarily as a result of the decreased sales caused
from the delay in orders from the U.S. Air Force. Revenue from new


                                      -16-
<PAGE>   17
and emerging carriers increased from 10% of revenue in 1997 to 27% of revenue in
1998 primarily as a result of increased sales of the new NetPlus PRO*VISION
product.

     Gross Margins for 1998 were 41% compared to 48% for 1997. The decrease in
the gross margins was caused by the effect of certain fixed costs on lower
volume of revenue, particularly with regard to sales of DCMS hardware products,
the mix of products and services and the addition of approximately $334,000 of
additional reserves for inventory obsolescence.

     Selling General and Administrative (SG & A) expenses for 1998 were $14.6
million compared to $11.3 million in 1997 (representing 65% and 33% of revenue
for 1998 and 1997 respectively). A primary cause of the increase was due to the
increased personnel, fringe benefits and facilities costs associated with
expansion of the Company's marketing, sales and administrative functions in
anticipation of receiving significant orders from Korea and the Asia Pacific
region before the economic crisis impacted the Company's business.

     In April 1998, the Company completed a general reduction in staffing which
included administrative personnel. As a result of these staff reductions and
ordinary turnover, the Company expects selling, general and administrative
expenses to be lower as a percentage of revenue in 1999.

     Research and Development expenses for 1998 were $2.4 million (10% of
revenue) compared to $1.5 million (4% of revenue) in 1997. The increase of $0.9
million was primarily due to the development of the Company's NetPlus PRO*VISION
product line for the new and emerging carrier market.

     Provision for Doubtful Accounts. The Company increased its allowance for
doubtful accounts receivable in 1998 by $2.5 million, considering the increased
aging of accounts and the Company's evaluation of the collectibility of its
accounts receivable.

     Income Taxes. The Company recognized a $898,000 benefit from income taxes
in 1998 compared to a $898,000 provision for income taxes in 1997. The benefit
was recognized as a result of the utilization of the Company's net operating
losses which eliminated its deferred income tax liability.

LIQUIDITY AND CAPITAL RESOURCES

     At June 30, 1999, the Company had $3.4 million of cash and cash
equivalents, compared to $3.0 million at June 30, 1998. Operating activities
provided the Company with $2.7 million for the year ended June 30, 1999. Net
income, non-cash depreciation and amortization, a decrease in accounts
receivables and inventories, offset by a decrease in accrued expenses and
deferred revenue, were the primary drivers of cash provided by operations.
During the same period the Company used $1.2 million for purchases of property
and equipment and investments in capitalized software. For the year ended June
30, 1999, the Company paid $1.0 million in debt and capital lease obligations
which were partially offset by proceeds from the exercise of common stock
options and employee stock purchases of $0.1 million.

     Accounts receivables, net of allowances for doubtful accounts, declined to
$6.5 million at June 30, 1999 from $10.0 million at June 30, 1998. Accounts
receivables include billed accounts receivables, unbilled accounts receivables
and an allowance for doubtful accounts. Billed accounts receivables declined to
$4.4 million at June 30, 1999 from $8.8 million at June 30, 1998 reflecting
aggressive collections and charge-offs of uncollectible accounts. Unbilled
accounts receivables decreased to $3.1 million at June 30, 1999 from $3.6
million at June 30, 1998. These receivables primarily represent contractual
payment terms which may not be billed for up to twelve months. During 1999, the
Company increased its allowance for doubtful accounts receivable by $0.8
million, wrote off $2.8 million in uncollectible accounts and reported
recoveries of $0.4 million. The Company believes the allowance for doubtful
accounts is adequate.

     Gross inventories decreased to $2.4 million at June 30, 1999 from $3.6
million at June 30, 1998. The decrease of $1.2 million was primarily due to
several large shipments made during fiscal 1999, some of which were on hand at
June 30, 1998. In addition the Company wrote-off $0.2 million in obsolete
inventory during 1999.


                                      -17-
<PAGE>   18
     Accrued liabilities decreased to $3.1 million at June 30, 1999 from $6.5
million at June 30, 1998. The decrease of $3.4 million was primarily due to a
decrease of $2.9 million in accrued contract costs in 1999. The decrease in
accrued contract costs was principally due to commission payments made to a
strategic alliance partner doing business in Asia.

     In March 1998, the Company converted a $1.6 million account receivable,
outstanding from a prime contractor, to a secured interest-bearing promissory
note, payable over a term of 18 months. Principal and interest payments on the
note are due monthly through September 1999 at an interest rate of prime plus
1%. At June 30, 1998, the outstanding principal balance was $1.1 million, and
all principal and interest payments had been made in accordance with the payment
schedule outlined in the note agreement.

     In June 1999, the principal amount of the note was amended to $0.6 million,
consisting of the original principal balance of $1.6 million, increased by
additional amounts due and payable of $0.2 million, and decreased by principal
payments received of $1.2 million. The term of the note was extended to December
1999. At June 30, 1999, the outstanding principal balance was $0.5 million, and
all principal and interest payments had been made in accordance with the payment
schedule outlined in the amended note agreement.

     In April 1998, the Company obtained from Crestar Bank of Maryland
("Crestar") a revolving credit facility ("line of credit") providing for
borrowings of up to $3.5 million. At June 30, 1998, the balance of borrowings
under the line of credit included a $100,000 draw on the line of credit, which
was subsequently paid in August of 1998, and letters of credit in the aggregate
amount of $743,000. In addition, the Company had term loans outstanding from
Crestar in the aggregate principal amount of $888,000 at June 30, 1998.

     During the second quarter of fiscal 1999, the Crestar line of credit was
cancelled and replaced with a Accounts Receivable Purchase Agreement
("Agreement") with Silicon Valley Bank ("SVB"). The Agreement enables the
Company to borrow up to $4.0 million through SVB's discretionary purchases of
accounts receivable. SVB will pay up to 80% of the face amount of each
receivable, with the balance of such face amount (less certain finance and
administrative charges) payable to the Company following collection of the
receivable. The receivables purchased by SVB must be collected within 90 days
unless otherwise agreed by SVB and the Company, must not be in dispute, and must
conform to other eligibility requirements. The purchases are with full recourse
against the Company, which has agreed to repurchase any non-conforming
receivable subject to SVB's ability to allow the substitution of conforming for
non-conforming receivables. The Company's obligations under the Agreement are
secured by a security interest in all of the Company's assets. Advances made to
the Company are repayable in full upon demand in the event of default under the
Agreement, including a breach in any material respect of any representation or
warranty as to the receivables purchased or the Company's insolvency. The
finance charges and administrative fees under this Agreement are based on an
amount equal to SVB's prime rate plus 4% per annum, of the average daily
outstanding account balance and .625% of the face amount of each purchased
receivable, respectively. Outstanding borrowings as of the date of this filing
are $ 1.0 million

     In August 1999, the Company and SVB modified the Agreement to reduce the
rate of interest charged from prime plus 4% per annum to prime.

     Under the terms of its office lease, the Company maintains a letter of
credit under its line of credit with SVB, 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 the Company. The letter of credit required under the lease for 1999
is $400,000 decreasing annually through 2003 to $100,000. As of the date of this
filing, the Company was not subject to any draw against this letter of credit by
the landlord.

     During 1999, the Company paid down debt balances and its capital lease
obligations by $1.0 million. At June 30, 1999, the balance of current and
non-current borrowings represents amounts due under a capital lease.

     In September 1999, the Company entered into a one-year loan and security
agreement with SVB. The agreement provides for advances of up to $1,250,000 in
the aggregate to finance equipment purchases. The minimum


                                      -18-
<PAGE>   19
amount of each advance is $50,000 and a maximum of ten equipment advances may be
made over the term of the agreement. Each advance is repayable over 36 months
and is secured by each item of equipment, or personal property financed by the
advance. The Company is required under this agreement to maintain certain
financial covenants. The agreement also contains other customary conditions and
events of default, the failure to comply with, or occurrence of, would prevent
any further borrowings and would generally require the immediate repayment of
any outstanding borrowings under the agreement. Interest on each equipment
advance is determined by the Bank and is equal to the sum of a comparable term
to the U.S. Treasury note, plus 350 basis points. Outstanding advances as of the
date of this filing aggregated approximately $ 441,000.

     The Company believes that existing cash balances, cash flows from
operations and available sources of financing will be sufficient to support the
Company's working capital requirements for at least the next twelve months.

ADDITIONAL FACTORS AFFECTING FUTURE OPERATING RESULTS

     ACE*COMM provides products to a technology driven industry sector.
Therefore, ACE*COMM's success is dependent in part upon factors beyond its
control. This report contains forward-looking statements relating to the
prospective operating results of the Company. The following are factors, in
addition to those set forth in "Selected Quarterly Financial Data", and
"--Year 2000", which could affect ACE*COMM's future operating results. These
factors are intended to serve as a cautionary statement to statements that may
be made, either verbally or in writing, including those in any other
forward-looking statements made by or on behalf of the Company.

     To date, a significant portion of the Company's revenue has been derived
from substantial orders placed by large organizations. The Company expects that
in the future it will continue to be dependent upon a limited number of
customers in any given period for a significant portion of its revenue. The
Company's future success may depend upon the continued demand by such customer
for its products and services. In addition, in fiscal 2000, management believes
that its customers' capital spending decisions will be affected by the
diversion of resources to Year 2000 issues and to related changes in their
internal operations. The Company's results of operations and financial
condition could be materially adversely affected by the failure of anticipated
orders to materialize and by deferrals or cancellation of orders.

     The Company's business is dependent upon the continued growth of the
telecommunications industry, in the United States and internationally, on the
continued convergence of voice and data networks and on the evolution and
widespread adoption of emerging network technologies. Any decline in the growth
of the industry, the failure of these markets to converge or the failure of
these network technologies to evolve or achieve widespread market acceptance
could have a material adverse effect on the Company.

     A key element of the Company's business strategy is to develop strategic
alliances with leading companies that provide telecommunications services or
that manufacture and market network equipment in order to expand the Company's
distribution channels and enter new markets. There can be no assurance that the
Company will be able to continue to increase the number of, or to expand, these
types of relationships, in order to market its products effectively,
particularly internationally, or that it will successfully develop other sales
and marketing strategies.

     The Company's growth has placed significant demands on the Company's
administrative, operational and financial personnel and systems. Additional
expansion by the Company may further strain the Company's management, financial
and other resources. There can be no assurance that the Company's systems,
procedures, controls and existing space will be adequate to support continued
growth of the Company's operations. If the Company is unable to respond to and
manage changing business conditions, the quality of its products and services
and its results of operations could be materially adversely affected.

     The new and emerging carrier market in the United States and overseas
represents a source of growing demand for the Company's products, software
licenses and services. In that this market segment is relatively new and in that
many of these organizations are in the early stages of their development,
financial resources may be limited and may adversely affect their ability to pay
for the Company's products, software licenses and services.


                                      -19-
<PAGE>   20
     Trade receivables subject the Company to the potential for credit risk with
customers in the telecommunication services industry and government sector.
Approximately 49% of the Company's gross trade receivables balances was
represented by five customers at June 30, 1999. To reduce credit risk, the
Company conducts ongoing evaluations of its customers and requires letters of
credit or other pre-payment arrangements, as appropriate. The Company maintains
accounts receivable allowances to provide for potential credit losses. However
there can be no assurances that one or more customers will not be unable or
unwilling to pay its or their obligations to the Company and in such event the
Company's cash flows and financial results would be adversely affected.

     The Company derived approximately $12.1 million, or 41% of its total
revenues, from customers outside of the United States in 1999. The Company
anticipates that a significant amount of future revenues will be derived from
sales to end users in Asia, Europe and other areas of the world. These revenues
may be adversely affected by changing economic conditions in foreign countries,
which, in turn, could have a material adverse effect on the Company's business,
financial condition and results of operations.

     The Company's ability to successfully develop new, and enhance existing,
products, to service its customers, and to remain competitive depends in large
part on its ability to attract and retain highly qualified technical, sales and
marketing and management personnel. Competition for such personnel is intense,
and there can be no assurance that the Company will be able to continue to
attract and retain such personnel.

YEAR 2000

     The Company develops and markets hardware and software products which (i)
collect call record data for use in customer billing, customer care, network
surveillance, alarm processing and network management and (ii) automate certain
of such network operation and management functions. The Company's products are
incorporated in systems used by post, telephone and telegraph companies,
telephone and wireless carriers, and large enterprises. The Company's products
must be able to process date-dependent data correctly. The Year 2000 problem
refers to the limitations in the programming code of certain existing software
programs which limit the ability of such programs to accurately produce or
process date-sensitive information for the year 2000 and beyond. In the case of
the Company's products, unless the relevant software programs are modified prior
to December 31, 1999, the supply by an end-user's system of inaccurate
date-sensitive data (such as call records) or inaccuracies in the Company's
software (including third party operating system software) could cause the
Company's products to provide erroneous or inaccurate output data to its
customers for billing, network management, etc. Certain of the Company's
installed products are the subject of warranties or of maintenance contracts
under which the Company agrees to modify products to accurately process
date-sensitive information, including dates at and beyond January 1, 2000.

     The Company has completed testing of its current products (including
component parts supplied by third parties) for Year 2000 compliance, using the
definition of Year 2000 conformity requirements developed by the British
Standards Institute. The Company has notified customers that older products may
require modification to become Year 2000 compliant and is offering maintenance
contracts to provide such modifications for a fee. Customers who have elected
not to purchase an extended maintenance contract and want the Company's product
to be Year 2000 compliant must procure the Year 2000 upgrade for a fee. Most,
but not all, customers have entered into such maintenance or upgrade contracts.
The Company plans to complete upgrading all customers who are currently under
customer support contracts by September 30, 1999.

     The Company has completed an assessment of the risks and costs associated
with the Year 2000 issue on internal hardware and software. The Company is in
the process of implementing systems changes and expects this process to be
completed for all critical systems by September 30, 1999. The Company is in the
process of obtaining an assessment of its non-information technology systems
(e.g. elevators, HVAC contained in facilities that the company leases from
others).


                                      -20-
<PAGE>   21
     The cost of addressing the Company's Year 2000 issues has not been fully
quantified. The Company expenses such costs as incurred. Management is not aware
of any Year 2000 compliance exposures which would preclude ongoing operations
during the next twelve months or which would result in material short-term cash
requirements.

     The Company's business, financial condition and results of operations could
be materially adversely affected by the Year 2000 problem if it or third parties
fail to successfully address this issue. In particular, if customers fail to
modify their systems such as to supply accurate data, their systems could be
significantly disrupted and claims against the Company could result. In
addition, if customers fail to purchase Year 2000 upgrades or maintenance
contracts, or if the Company's upgrades or modifications are inadequate, the
Company may experience significant liability, which could have a material
adverse effect on the Company. These and other Year 2000 related problems which
may be encountered by the Company's strategic partners and customers could have
a material adverse effect on the Company, through the impact of litigation or
the loss of business. In addition, in the event that the Company's internal
systems are not compliant, the Company could experience considerable delays in
customer service, sales and collections and in compiling sales and financial
information and performing other administrative functions. The Company may have
to expend more resources than is currently anticipated to resolve Year 2000
issues and such expenditures could have a material adverse effect on the
Company's results of operations and financial condition.

     The Company has developed a contingency plan to address the situation that
may result if the Company or third parties are unable to achieve Year 2000
compliance for its critical operations.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

           The Company's Financial Statements, together with the independent
           accountants' reports thereon, appear at pages F-1 through F-20 of
           this Form 10-K.

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

           Previously reported

                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

           The information called for by Item 10 is incorporated by reference to
           Proxy Statement for the 1999 Annual Meeting of Stockholders, to be
           filed pursuant to Regulation 14A not later than 120 days after the
           end of the year covered by this report.

ITEM 11.   EXECUTIVE COMPENSATION

           The information called for by Item 11 is incorporated by reference to
           Proxy Statement for the 1999 Annual Meeting of Stockholders, to be
           filed pursuant to Regulation 14A not later than 120 days after the
           end of the year covered by this report.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

           The information called for by Item 12 is incorporated by reference to
           Proxy Statement for the 1999 Annual Meeting of Stockholders, to be
           filed pursuant to Regulation 14A not later than 120 days after the
           end of the year covered by this report.


                                      -21-
<PAGE>   22
ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

           The information called for by Item 13 is incorporated by reference to
           Proxy Statement for the 1999 Annual Meeting of Stockholders, to be
           filed pursuant to Regulation 14A not later than 120 days after the
           end of the year covered by this report.

                                     PART IV

ITEM 14.   EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1)                 INDEX TO FINANCIAL STATEMENTS

     The following Financial Statements of the Registrant are filed as part of
this report:

                                                                           Page

Report of Independent Auditors      ................................       F-2

Report of Independent Accountants   ................................       F-3

Balance Sheets as of June 30, 1999 and 1998.........................       F-4

Statements of Operations for the years ended June 30, 1999, 1998
            and 1997................................................       F-5

Statements of Stockholders' Equity for the years
            ended June 30, 1999, 1998 and 1997......................       F-6

Statements of Cash Flows for the years
            ended June 30, 1999, 1998 and 1997......................       F-7

Notes to Financial Statements.......................................       F-8


(a)(2)         FINANCIAL STATEMENT SCHEDULES

            Except for the schedule listed below, all other schedules are
            omitted because they are not applicable or the required information
            is shown in the financial statements or notes thereto.

            Schedule II - Valuation and Qualifying Accounts                 X-1

(a)(3)         EXHIBITS

            3.2         (A)   Articles of Amendment and Restatement dated
                              November 18, 1991.
            3.3         (A)   Articles of Amendment dated August 6, 1996.
            3.5         (A)   Form of Articles of Amendment and Restatement of
                              the Company.
            3.6         (A)   By-laws of the Company as amended to date.
            4.1         (A)   Form of Specimen of Common Stock Certificate.
            10.1        (A)   Supplier Agreement dated December 16, 1992 between
                              the Registrant and AT&T World Services, Inc.
            10.2        (A)   Marketing Agreement dated June 18, 1990 between
                              the Registrant and AT&T World



                                      -22-
<PAGE>   23
                              Services, Inc .
            10.3        (A)   Subcontract Agreement dated February 24, 1994
                              between Registrant and AT&T Corporation,
                              Government Integrated Solutions .
            10.4        (A)   Authorized Distributor Agreement dated July 23,
                              1991 between the Registrant and AmerInd, Inc .
            10.5        (A)   Supply Contract dated August 17, 1994 between the
                              Registrant and Teleglobe Canada, Inc .
            10.6        (A)   License Agreement dated August 1, 1995 between the
                              Registrant and Teleglobe Canada, Inc .
            10.7        (A)   Subcontract No. 95-1350-01 dated November 8, 1995
                              between the Registrant and ANSTEC, Inc .
            10.8        (A)   Agreement of Subcontract dated April 24, 1994
                              between the Registrant and the Communications
                              Systems Division of GTE Government Systems
                              Corporation
            10.9        (A)   Agreement to Purchase Hardware, Render Services
                              and License and Sublicense the Use of Software
                              dated October 11, 1995 between the Registrant and
                              Telefonos de Mexico, S.A. de C.V.
            10.12       (B)*  Form of Term Loan Note entered into Between the
                              Company and two Officers in Fiscal 1997
            10.13       (B)*  Form of Non-Qualified Stock Option Grant Agreement
                              (certain executive officers - fiscal  1997)
            10.14       (B)*  Form of Non-Qualified Stock Option Grant Agreement
                              (certain executive officers - fiscal 1997)
            10.15       (B)*  Executive Bonus Plan
            10.16       (B)   Lease Between Principal Mutual Life Insurance
                              Company and the Company as Tenant dated August 6,
                              1996
            10.22       (C)*  Amended and Restated Omnibus Stock Plan
            10.23       (C)*  Amended and Restated Omnibus Stock Plan for
                              Directors
            10.24       (D)*  Employment Agreement dated as of October 1, 1998
                              between the Company and T. Russotto
            10.25       (D)*  Non-Qualified Stock Option Grant Agreement dated
                              March 23, 1999 between the Company and T.
                              Russotto.
            10.26       (D)*  Incentive Stock Option Grant Agreement dated
                              March 4, 1999 between the Company and J. Eckler.
            23          (D)   Consent of Ernst & Young LLP
            23.1        (D)   Consent of PricewaterhouseCoopers LLP
            27.         (D)   Financial Data Schedule
            27.1        (D)   Amended Financial Data Schedule for the quarters
                              ending September 30, December 31, and March 31,
                              1999
            27.2        (D)   Amended Financial Data Schedule - Fiscal Year 1998
            --------------------------------------------------------------------
                        (A)   Incorporated by reference to the identically
                              numbered exhibit filed as an exhibit to the
                              Company's Registration Statement on Form S-1, File
                              No. 333-25439

                        (B)   Incorporated by reference to the identically
                              numbered exhibit filed as an exhibit to the
                              Company's Form 10-K, filed October 1, 1997.

                        (C)   Incorporated by reference to the Company's Proxy
                              Statement, dated October 21, 1997.
                        (D)   Filed herewith * Management contract or
                              compensatory plan or amendment required to be
                              filed as an exhibit.

(b)  REPORTS ON FORM 8-K and 8-K/A

     A Report on Form 8-K was filed on May 6, 1999, and amended on May 13,1999,
     with respect to Item 9. Changes in Registrant's Certifying Accountant.


                                      -23-
<PAGE>   24
 SIGNATURES

     Pursuant to the requirements of section 13 or 15(d) 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

                                                 By: /s/George T. Jimenez
                                                     ---------------------------
                                                        George T. Jimenez
                                                        Chief Executive Officer

                                                 Date:  September 28, 1999

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
NAME                        TITLE                                         DATE
----                        -----                                         ----

<S>                         <C>                                           <C>
/s/George T. Jimenez        Chief Executive Officer                       September 28, 1999
--------------------        and Chairman of the Board
(George T. Jimenez)



/s/James K. Eckler          Executive Vice President of Finance and       September 28, 1999
------------------          Administration
(James K. Eckler)           (Principal Financial Officer)
                            (Principal Accounting Officer)

/s/Paul G. Casner, Jr.      Director                                      September 28, 1999
----------------------
(Paul G. Casner, Jr.)


/s/Gilbert A. Wetzel        Director                                      September 28, 1999
--------------------
(Gilbert A. Wetzel)

/s/William R. Newlin        Director                                      September 28, 1999
--------------------
(William R. Newlin)

/s/Harry M. Linowes         Director                                      September 28, 1999
-------------------
(Harry M. Linowes)
</TABLE>


                                      -24-
<PAGE>   25
                              ACE*COMM CORPORATION

INDEX TO FINANCIAL STATEMENTS

     The following Financial Statements of the Registrant are filed as part of
this report:

                                                                         Page

Report of Independent Auditors...........................................F-2

Report of Independent Accountants........................................F-3

Balance Sheets as of June 30, 1999 and 1998..............................F-4

Statements of Operations for the years ended June 30,
            1999, 1998 and 1997..........................................F-5

Statements of Stockholders' Equity for the years
            ended June 30, 1999, 1998 and 1997...........................F-6

Statements of Cash Flows for the years ended June 30,
            1999, 1998 and 1997..........................................F-7

Notes to Financial Statements............................................F-8


                                      F-1
<PAGE>   26
                         REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying balance sheet of ACE*COMM Corporation as of
June 30, 1999, and the related statement of operations, stockholders' equity,
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ACE*COMM Corporation at June
30, 1999, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.

Ernst & Young LLP

Washington, D.C.
August 25, 1999



                                      F-2
<PAGE>   27
                        REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of ACE*COMM
Corporation at June 30, 1998, and the results of its operations and its cash
flows for each of the two years in the period ended June 30, 1998 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

Washington, D.C.
September 29, 1998


                                      F-3
<PAGE>   28
                              ACE*COMM CORPORATION
                                 BALANCE SHEETS
                (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                        JUNE 30,
                                                                     -----------------------------------------------
                                                                            1999                       1998
                                                                     --------------------       --------------------
<S>                                                                  <C>                        <C>
                    ASSETS

Current assets:
  Cash and cash equivalents                                          $            3,424         $            2,956
  Accounts receivable, net                                                        6,547                      9,985
  Inventories, net                                                                2,152                      3,232
  Notes receivable                                                                  516                        825
  Prepaid expenses and other                                                        466                        666
                                                                     --------------------       --------------------
     Total current assets                                                        13,105                     17,664
Property and equipment, net                                                       3,779                      4,069
Capitalized software development costs, net                                       1,747                      2,461
Notes receivable                                                                      -                        310
Other assets                                                                         68                         89
                                                                     ====================       ====================
     Total assets                                                    $           18,699         $           24,593
                                                                     ====================       ====================

                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Borrowings                                                         $               47         $            1,030
  Accounts payable                                                                1,517                      2,010
  Accrued expenses                                                                  797                        739
  Accrued compensation                                                            1,621                      2,161
  Accrued contract costs                                                            718                      3,577
  Deferred revenue                                                                  446                      2,169
                                                                     --------------------       --------------------
     Total current liabilities                                                    5,146                     11,686
  Noncurrent borrowings                                                              74                        122
                                                                     --------------------       --------------------
     Total liabilities                                                            5,220                     11,808
                                                                     --------------------       --------------------

Commitments and contingencies ( Note 14 )

Stockholders' equity:
  Preferred stock, $.01 par value, 5,000,000 shares authorized, 0
  shares issued and outstanding                                                       -                          -
  Common stock, $.01 par value, 45,000,000 shares authorized,
  8,877,628 and 8,807,049 shares issued and outstanding                              89                         88
  Additional paid-in capital                                                     19,897                     19,822
  Accumulated deficit                                                            (6,507)                    (7,125)
                                                                     --------------------       --------------------
     Total stockholders' equity                                                  13,479                     12,785
                                                                     --------------------       --------------------

     Total liabilities and stockholders' equity                      $           18,699         $           24,593
                                                                     ====================       ====================
</TABLE>




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


                                      F-4
<PAGE>   29
                              ACE*COMM CORPORATION
                            STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                YEARS ENDED JUNE 30,
                                                         -------------------------------------------------------------------
                                                                 1999                  1998                     1997
                                                         -------------------     -----------------      --------------------

<S>                                                        <C>                     <C>                    <C>
Revenue                                                    $      29,657           $      22,465          $      33,684
Cost of revenue                                                   13,765                  13,325                 17,627
                                                         -------------------     -----------------      --------------------
Gross profit                                                      15,892                   9,140                 16,057
Selling, general and administrative expense                       13,046                  14,574                 11,254
Research and development expense                                   1,562                   2,358                  1,472
Provision for doubtful accounts                                      812                   2,455                      -
                                                         -------------------     -----------------      --------------------

Income (loss) from operations                                        472                 (10,247)                 3,331
Interest income                                                     (185)                   (247)                  (347)
Interest expense                                                      39                     117                    156
                                                         -------------------     -----------------      --------------------
Income (loss) before income taxes                                    618                 (10,117)                 3,522
Income tax (benefit) provision                                         -                    (898)                   898
                                                         -------------------     -----------------      --------------------
Net income (loss)                                           $        618            $     (9,219)          $      2,624
                                                         ===================     =================      ====================

Basic net income (loss) per share                           $       0.07            $      (1.06)          $       0.35
                                                         ===================     =================      ====================
Diluted net income (loss) per share                         $       0.07            $      (1.06)          $       0.32
                                                         ===================     =================      ====================
Shares used in computing net income (loss) per share:
    Basic                                                          8,838                   8,708                  7,460
                                                         ===================     =================      ====================
    Diluted                                                        8,931                   8,708                  8,152
                                                         ===================     =================      ====================
</TABLE>



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


                                      F-5
<PAGE>   30
                              ACE*COMM CORPORATION
                       STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                          PREFERRED STOCK                              COMMON STOCK
                                               ---------------------------------------    ----------------------------------------
                                                              CLASS B
                                                    SHARES              PAR VALUE              SHARES              PAR VALUE
                                               ------------------    -----------------    -----------------    -------------------
<S>                                                       <C>        <C>                           <C>         <C>
 Balance, June 30, 1996                                      1       $             1                 3,590     $             36
 Accretion of preferred stock dividends                      -                     -                     -                    -
 Conversion of preferred stock, Class C                      -                     -                 1,531                   15
 Redemption of preferred stock, Class B                     (1)                   (1)                    -                    -
 Issuance of common stock pursuant to
   initial public offering                                   -                     -                 2,645                   26
 Exercise of common stock options                            -                     -                   838                    8
 Repurchase and retirement
   of common stock                                           -                     -                   (54)                   -
 Net income for the year ended June 30, 1997                 -                     -                     -                    -
                                               ------------------    -----------------    -----------------    -------------------
 Balance, June 30, 1997                                      -       $             -                 8,550     $             85
 Exercise of common stock options                            -                     -                   258                    3
 Repurchase and retirement
   of common stock                                           -                     -                    (1)                   -
Net loss for the year ended June 30, 1998                    -                     -                     -                    -
                                               ------------------    -----------------    -----------------    -------------------
Balance, June 30, 1998                                       -       $             -                 8,807     $             88
Exercise of common stock options                             -                     -                    66                    1
Employee stock purchase plan                                 -                     -                     4                    -
Net income for the year ended June 30, 1999                  -                     -                     -                    -
                                               ------------------    -----------------    -----------------    -----------------
Balance, June 30, 1999                                       -       $             -                 8,877     $             89
                                               ==================    =================    =================    ===================

<CAPTION>
                                                                        (ACCUMULATED
                                                  ADDITIONAL              DEFICIT)
                                                   PAID-IN                RETAINED
                                                   CAPITAL                EARNINGS                TOTAL
                                               -----------------    ---------------------    ----------------
<S>                                            <C>                  <C>                       <C>
 Balance, June 30, 1996                        $           343      $              (530)      $        (150)
 Accretion of preferred stock dividends                    (17)                       -                 (17)
 Conversion of preferred stock, Class C                  2,264                        -               2,279
 Redemption of preferred stock, Class B                   (307)                       -                (308)
 Issuance of common stock pursuant to
   initial public offering                              16,083                        -              16,109
 Exercise of common stock options                        2,060                        -               2,068
 Repurchase and retirement
   of common stock                                        (896)                       -                (896)
 Net income for the year ended June 30, 1997                 -                    2,624               2,624
                                               -----------------    ---------------------    ----------------
 Balance, June 30, 1997                        $        19,530      $             2,094       $      21,709
 Exercise of common stock options                          313                        -                 316
 Repurchase and retirement
   of common stock                                         (21)                       -                 (21)
Net loss for the year ended June 30, 1998                    -                   (9,219)             (9,219)
                                               -----------------    ---------------------    ----------------
Balance, June 30, 1998                         $        19,822      $            (7,125)      $      12,785
Exercise of common stock options                            64                        -                  65
Employee stock purchase plan                                11                        -                  11
Net income for the year ended June 30, 1999                  -                      618                 618
                                               ---------------    -----------------------    ----------------
Balance, June 30, 1999                                $ 19,897      $            (6,507)      $      13,479
                                               =================    =====================    ================
</TABLE>


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

                                      F-6
<PAGE>   31
                              ACE*COMM CORPORATION
                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                   YEARS ENDED JUNE 30,
                                                                      -------------------------------------------
                                                                          1999            1998            1997
                                                                      ------------   -------------   ------------
<S>                                                                   <C>            <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                     $      618     $    (9,219)    $    2,624
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating
activities:
  Depreciation and amortization                                            2,243           1,563          1,135
  Provision for doubtful accounts                                            812           2,455              -
Changes in operating assets and liabilities:
  Accounts receivable                                                      2,626           3,680         (7,476)
  Inventories, net                                                         1,080            (418)          (978)
  Notes receivable                                                           619          (1,135)             -
  Prepaid expenses and other assets                                          221             362           (367)
  Accounts payable                                                          (493)           (725)          (387)
  Accrued liabilities                                                     (3,341)            351          4,078
  Deferred income taxes                                                        -            (898)           898
  Deferred revenue                                                        (1,723)          1,659         (1,380)
                                                                      ------------   -------------   ------------
Net cash provided by (used for) operating activities                       2,662          (2,325)        (1,853)
                                                                      ------------   -------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment                                         (624)         (1,203)        (2,390)
Additions to capitalized software development costs                         (615)         (1,343)        (1,371)
                                                                      ------------   -------------   ------------
Net cash used for investing activities                                    (1,239)         (2,546)        (3,761)
                                                                      ------------   -------------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase  in line of credit                                  (100)            100         (4,446)
Other borrowings                                                               -               -          1,000
Payments on debt                                                            (883)           (450)          (341)
Principal payments under capital lease obligation                            (48)            (38)           (21)
Net proceeds from common stock issued                                          -               -         16,109
Exercise of common stock options                                              65             316          2,068
Employee stock purchase plan                                                  11               -              -
Repurchase and retirement of common stock                                      -             (21)          (896)
Redemption of class B preferred shares                                         -               -           (308)
                                                                      ------------   -------------   ------------
Net cash (used for) provided by financing activities                        (955)            (93)        13,165
                                                                      ------------   -------------   ------------
Net increase (decrease) in cash and cash equivalents                         468          (4,964)         7,551
Cash and cash equivalents at beginning of year                             2,956           7,920            369
                                                                      ============   =============   ============
Cash and cash equivalents at end of year                              $    3,424     $     2,956     $    7,920
                                                                      ============   =============   ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the period for :
    Interest                                                          $       39     $       114     $      164

SUPPLEMENTAL SCHEDULE OF NON CASH FINANCING ACTIVITIES:
Accretion of preferred stock dividends                                $        -     $        -      $       17
Purchase of equipment under capital lease                             $        -     $        -      $      222
Conversion of Class C preferred stock                                 $        -     $        -      $    2,279
</TABLE>


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

                                      F-7
<PAGE>   32
                              ACE*COMM CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION

ACE*COMM Corporation (the "Company") develops, sells and services Operations
Support Systems ("OSS") hardware and software products for data and voice
networks. The Company's customers include telecommunications service providers
and large enterprises operating data and voice networks using intranets and the
Internet. The Company's products perform such functions as billing data
collection, network surveillance, alarm processing and network management.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles 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 towards completion which are used to determine
revenue recognition under the percentage-of-completion method, estimates of
allowances for doubtful accounts receivable and inventory obsolescence, tax
valuation allowances, and estimates of the net realizable value of capitalized
software development costs.

REVENUE RECOGNITION

The Company derives revenues from hardware sales, services, and software license
fees. Revenue from hardware sales is recognized upon delivery. Revenue from
services consists of consulting, service bureau processing, system design and
analysis, customization and installation, training, support and maintenance
fees. Revenue from service bureau processing and consulting are recognized as
services are performed. Revenue from support and maintenance services are
recognized ratably over the term of the related agreement, generally one year.

The Company's software licenses to end users generally provide for an initial
license fee to use the product in perpetuity. Under certain contracts, the
Company licenses the source code of its software to resellers for subsequent
modification and resale. Revenue from software licenses is recognized at the
time of delivery, provided that the Company has no remaining service
obligations, collectibility is considered probable and the fees are fixed and
determinable. Revenue from contracts with payment terms in excess of one year is
recognized to the extent of payments that are probable and due within one year.
Revenue related to obligations to provide post contract customer support without
charge is unbundled from the license and recognized ratably over the term of the
agreement. Where there are service obligations (such as system design and
analysis, customization, installation and training) that are essential to the
functionality of the software delivered, revenue from software license fees and
services are recorded using the percentage-of-completion method, whereby revenue
is recognized based on the estimated stage of completion of individual contracts
determined on a cost or level of efforts basis.

In 1999, the Company adopted Statement of Position 97-2, Software Revenue
Recognition ("SOP 97-2"), as amended. SOP 97-2 provides guidance in recognizing
revenue on software transactions and did not significantly affect existing
revenue recognition policies.

Payments received for revenues not yet recognized are reflected as deferred
revenue in the accompanying balance sheets. Revenue recognized prior to the
scheduled billing date of an item is reflected as unbilled accounts receivable.


                                      F-8
<PAGE>   33
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

CASH EQUIVALENTS

The Company considers all investments with an original maturity of three months
or less on their acquisition date to be cash equivalents.

INVENTORIES

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

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets as
follows: equipment and vehicles - 7 years; computer equipment -3 to 7 years.
Leasehold improvements are amortized on a straight-line method over the shorter
of the improvements' estimated useful lives or related remaining lease terms.
Maintenance and repair costs are charged to current earnings. Long-lived assets
held and used by the Company are reviewed for impairment whenever changes in
circumstances indicate the carrying value of an asset may not be recoverable.

CAPITALIZED SOFTWARE DEVELOPMENT COSTS

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

Research and development costs are expensed as incurred. However, computer
software development costs incurred after technological feasibility of a product
is established through the time when the product is available for release to
customers are capitalized. Capitalized software and purchased technology costs
are amortized on a product by product basis based on the greater of the ratio of
current sales to estimated total future sales or a straight-line basis over the
remaining estimated economic life of the product, not exceeding 3 years. The
Company periodically evaluates its capitalized software costs for recoverability
against anticipated future revenues, and writes down or writes off capitalized
software costs if recoverability is in question.

EARNINGS PER SHARE

Basic earnings per share excludes dilution and is computed by dividing net
income (loss) by the weighted average of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were exercised or
converted into common stock.

INCOME TAXES

Deferred income taxes are recognized for the expected future tax consequences of
temporary differences by applying enacted statutory tax rates to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities.


                                      F-9
<PAGE>   34
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, and accrued expenses approximate fair value because of the short
maturity of these items.

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

RECLASSIFICATION

Certain prior year information has been reclassified to conform with current
year presentation.

NOTE 3 - ACCOUNTS AND NOTES RECEIVABLE

Accounts receivable consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                    JUNE 30,
                                         ---------------------------------------------------------------
                                                    1999                               1998
                                         ----------------------------       ----------------------------

<S>                                      <C>                                <C>
Billed                                   $                  4,355           $                  8,829
Unbilled                                                    3,059                              3,621
Allowance for doubtful accounts                              (867)                            (2,465)
                                         ----------------------------       ----------------------------
                                         $                  6,547           $                  9,985
                                         ============================       ============================
</TABLE>

Unbilled receivables include costs and estimated profit on contracts in progress
which have been recognized as revenue but not yet billed to customers under the
provisions of specific contracts. Substantially all unbilled receivables are
expected to be billed and collected within one year. In fiscal 1999, $2,410,000
in accounts receivable were written off, net of recoveries. There were no
write-offs of accounts receivable in 1998 and 1997.

NOTES RECEIVABLE

In March 1998, the Company converted a $1.6 million account receivable,
outstanding from a prime contractor, to a secured interest-bearing promissory
note, payable over a term of 18 months. Principal and interest payments on the
note are due monthly through September 1999 at an interest rate of prime plus
1%. At June 30, 1998, the outstanding principal balance was $1.1 million, and
all principal and interest payments had been made in accordance with the payment
schedule outlined in the note agreement.

In June 1999, the principal amount of the note was amended to $0.6 million,
consisting of the original principal balance of $1.6 million, increased by
additional amounts due and payable of $0.2 million, and decreased by principal
payments received of $1.2 million. The term of the note was extended to December
1999. At June 30, 1999, the outstanding principal balance was $0.5 million, and
all principal and interest payments had been made in accordance with the payment
schedule outlined in the amended note agreement.


                                      F-10
<PAGE>   35
NOTE 4 - INVENTORIES

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                    JUNE 30,
                                         ---------------------------------------------------------------
                                                    1999                               1998
                                         ----------------------------       ----------------------------

<S>                                      <C>                                <C>
Inventories                              $                  2,404           $                  3,581
Allowance for obsolescence                                   (252)                              (349)
                                         ----------------------------       ----------------------------
                                         $                  2,152           $                  3,232
                                         ============================       ============================
</TABLE>

In fiscal 1999, $220,000 in obsolete inventories were written off. There were no
write-offs of inventories in fiscal years 1998 and 1997.

NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                           JUNE 30,
                                                ---------------------------------------------------------------
                                                           1999                               1998
                                                ----------------------------       ----------------------------

<S>                                             <C>                                <C>
Computer equipment                              $                  5,172           $                  4,454
Office equipment                                                   1,055                              1,153
Vehicles                                                               -                                 42
Leasehold improvements                                               205                                205
                                                ----------------------------       ----------------------------
                                                                   6,432                              5,854
Less accumulated depreciation and amortization                    (2,653)                            (1,785)
                                                ----------------------------       ----------------------------
                                                $                  3,779           $                  4,069
                                                ============================       ============================
</TABLE>

Depreciation expense of property and equipment amounted to $914,000, $604,000
and $448,000 in 1999, 1998 and 1997, respectively. At June 30, 1999 and 1998,
office equipment includes a capitalized lease in the amount of $222,000 and
accumulated depreciation of $ 57,000 and $35,000, respectively.


NOTE 6 - CAPITALIZED SOFTWARE DEVELOPMENT COSTS

Capitalized software development costs consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   JUNE 30,
                                           ---------------------------------------------------------
                                                     1999                            1998
                                           -------------------------       -------------------------

<S>                                        <C>                             <C>
Capitalized software development costs     $               7,897           $               7,282
Less accumulated amortization                             (6,150)                         (4,821)
                                           -------------------------       -------------------------
                                           $               1,747           $               2,461
                                           =========================       =========================
</TABLE>

Amortization expense of capitalized software amounted to $1,329,000, $959,000
and $687,000 in 1999, 1998 and 1997, respectively.


                                      F-11
<PAGE>   36
NOTE 7 - BORROWINGS

The Company's borrowings consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                     JUNE 30,
                                                             ---------------------------------------------------------
                                                                       1999                            1998
                                                             -------------------------       -------------------------

<S>                                                          <C>                             <C>
Installment note with Crestar Bank, due in monthly
installments through July 1, 2001, bearing interest
at the bank's prime rate (8.5% at June 30, 1998),
collateralized by general assets of the Company.             $                   -           $                 771

Installment notes with Crestar Bank, due in monthly
installments through June 2000, bearing interest at
the bank's prime rate (8.5% at June 30, 1998) plus 1%,
collateralized by accounts receivable, inventory and
specific equipment.                                                              -                             117

Capital lease obligation for the use of an office
telephone system, principal plus interest (10.03%),
due in monthly installments through November 2001.                             121                             164

Line of credit with Crestar Bank, credit limit up to
$3.5 million due December 31, 1998, bearing interest at
LIBOR (5.66% at June 30, 1998) plus 2.5%, collateralized
by general assets of the Company.                                                -                             100

                                                             -------------------------       -------------------------
Total borrowings                                                               121                           1,152

Less current portion                                                           (47)                         (1,030)
                                                             -------------------------       -------------------------

Noncurrent portion                                           $                  74           $                 122
                                                             =========================       =========================
</TABLE>

LINE OF CREDIT

In April 1998, the Company obtained from Crestar Bank of Maryland ("Crestar") a
revolving credit facility ("line of credit") providing for borrowings of up to
$3.5 million. At June 30, 1998, the balance of borrowings under the line of
credit included a $100,000 draw on the line of credit, which was subsequently
paid in August of 1998, and letters of credit in the aggregate amount of
$743,000 (see Note 14). In addition, the Company had term loans outstanding from
Crestar in the aggregate principal amount of $888,000 at June 30, 1998. The
Company was in default of the line of credit at June 30, 1998. However, the
Company arranged alternative financing to support working capital needs during
the period of default.

During the second quarter of fiscal 1999, the Crestar line of credit was
canceled and replaced with a Accounts Receivable Purchase Agreement
("Agreement") with Silicon Valley Bank ("SVB"). The Agreement enables the
Company to borrow up to $4.0 million through SVB's discretionary purchases of
accounts receivable. SVB will pay up to 80% of the face amount of each
receivable, with the balance of such face amount (less certain finance and
administrative charges) payable to the Company following collection of the
receivable. The receivables purchased by SVB must be collected within 90 days
unless otherwise agreed by SVB and the Company, must not be in dispute, and must
conform to other eligibility requirements. The purchases are with full recourse
against the Company, which has agreed to repurchase any non-conforming
receivable subject to SVB's ability to allow the substitution of conforming for
non-conforming receivables. The Company's obligations under the Agreement are
secured by a security interest in all of the Company's assets. Advances made to
the Company are repayable in full upon demand in the event of default under the
Agreement, including a breach in any material respect of any


                                      F-12
<PAGE>   37
NOTE 7 - BORROWINGS, CONTINUED

representation or warranty as to the receivables purchased or the Company's
insolvency. The finance charges and administrative fees under this Agreement are
based on an amount equal to SVB's prime rate plus 4% per annum, of the average
daily outstanding account balance and .625% of the face amount of each purchased
receivable, respectively. As of June 30, 1999, there were no outstanding
borrowings.

In August 1999, the Company and SVB modified the Agreement to reduce the rate of
interest charged from prime plus 4% per annum to prime.

NOTE 8 - RETIREMENT PLAN

The Company has a 401(k) plan, under which to be eligible, employees must have
completed six months of service, be at least 21 years of age and be credited
with 1,000 hours of service. The Company may make contributions to the plan at
its discretion. Contributions expensed by the Company during 1999, 1998, and
1997 were approximately $110,000, $0, and $103,000, respectively.

NOTE 9 - INCOME TAXES

Deferred tax assets (liabilities) are related to the following (in thousands):

<TABLE>
<CAPTION>
                                                                       JUNE 30,
                                                  ---------------------------------------------------
                                                           1999                         1998
                                                  -----------------------      ----------------------

<S>                                               <C>                          <C>
Tax assets:
     Inventories                                  $                336         $                460
     Accrued expenses                                              645                          808
     Net operating loss carryforwards                            3,097                        6,806
     Tax credit carryforwards                                      519                          572
     Other                                                           -                          115
                                                  -----------------------      ----------------------
               Gross deferred tax assets                         4,597                        8,761
                                                  -----------------------      ----------------------

Tax liabilities:
     Income on contracts                                        (1,161)                      (1,846)
     Software costs                                               (663)                        (871)
     Depreciation                                                 (420)                        (456)
                                                  -----------------------      ----------------------
               Gross deferred tax liabilities                   (2,244)                      (3,173)
                                                  -----------------------      ----------------------
          Net deferred tax asset                                 2,353                        5,588
     Valuation allowance                                        (2,353)                      (5,588)
                                                  -----------------------      ----------------------
     Net deferred tax                             $                  -         $                  -
                                                  =======================      ======================
</TABLE>


                                      F-13
<PAGE>   38
NOTE 9 - INCOME TAXES, CONTINUED

The components of the (benefit) provision for income taxes are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                             YEARS ENDED JUNE 30,
                               ---------------------------------------------------------------------------------
                                        1999                         1998                         1997
                               -----------------------      -----------------------      -----------------------

<S>                            <C>                          <C>                          <C>
Current:
          Federal              $                  -         $                  -         $                  -
          State                                   -                            -                            -
                               -----------------------      -----------------------      -----------------------
Total current                                     -                            -                            -
                               -----------------------      -----------------------      -----------------------

Deferred
          Federal                                 -                         (745)                         745
          State                                   -                         (153)                         153
                               -----------------------      -----------------------      -----------------------
Total deferred                                    -                         (898)                         898
                               -----------------------      -----------------------      -----------------------

Total                          $                  -         $               (898)        $                898
                               =======================      =======================      =======================
</TABLE>

The Company records a valuation allowance for deferred tax assets when it is
management's judgment that it is more likely than not that all or a portion of a
deferred tax asset will not be realized. Any income tax benefit resulting from
the utilization of operating losses resulting from the exercise of options will
be reflected in additional paid-in-capital (versus through the tax provision)
when actually realized for tax purposes.

In 1998, the income tax benefit was comprised of a $898,000 benefit resulting
from the reversal of deferred tax liabilities based on the ability of the
Company to utilize current year losses to reduce future payment of such taxes.
The benefit was net of an increase in the valuation allowance of $825,000. In
1997, the provision for income taxes was comprised of $898,000 including a
reduction in the valuation allowance of $277,000.

At June 30, 1999, the Company has available general business credit
carryforwards of approximately $250,000, which are available to offset future
income tax and expire in years through 2007. The Company also has net operating
loss carryforwards for tax purposes of approximately $8.0 million that expire in
years 2007 through 2019. Included in net operating loss carryforwards at June
30, 1999 are $4.7 million for tax deductions related to non-qualified stock
options. Ownership changes as defined by the Internal Revenue Code, may limit
the amount of net operating loss carryforwards that can be utilized annually to
offset future taxable income.

The total income tax (benefit) provision for each year varied from the amount
computed by applying the statutory U.S. Federal income tax rates to net income
(loss) before income taxes as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                  YEARS ENDED JUNE 30,
                                                        ----------------------------------------------------------------------
                                                                 1999                     1998                     1997
                                                        ---------------------    ---------------------    --------------------

<S>                                                     <C>                      <C>                      <C>
Income tax provision (benefit) at statutory rate        $                210     $             (1,963)    $             1,287
State income taxes net of Federal benefit                                 30                     (229)                    178
Nondeductible expenses                                                    47                       79                      70
Foreign tax credit                                                        53                        -                    (259)
Other                                                                      -                      390                    (101)
Change in valuation allowance                                           (340)                     825                    (277)
                                                        ---------------------    ---------------------    --------------------
     Actual (benefit) provision                         $                  -     $               (898)    $               898
                                                        =====================    =====================    ====================
</TABLE>


                                      F-14
<PAGE>   39
NOTE 10 - STOCKHOLDERS' EQUITY

Employee Stock Purchase Plan

In 1999, the Company adopted an Employee Stock Purchase Plan (the "Plan") to
provide a method whereby all employees have an opportunity to acquire a
proprietary interest in the Company through the purchase of shares of common
stock. The Plan is implemented through common stock offerings in consecutive
offering periods, each constituting a calendar quarter. The first offering
period commenced on January 1, 1999. The option price of the common stock,
purchased with payroll deductions made during an offering period, is the lower
of 85% of the closing price of the common stock on the first eligible trading
day of an offering period or 85% of the closing price of the common stock on the
last eligible day of an offering period. The maximum number of shares of common
stock which may be issued under the Plan is 240,000 shares. During 1999, the
Company issued 4,296 shares of common stock under the Plan.

Stock Options

OMNIBUS STOCK PLAN ("OMNIBUS PLAN")

In connection with the Shareholder approved Omnibus Plan, the Company has
reserved 3,200,000 shares of Common Stock to grant nonqualified and incentive
stock options to officers and employees. The exercise price of each option
granted under the Omnibus Plan is determined by the Compensation Committee, and
is limited to a minimum of the fair market value of the Company's Common Stock
on the date of grant. The Omnibus Plan also provides for the issuance of
restricted or unrestricted stock, stock appreciation rights and phantom stock
options. The Company may grant options under the Omnibus Plan until September
2007.

The terms of option grants and issuances of restricted stock, stock appreciation
rights and phantom stock options, including vesting and exerciseability, are
determined by the Compensation Committee. Options and phantom stock options
granted to date vest either immediately or over a period of one to eight years
from the date of grant, subject to accelerated vesting in certain events such as
a change of control, and expire upon the earlier of the employee's termination
or five or ten years from the date of grant. Certain options and phantom stock
options granted in 1999, 1998, and 1997 are further subject to accelerated
vesting based on achievement of certain pre-determined performance goals.
Vested options and phantom stock options become exercisable immediately upon
vesting or within three years from the date of grant. As of June 30, 1999,
1998 and 1997, there were outstanding phantom stock options totaling 10,082,
8,082, and 3,082, respectively, and no restricted stock or stock appreciation
rights had been granted. Compensation cost associated with the 1999, 1998, and
1997 phantom stock option grants was immaterial.

In July 1998, the Company re-priced 122,984 options and phantom stock options
with original exercise and base unit prices of $12.00 to the $5.00 fair market
value on the date of re-pricing. During fiscal year 1998, the Company re-priced
80,000 options with an original exercise price of $17.75 to the $6.38 fair
market value on the date of re-pricing. No other terms of the options were
modified. There were no modifications of option terms in 1997.


                                      F-15
<PAGE>   40
NOTE 10 - STOCKHOLDERS' EQUITY, CONTINUED

STOCK OPTION PLAN FOR DIRECTORS ("DIRECTORS' PLAN")

In connection with the Shareholder approved Directors' Plan, the Company has
reserved 200,000 shares of Common Stock to grant nonqualified stock options to
non-employee members of the Company's Board of Directors. The exercise price of
each option granted under the Directors' Plan is limited to a minimum of the
fair market value of the Company's Common Stock on the date of grant. The
Company may grant options under the Directors' Plan until July 2000.

Options granted to directors through June 30, 1997 vest 4,500 shares each year
from the date of grant. Options granted subsequent to June 30, 1997 vest 3,000
shares each year from the date of grant. Vested options become exercisable
immediately upon vesting. Options granted under the Directors' Plan generally
expire five years from date of grant.

Information relating to all the plans is summarized as follows:

<TABLE>
<CAPTION>
                                       OMNIBUS PLAN                                                  DIRECTORS' PLAN
                                       --------------------------------------------    --------------------------------------------
                                                                WEIGHTED AVG.                                     WEIGHTED AVG.
                                       NUMBER OF SHARES          SHARE PRICE            NUMBER OF SHARES           SHARE PRICE
                                       -----------------      -------------------      -------------------      -------------------
<S>                                        <C>               <C>                                <C>            <C>
Outstanding Options at June 30, 1996        1,033,211         $          1.40                    40,500         $            1.92
Granted                                       744,677                    8.86                    13,500                      7.00
Exercised                                    (806,960)                   2.55                   (31,500)                     0.50
Expired                                        (5,250)                  12.00                         -                         -
                                       -----------------      -------------------      -------------------      -------------------
Outstanding Options at June 30, 1997          965,678                    6.13                    22,500                      7.00

Granted                                       689,883                    7.67                     9,000                     17.50
Exercised                                    (257,871)                   1.22                         -                         -
Expired                                      (286,908)                  10.48                         -                         -
                                       -----------------      -------------------      -------------------      -------------------
Outstanding Options at June 30, 1998        1,110,782                    7.10                    31,500                     10.00

Granted                                       795,259                    3.47                    15,000                      4.39
Exercised                                     (66,283)                   0.97                         -                         -
Expired                                      (393,687)                   8.07                         -                         -
                                       -----------------      -------------------      -------------------      -------------------
Outstanding Options at June 30, 1999        1,446,071         $          5.12                    46,500         $            8.19
                                       =================      ===================      ===================      ===================

Options exercisable at June 30, 1997          584,697         $          3.41                     9,000         $            7.00
                                       =================      ===================      ===================      ===================
Options exercisable at June 30, 1998          444,354         $          6.18                    18,000         $            7.00
                                       =================      ===================      ===================      ===================
Options exercisable at June 30, 1999          576,579         $          6.35                    25,500         $            8.24
                                       =================      ===================      ===================      ===================
Options available for granting                347,609                                            90,500
                                       =================                               ===================
</TABLE>


                                      F-16
<PAGE>   41
10 - STOCKHOLDERS' EQUITY, CONTINUED

The following table summarizes information about stock options outstanding at
June 30, 1999:

<TABLE>
<CAPTION>
                           OPTIONS OUTSTANDING                                                           OPTIONS EXERCISABLE
-------------------------------------------------------------------------------------------  ---------------------------------------
                                                       Weighted-
                                                        Average
                                   Number              Remaining          Weighted-               Number               Weighted-
        Range of                 Outstanding          Contractual          Average              Exercisable             Average
     Exercise Prices          at June 30, 1999        Life (yrs)       Exercise Price        at June 30, 1999       Exercise Price
-------------------------- ------------------------  ------------  ------------------------  ---------------------  ----------------

<S>                                        <C>           <C>      <C>                                    <C>       <C>
$ 0.41 to $ 1.78                            38,874        0.6      $                 0.77                  38,874   $           0.77
$ 1.78 to $ 3.55                           437,575        9.6      $                 2.29                       -                  -
$ 3.55 to $ 5.33                           295,413        8.7      $                 4.87                  86,428   $           5.00
$ 5.33 to $ 7.10                           624,262        6.2      $                 6.59                 439,658   $           6.68
$ 7.10 to $ 8.88                             3,000        4.6      $                 7.94                       -                  -
$10.65 to $12.43                            79,263        7.8      $                11.88                  28,935   $          11.88
$14.20 to $15.98                             5,184        2.6      $                14.75                   5,184   $          14.75
$15.98 to $17.75                             9,000        3.4      $                17.50                   3,000   $          17.50
                           ------------------------                                             -----------------
                                         1,492,571                                                        602,079
                           ========================                                             =================
</TABLE>

FINANCIAL ACCOUNTING STANDARDS NO. 123

Effective June 30, 1997, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In
accordance with the standard, the Company has elected to continue to measure
compensation expense for its stock option plans using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company recorded no compensation cost associated with
stock options in 1999, 1998 and 1997.

For the purposes of the pro forma amounts shown below, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes model.
The weighted-average assumptions included in the Company's fair value
calculations are as follows:

<TABLE>
<CAPTION>
                                        1999                        1998                         1997
                               -----------------------     -----------------------      -----------------------

<S>                                           <C>                          <C>                        <C>
Expected life (years)                         3-8                          3-8                        3-8
Risk-free interest rate                       5-6 %                        5-6 %                        6 %
Expected volatility                           123 %                         81 %                       77 %
Dividend yield                                  0 %                         0  %                        0 %

</TABLE>

The weighted average fair value of stock options granted under the stock option
plans during 1999, 1998 and 1997 was $2.91, $5.48 and $5.83 respectively. If the
Company determined compensation costs for these plans in accordance with SFAS
123, the Company's net (loss) income and earnings per share would have been:


                                      F-17
<PAGE>   42
10 - STOCKHOLDERS' EQUITY, CONTINUED

<TABLE>
<CAPTION>
(amounts in thousands except per share amounts)             1999                         1998                         1997
                                                   -----------------------      -----------------------      -----------------------
<S>                                                   <C>                         <C>                          <C>
Pro-forma amounts
  Net (loss) income                                   $           (1,010)          $           (9,893)         $              1,212
                                                   =======================      =======================      =======================
  Basic (loss) income per share                       $            (0.11)          $            (1.14)         $               0.16
                                                   =======================      =======================      =======================
  Diluted (loss) income per share                     $            (0.11)          $            (1.14)         $               0.15
                                                   =======================      =======================      =======================
</TABLE>

The SFAS 123 method of accounting does not apply to options granted prior to
January 1, 1995 and, accordingly, the resulting pro forma compensation cost may
not be representative of that to be expected in the future.

NOTE 11 - MANDATORILY REDEEMABLE PREFERRED STOCK

On October 31, 1991, in connection with an investment agreement, the Company
sold 340,211 shares of Class C Preferred Stock at $5.14 per share. In connection
with the Company's initial public offering in August 1996, and pursuant to the
terms of the investment agreement, the shares were converted into 1,530,950
shares of the Company's common stock.

Activity with respect to Class C Preferred Stock was as follows (in thousands):

<TABLE>
<CAPTION>
<S>                                                                  <C>
Balance, June 30, 1996                                                                     2,262
Accretion of dividends                                                                        17
Conversion upon initial public offering                                                   (2,279)
                                                                      ----------------------------
Balance, June 30, 1997                                                $                        -
                                                                      ============================
</TABLE>


                                      F-18
<PAGE>   43


NOTE 12 - EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following is a reconciliation of the numerators and denominators of basic
net income (loss) per common share ("Basic EPS") and diluted net income (loss)
per common share ("Diluted EPS"):

<TABLE>
<CAPTION>
                                                                               YEARS ENDED JUNE 30,
                                                         -----------------------------------------------------------------
                                                                1999                   1998                    1997
                                                         ------------------     ------------------      ------------------

<S>                                                      <C>                    <C>                     <C>
BASIC EPS:
Income (numerator):
    Net income (loss)                                    $           618        $        (9,219)        $         2,624
    Less:  preferred stock dividends                                   -                      -                     (17)
                                                         ------------------     ------------------      ------------------

Net income (loss) available to common stockholders       $           618        $        (9,219)        $         2,607
                                                         ==================     ==================      ==================
Shares (denominator):
     Weighted average common shares                                8,838                  8,708                   7,460
                                                         ==================     ==================      ==================

Basic EPS                                                $          0.07        $         (1.06)        $          0.35
                                                         ==================     ==================      ==================

DILUTED EPS:
Income (numerator):
     Net income (loss)                                   $           618        $        (9,219)        $         2,624
     Less:  Preferred stock dividends                                                         -                     (17)
Effect of dilutive securities:
     Convertible preferred stock                                                              -                      17
                                                         ------------------     ------------------      ------------------

Net income (loss) available to common stockholders       $           618        $        (9,219)        $         2,624
                                                         ==================     ==================      ==================
Shares (denominator):
     Weighted average common shares                                8,838                  8,708                   7,460
     Stock options                                                    93                      -                     486
     Convertible preferred stock                                                              -                     206
                                                         ------------------     ------------------      ------------------

     Total weighted shares and equivalents                         8,931                  8,708                   8,152
                                                         ==================     ==================      ==================
Diluted EPS                                              $          0.07        $         (1.06)        $          0.32
                                                         ==================     ==================      ==================
</TABLE>


Options to purchase 288,455 shares of Common Stock were outstanding during 1998,
but were not included in the computation of diluted EPS because the effect would
have been anti-dilutive.

NOTE 13 - INITIAL PUBLIC OFFERING

On August 13, 1996, in connection with the Company's initial public offering,
2,875,000 shares of Common Stock, 2,645,000 of which were offered by the
Company, were sold at $7.00 per share. The net proceeds raised by the Company
totaled approximately $16.1 million.

The Mandatorily Redeemable Class C Preferred Stock was automatically converted
into 1,530,950 shares of the Company's Common Stock upon the completion of the
Company's initial public offering. No dividends were payable with respect to the
converted shares.

On August 28, 1996, the Company redeemed the Class B Preferred Stock for
$308,000 in accordance with its terms that required redemption upon transfer of
substantially all assets or of majority control of the Company.


                                      F-19
<PAGE>   44
NOTE 14 - COMMITMENTS AND CONTINGENCIES

At June 30, 1998 the Company had a $450,000 letter of credit arrangement with
Crestar which guarantees the Company's performance to its landlord (see Note 7).
During the second quarter of fiscal 1999, the Company replaced its letter of
credit arrangement with Crestar with a new $400,000 standby letter of credit
arrangement with Silicon Valley Bank. The letter of credit is secured by
restricted cash equivalents maintained at SVB; the requirement decreases
annually through 2003 to $100,000.

At June 30, 1998, the Company had letter of credit arrangements with Crestar
totaling $293,000 which guaranteed the Company's performance under certain
contracts (see Note 7). The letter of credit arrangement expired in the second
quarter of fiscal 1999.

The Company leases office space under non-cancelable operating leases. Lease
terms range from two to seven years and include renewal options for additional
periods. Management expects that in the normal course of business, leases will
be renewed or replaced by other leases. Additionally, the Company leases
equipment under operating leases which, in the aggregate, are not significant.

The Company is committed for the payment of minimum rentals under operating
lease agreements through the year 2004 in the following amounts (in thousands):

<TABLE>
<CAPTION>
              YEAR ENDING JUNE 30,                            AMOUNT
       -------------------------------------       -----------------------------

<S>                                                <C>
                      2000                         $                        810
                      2001                                                  803
                      2002                                                  790
                      2003                                                  736
                      2004                                                  310
                                                   -----------------------------

                                                   $                      3,449
                                                   =============================
</TABLE>

The total rental expense under operating leases was $868,000, $813,000 and
$728,000 for the years ended June 30, 1999, 1998 and 1997, respectively.

NOTE 15 - EXPORT SALES AND SALES TO MAJOR CUSTOMERS

EXPORT SALES

The Company sells its products worldwide from its headquarters in Gaithersburg,
Maryland. The following is a breakdown of the Company's revenue by geographic
area (in thousands):

<TABLE>
<CAPTION>
                                      -----------------------     -----------------------      -----------------------
                                               1999                        1998                         1997
                                      -----------------------     -----------------------      -----------------------
<S>                                     <C>                          <C>                          <C>
U.S.                                     $       17,519               $      12,314                $      12,770
Canada and Mexico                                 1,670                       2,557                        7,746
Asia                                              7,971                       5,178                       11,186
Europe                                              999                         858                        1,203
South America                                       222                         815                          699
Africa and Middle East                            1,276                         743                           80
                                      -----------------------     -----------------------      -----------------------
     Total Revenue                       $       29,657              $       22,465                $      33,684
                                      =======================     =======================      =======================
</TABLE>

SALES TO MAJOR CUSTOMERS

Sales to three customers representing a single end-user in Asia comprised
approximately 14%, 9% and 21% of total revenue for 1999, 1998 and 1997,
respectively. Sales to an end user in Mexico comprised


                                      F-20
<PAGE>   45
approximately 7% and 17% of the Company's revenues in 1998 and 1997,
respectively. Two other customers each accounted for approximately 12% and 10%
of total revenue in fiscal year 1999.

NOTE 16 - CONCENTRATIONS OF CREDIT RISK

Trade receivables subject the Company to the potential for credit risk with
customers in the telecommunication services industry and government sector.
Approximately 49% of the Company's gross trade receivables balances was
represented by five customers at June 30, 1999. To reduce credit risk, the
Company conducts ongoing evaluations of its customers and requires letters of
credit or other pre-payment arrangements, as appropriate. The Company maintains
accounts receivable allowances to provide for potential credit losses.


                                      F-21
<PAGE>   46
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>

                                           BALANCE AT      CHARGED TO     RECOVERIES OF                    BALANCE AT
                                            BEGINNING       COSTS AND        PRIOR                           END OF
                     DESCRIPTION            OF PERIOD       EXPENSES       WRITE-OFFS      WRITE-OFFS        PERIOD
<S>                                       <C>             <C>             <C>            <C>               <C>
Year ended June 30, 1999:
     Allowance for doubtful accounts      $  2,465,000    $  812,000      $ 392,000      $  2,802,000       $  867,000
     Reserve for obsolete inventory            349,163       (97,353)             -                 -          251,810

Year ended June 30, 1998:
     Allowance for doubtful accounts            10,000      2,455,000             -                 -        2,465,000
     Reserve for obsolete inventory             15,000        334,163             -                 -          349,163

Year ended June 30, 1997:
     Allowance for doubtful accounts            10,000              -             -                 -           10,000
     Reserve for obsolete inventory             15,000              -             -                 -           15,000
</TABLE>


                                      S-1
<PAGE>   47
INDEX TO EXHIBITS

<TABLE>
           <S>       <C>
           10.24     (D)*  Employment Agreement dated as of October 1, 1998 between the Company and T. Russotto
           10.25     (D)*  Non-Qualified Stock Option Grant Agreement dated March 23, 1999 between the Company and T. Russotto.
           10.26     (D)*  Incentive Stock Option Grant Agreement dated March 4, 1999 between the Company and J. Eckler.
           23        (D)   Consent of Ernst & Young LLP
           23.1      (D)   Consent of PricewaterhouseCoopers LLP
           27.       (D)   Financial Data Schedule
           27.1      (D)   Amended Financial Data Schedule for the quarters ending September 30, December 31, and March 31, 1999
           27.2      (D)   Amended Financial Data Schedule - Fiscal Year 1998
           ---------------------------------------------------------------------------------------------------------------------
                     (D)   Filed herewith
                     *     Management contract or compensatory plan or amendment required to be filed as an exhibit.
</TABLE>


                                      X-1