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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934

|  |  |                                                                                     
|- |  | ------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2003
OR


|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|o |  | 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)


|                                                               |  |                           
|-------------------------------------------------------------- |  | --------------------------
|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)                

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 12, 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 o

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

As of September 16, 2003, the aggregate market value of the Common Stock
held by non-affiliates of the registrant [(i.e. persons who are not directors,
officers or affiliated therewith)] was approximately $14.6 million (7,796,840
shares of Common Stock at a closing price on the Nasdaq National Market of
$1.87 on such date). Outstanding as of September 16, 2003 were 9,818,356
shares of Common Stock.

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ACE*COMM CORPORATION

TABLE OF CONTENTS

|         |  |                                                                                       |  |     
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                       |  | PAGE
|         |  |                                                                                       |  |     
|         |  | PART I                                                                                |  |     
|Item 1.  |  | BUSINESS                                                                              |  | 4   
|Item 2.  |  | PROPERTIES                                                                            |  | 17  
|Item 3.  |  | LEGAL PROCEEDINGS                                                                     |  | 17  
|Item 4.  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 17  
|         |  | PART II                                                                               |  |     
|Item 5.  |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS                 |  | 18  
|Item 6.  |  | SELECTED FINANCIAL DATA                                                               |  | 19  
|Item 7.  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |  | 21  
|Item 7A. |  | QUANTATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 27  
|Item 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           |  | 27  
|Item 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  |  | 27  
|Item 9A. |  | DISCLOSURE OF CONTROLS AND PROCEDURES                                                 |  | 28  
|         |  | PART III                                                                              |  |     
|Item 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                    |  | 29  
|Item 11. |  | EXECUTIVE COMPENSATION                                                                |  | 31  
|Item 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        |  | 34  
|Item 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        |  | 35  
|         |  | PART IV                                                                               |  |     
|Item 15. |  | EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K                     |  | 36  

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INTRODUCTION

ACE*COMM Corporation, incorporated in Maryland in 1983, and its wholly owned
subsidiary, Solutions ACE*COMM Corporation, incorporated in Quebec in 1996, are
referred to in this document collectively as ACE*COMM, unless otherwise noted
or the context indicates otherwise.

ACE*COMMs fiscal year ends on June 30. Unless otherwise noted, all references
to years in this document are assumed to be fiscal years.The consolidated
financial statements include the accounts of ACE*COMM and its subsidiary,
Solutions ACE*COMM Corporation. All significant inter-company balances and
transactions have been eliminated in consolidation.

FORWARD LOOKING STATEMENTS

This annual report on Form 10-K and the information incorporated by reference
in it include forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. We intend the forwarding-looking statements to be covered by the safe
harbor provisions for forward-looking statements in these sections. These
forward-looking statements relate to future events or the future financial
performance of ACE*COMM (as defined below), some or all of which may involve
risk and uncertainty. ACE*COMM often introduces a forward-looking statement by
such words as anticipate, plan, projects, continuing, ongoing,
expects, management (or ACE*COMM) believes, or intend. Investors should
not place undue reliance on these forward-looking statements, which involve
estimates, assumptions, risks and uncertainties that could cause actual results
to vary materially from those expressed in this Report or from those indicated
by one or more forward-looking statements. The forward-looking statements speak
only as of the date on which they were made, and ACE*COMM undertakes no
obligation to update any of the forward-looking statements. In evaluating
forward-looking statements, the risks and uncertainties investors should
specifically consider include, but are not limited to, demand levels in the
relevant markets for ACE*COMMs products, the ability of ACE*COMMs customers
to make timely payment for purchases of its products and services, the risk of
additional losses on accounts receivable, success in marketing ACE*COMMs
products and services internationally, the effectiveness of cost containment
strategies, as well as the various factors identified in this annual report on
Form 10-K which could cause actual results to differ materially from those
indicated by such forward-looking statements, including the matters set forth
in Business - Backlog, Business - Proprietary Rights and Licenses,
Selected Financial Data, Managements Discussion and Analysis of Financial
Condition and Results of Operations and Risk Factors Affecting Future
Operating Results. Investors should not place undue reliance on these
forward-looking statements. These forward-looking statements speak only as of
the date in which they are made, and ACE*COMM undertakes no obligation to
update any forward-looking statements.

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PART I

ITEM 1.
     BUSINESS

General

ACE*COMM is a global provider of advanced Convergent Mediation products and
Enterprise Telemanagement software applications. These hardware and software
solutions and related products and services are employed in wired and wireless
networks that deliver voice, data, mixed media and Internet communications.
They provide the ability to capture, secure, validate, and enhance data from
multiple networks and technologies. These operations can be performed
interactively with a data warehouse, and processed information is distributed
in near real-time, to all types of carrier OSS (Operations Support Systems) and
BSS (Business Support Systems), such as billing and fraud systems. Customers
can use these products to analyze and handle this information to reduce costs,
accelerate time-to-market for new products and services, generate new sources
of revenue, and push forward with next-generation initiatives. ACE*COMM markets
the Convergent Mediation product line to telecommunications carriers and
Internet communications service providers, and the NetPlus® Enterprise
Operations Support System (or NetPlus® EOSS) and other products primarily to
large enterprises.

Current telecommunications and Internet communications industry dynamics have
demonstrated an increase in the worldwide demand for data, voice, and video
services, an adherent demand for increased network capacity and new network
services, and an increasingly competitive environment due to continued
deregulation and privatization of the global telecommunications industry for
telecommunications service providers. This has, in turn, created the
requirement for accurate information regarding network performance and system
usage to support the increasing volumes of data and voice communications to and
from employees, customers, and suppliers. ACE*COMMs products and services are
designed to enable carriers and large enterprises to gain better insights into
their network performance and to optimize their use of new and existing
communications networks.

Over the past few years, the strong decline in the telecommunications and
Internet communications industries have caused a significant reduction in
spending by companies in these industries. This has caused a significant
reduction in ACE*COMMs revenues, from U.S., Canadian and European customers in
particular. ACE*COMM has responded to this industry decline in demand by
reducing its overhead and other costs, and conserving cash resources. We
incurred losses over the last three years despite savings associated with
reducing headcount and scaling back certain operations due to the
aforementioned decline in revenues and the expenses of maintaining the
resources and key functions needed to grow the company when demand begins to
trend upward again.

We have been focusing over the last three years on non-domestic customers, and
have experienced an increase in revenue from outside of North America, in
particular China, although the increase has not been sufficient to offset the
decline in revenues from the North American market. We have also reacted to the
reduced demand from telecommunications customers by working with existing large
customers, such as Siemens AG, which contributed 10 percent or more of our
total revenues over the past three years, and by pursuing new strategic
alliances such as Giza Engineering Systems, Westlake Global Technology
Solutions (WGTS), and Northrop Grumman (formerly TRW) to expand our
international revenues. In addition, we added significant new customers over
the past three years including IUSACELL, a large wireless provider in Mexico,
Telecom Egypt, and Merrill Lynch. In December 2002, we entered into an
arrangement with WGTS, which included an investment in ACE*COMM and support for
our sales efforts in China. We recently concluded a formal distribution
agreement with WGTS encompassing mainland China, Taiwan, Hong Kong, and Japan.

Shortly after the close of fiscal 2003, we entered into a merger agreement with
i3 Mobile that calls for us to issue a to-be-determined number of shares of our
common stock in exchange for i3 Mobiles outstanding stock immediately prior to
consummation of the transaction. i3 Mobile is a New Jersey based company which
ceased operations in March 2003 in an attempt to conserve its remaining capital
and liquidity. If the merger is concluded successfully, which is presently
expected to occur by the end of calendar year 2003, we anticipate that the i3
Mobile arrangement will provide us with significant cash resources that can be
used to acquire new technologies to expand our product lines, or to acquire
complementary companies that can increase the revenues and improve the
profitability of the combined company.

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Despite our cost reductions, we have introduced new products and added new
capabilities to existing products. These include the release of: a) NetPlus®
version 6, b) the N*Score customer churn reduction engine, c) the Workflow
Engine task automation tool, and d) the N*VISION® Go! Rapid-deployment version
of our N*VISION® usage data management product.

Products and Services

Solutions for telecommunications carriers and Internet service providers

ACE*COMMs Convergent Mediation products enable telecommunications carriers
and Internet service providers to bring together the varied wired and wireless,
voice, data and Internet communications technologies used by these customers,
in either conventional or next-generation network technology environments.
They provide a consistent view of the data generated by these customers
network elements and often diverse technologies for near real-time processing
and reporting. These products employ a flexible and scalable distributed
architecture that make them suitable for networks of all sizes and complexity.
By enabling the various network elements to talk to each other, the
Convergent Mediation products assist customers in addressing their data needs
while protecting their investment in existing OSS or BSS infrastructure.
Convergent Mediation products support wired, wireless, voice, data, and
Internet communications services to bring together diverse and seemingly
incompatible protocols, formats, and technologies to solve our customers data,
billing, and reporting needs.

Geographic markets

ACE*COMM markets and sells its Convergent Mediation solutions into the
geographic regions described below. See Note 13 of the Notes to Financial
Statements for a summary of ACE*COMMs revenue by geographic area.

Canada & U.S.

ACE*COMMs corporate headquarters are located in Gaithersburg, Maryland, close
to the District of Columbia, with a development office in Montreal, Canada.
North American customers include Level 3 Communications, Birch Telecom, Nextel,
and TelCove.

Latin America

ACE*COMM has maintained a strong presence in Latin America for more than ten
years and has completed hundreds of installations throughout the region.
Through partner relationships, support offices in Mexico, Guatemala, and
Colombia provide customers with local support in their native language.
ACE*COMMs customers include Telmex, IUSACELL, CODETEL, and Telefonica Moviles
Mexico.

Europe

ACE*COMM has established a European customer-base through OEM relationships
with industry leading equipment manufacturers such as Siemens AG, Alcatel, and
Marconi. ACE*COMM is working with Northrop Grumman (TRW Inc.) and British
Telecom (BT) to provide the call event-processing component of the UKs Airwave
mmO2 Public Safety Radio Communications project.

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Middle East and Africa

Since 1995, ACE*COMM has maintained a presence in the Middle East and Africa
through regional partnerships with companies like Giza Systems Engineering,
Fujitsu Siemens, MOSECO Jordan, and ACT. ACE*COMMs systems are installed in
various locations in Morocco, Egypt, Qatar, Kuwait, Saudi Arabia, and the
Palestinian Territories.

Asia Pacific

With over ten years of experience in the region, ACE*COMM has developed a base
of customer and partner relationships in Asia-Pacific. ACE*COMM is extending
its initial focus on the traditional switching sector to address the needs of
complex IP and next-generation mediation technologies. Its systems are
installed in China, Singapore, the Philippines, Japan, Australia, Taiwan,
Indonesia, Malaysia, Korea, and Bhutan. ACE*COMM recently signed a
comprehensive distribution agreement with WGTS for China, Taiwan, Hong Kong,
and Japan.

Core capabilities

ACE*COMMs Convergent Mediation solutions provide the following range of
capabilities:

Capture and collection of data

Capture and collection refer to the processes involved in gathering and
securing data regarding network usage. Data is gathered directly from multiple
customer network elements and from other data processors. ACE*COMM products
permit customers to gather and secure the data all at once to ensure that the
duplication or gap problems that plague many data networks do not occur. The
products also enable customers to perform audits to ensure that data handoff
and exchange are performed correctly, and to generate alarms if any errors are
detected. Typically, the term capture is used where the data extraction
requires an interface co-located next to the network element. Collection
generally refers to the process of centralizing data from several sites.

Data management

Data management refers to the different data processing capabilities of our
products. For example, data is checked for syntactical and semantic errors.
Duplicate data is weeded out, gaps in the data sequence are identified, and
alarms are generated. Different data formats can be converted into a common
format to permit varied processing modules located further down in the
customers network to interact with the data in a consistent manner. The
products allow telecommunications carriers to augment their customer telephone
call records with customer identification, service, cost, and other billing
information gathered from elsewhere on the network. Fragmented customer call
records can be reassembled to provide a single record of the telephone call.
Also, error correction and reprocessing can be applied to data that generated
any processing alarms in a previous run.

Price and cost analysis

In price and cost analysis, our products identify and monitor inbound and
outbound data on a real-time basis in a way that enables telecommunications
carriers and other customers to perform detailed measurement of individual
records and summarized usage records. The ability to perform this tracking and
measurement supports inter-carrier invoice reconciliation and pre-billing
processing, which can be of significant importance to carriers. It also
improves their ability to implement rate changes on a scheduled basis or in
real-time for a rapid response to circumstances, and aids in the management of
termination costs.

Presentation of network-usage records

Our products presentation functions are used to reformat and summarize network
usage records for many applications such as billing and fraud prevention
systems. The presentation functions are able to provide information to our
customers on a one output record per input record basis or on a summary basis,
in which many detail records are aggregated into one record. A single source of
data is used for all business operations, which helps to eliminate

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duplication, discrepancies, and the need for data reconciliation, and improves
the ability to plan and make decisions based on solid business analysis.

Warehousing of data for analysis

Warehousing allows our customers to convert and store large volumes of network
data into the organized information required in todays marketplace, as well as
quickly detect and correct traffic flow problems. Specialized network-usage
data warehousing enables customers to correlate, aggregate and augment the data
according to each customers specifications. This product also allows the
customer to profile usage by their customers, yielding customer-specific
knowledge for more effective marketing, enhancing the ability to filter out
unbillable data, and expediting the resolution of erroneous data.

Revenue assurance

Real-time and near real-time data analysis capabilities enable immediate
detection, notification, and correction of identified problems. This provides
customers with the capability of generating a reliable and immediate audit
trail. The rapid data analysis also enables our customers to perform service
pricing and costing, and provides other revenue assurance benefits related to
data repair and correction, inter-carrier accounting and performance
management.

IP Centrex and billing system

ACE*COMMs TREX*COMM® collection solution creates an IP Centrex and billing
system by processing data from soft switches.

Churn-risk management

ACE*COMMs N*Score product enables service providers to rank their customers
according to a user-specified scoring system. N*Score cross-references known
customer turnover-risk (churn) factors against customers actual usage patterns
and uses that information to identify and rank high-risk customers. The
information generated by N*Score gives service providers and other customers
more information about the risk of losing particular customers, permitting
them to correct customer services or others issues before their client decides
to terminate service.

Solutions for large enterprises

ACE*COMM offers network
telecommunications management (telemanagement) products
and services to large enterprises, which include government agencies, military
organizations, educational institutions and Fortune 1000 size organizations.
ACE*COMMs principal product for these customers is the NetPlus® EOSS. It can
be used on multi-vendor/multi-protocol voice, data, and video networks, and is
scalable to accommodate numerous network sizes and locations. NetPlus® enables
enterprises to improve service and control costs by managing various aspects of
their networks, including alarm and fault resolution, cabling and facilities
management, convergent billing, charge back billing, cost control and recovery
of lost data. NetPlus® also provides enterprise customers with the ability to
automate maintenance of their networks by providing automated work orders and
trouble tickets, and to manage their inventory and switching equipment
configuration.

ACE*COMM introduced a new version of the product, NetPlus® 6 EOSS, in February
2003. The new version features a platform based on the n-tiered Java 2
Enterprise Edition (J2EE) architecture, which is an architecture that
represents the combined expertise of a collaborative industry effort and has
wide industry support from key middleware vendors. This version represents an
improvement in flexibility, extensibility, and mobility over present-day
systems. The new versions browser-based interface is expected to eliminate
the need for time-consuming client installation and upgrades, and includes a
configurable Workflow Engine that enables information technology (IT)
departments to further automate labor and paper-intensive processes for
improved network operating efficiency and data accuracy.

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Target market segments

ACE*COMM markets and sells NetPlus® into the following vertical markets:

Federal government agencies and military installations

ACE*COMM designs large scale, secure, high-availability network management
systems for Federal government agencies at installations in the U.S. and
abroad.

State and local governments

ACE*COMMs NetPlus® EOSS provides state governments with the platform required
to monitor and manage all aspects of their networks, enabling them to automate
telecommunications functions, control costs and appropriately allocate those
costs among state agencies.

Financial services

ACE*COMMs NetPlus® EOSS offers our financial services customers a fully
integrated network communications management system that covers the many
software and services needs of todays financial services institutions for
fault, configuration, accounting, performance, and security management.

Airports and transportation

Airports and other public transportation authorities must address the
communications service needs of their tenants. ACE*COMMs NetPlus® utilizes a
centralized database that provides our customers comprehensive network
monitoring, carrier bill reconciliation, and subscriber billing that are fast,
accurate, and automatic.

Educational institutions

Colleges and universities face challenges when addressing the diverse
communications needs of a large academic organization.
ACE*COMMs NetPlus®
provides educational institutions with the tools necessary to effectively
manage network performance while customizing services and information provided
to individual departments and organizations.

Public utilities

The recent changes in the regulatory environment have forced public utilities
to focus on cost management and to be more competitive with other suppliers.
Public utilities now have a requirement to reduce overall network
communications management costs and improve service levels to customers.
ACE*COMMs NetPlus® provides these tools, including traffic engineering and
analysis tools for ACD trunks.

Large enterprises (Fortune 1000)

The business of enterprise network communications management continues to
evolve rapidly. Not only has the technology advanced, but the scope of this set
of management functions has also expanded. As a result, todays large
enterprise network and IT managers face many complex challenges in defining the
role of network communications and IT management, and in establishing systems
that work together to realize their full potential. NetPlus® provides these
organization with the ability to manage communications and IT systems from an
enterprise-wide OSS.

Core capabilities

ACE*COMMs NetPlus® has the capability to resolve problems associated with
technology convergence, implementing new types of network services, managing
mergers and acquisitions, and the increasing demand for more equitable and
accurate methods for chargeback of IT and communications.

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ACE*COMMs network communications management products provide enterprise
customers with the following range of capabilities:

Fault management

A software product that allows network managers on a near real-time basis to
detect faults, determine their origins and perform fault correction.

Configuration management

A software product that provides subscriber, connectivity, and equipment
administration functions to track and report information on a network-wide
basis.

Accounting management

System functions that collect, store, process, rate and verify billing and
accounting data.

Performance management

System functions that aggregate and analyze network performance, call data and
configuration data to provide network managers an overall performance model of
their network and operations.

Security management

A multi-level, layered system that provides security functions at various
levels within the network, including those within the operating system and
database.

Directory management

An application that provides personnel, departmental and classified directory
listings in organizational or alphabetical formats.

Product BackplaneTM

A software system that essentially provides the common backbone to all NetPlus®
applications. Product Backplane is based on an Oracle® database, client/server
distributed processing, Web-based User Interface (WUI), and Graphical User
Interface (GUI) presentation, which operates for a single module or multiple
functional system and allows users to implement only the modules they need.

Network management applications

Infrastructure software that provides high-performance, low-cost,
small-footprint applications for managing network element performance.

Workflow engine

A task-based management and advanced work order processing tool with business
rule and process definition for improved productivity and data accuracy.

Professional Services and Support

ACE*COMMs services are generally delivered in conjunction with ACE*COMMs
network management products. ACE*COMMs professional service team assists
customers in implementing its products, educates users, and provides
maintenance and technical support. Implementation services include
identification of technical requirements, solution

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design, product testing, and installation and integration. ACE*COMMs systems
integration partners often provide additional expertise on international
contracts and orders. ACE*COMM provides comprehensive educational courses to
its customers, alliance partners, and employees so they can acquire the
knowledge and skills necessary to deploy, use and maintain ACE*COMMs
solutions. ACE*COMM also offers train-the-trainer programs that enable its
customers to conduct their own internal end-user training. ACE*COMMs
maintenance and technical support services include help desk support, problem
resolution, software maintenance and scheduled software upgrades. ACE*COMM
provides technical support for its products from its Gaithersburg, Maryland
headquarters and utilizes the Web, telephone, electronic mail and, if
necessary, on-site assistance to respond to and resolve our customers
technical questions. International customers are supported either directly by
ACE*COMM or by third-party vendors trained by ACE*COMM.

ACE*COMM believes that a high level of customer support is critical to
ACE*COMMs continuing success in developing relationships with end users and
its strategic partners.

Quality

ACE*COMM maintains an ISO 9001 standard Quality Management Program to monitor
the quality of its products and has an internal Quality Management Committee
to set quality objectives for ACE*COMM and a Quality Assurance Department to
implement and monitor compliance with the applicable procedures.

Sales and Marketing

ACE*COMM markets and sells productbased network communications and data
management solutions directly through its sales force. ACE*COMM concentrates
its sales efforts on a range of service providers, from small start-ups to
large established communication providers that offer voice and data services,
including Internet-based services. ACE*COMM complements its direct sales with
indirect sales through its strategic alliances with operators, original
equipment manufacturers (OEMs), and resellers. These alliance partners give
ACE*COMMs direct sales force a global reach and provide significant leads and
referrals. ACE*COMM also believes that alliances with companies that are well
known in the industry lend credibility and help to gain additional market
acceptance for ACE*COMM products.

ACE*COMM sells substantially all of its products worldwide from its
headquarters in Gaithersburg, Maryland. In 2002 and 2003, we continued to
expand our sales and marketing efforts outside North America through a
combination of direct sales in selected markets, continued partnerships with
systems integrators, and strengthened relationships with existing customers.
These efforts resulted in greater Middle Eastern and Asian sales in fiscal year
2002 and 2003.

Over the past two years, ACE*COMM has derived approximately one half of its
revenues from products delivered or services performed within the United
States. Products delivered or services performed outside of the United States
represented approximately 56 percent, 45 percent and 39 percent of total
revenues in fiscal years 2003, 2002, and 2001, respectively. See Note 13 of
the Notes to Financial Statements for a summary of ACE*COMMs revenue by
geographic area.

Revenue for a given period typically reflects products delivered or services
performed during the period with respect to relatively large financial
commitments from a small number of customers. During 2003, ACE*COMM had 12
major customers, which we define as customers generating $250,000 or more in
revenues during the period; and together the major customers represented
approximately 76% of total revenues. Siemens AG represented approximately 20%
of our total revenues, and Northrop Grumman contributed approximately 10%of
total revenues. During 2002, we had 20 major customers representing 86%of
total revenues. Siemens AG represented approximately 17% of our total revenues
and Northrop Grumman contributed 11%of total revenues earned during 2002.
During 2001, we had 23 major customers representing 93% of total revenues. The
average revenues earned per major customer were $0.9 million in 2003, $0.8
million in 2002 and $1.0 million in 2001.

The sales process for new contracts or orders 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. ACE*COMM

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spends significant time consulting with strategic partners and end
users to adapt its products to meet end user requirements and to determine
their evolving requirements for updates and enhancements.

Strategic Alliances

To assist in developing, marketing, and distributing its products effectively
and as part of ACE*COMMs marketing efforts, ACE*COMM has established strategic
alliances with several large organizations: telecommunication and Internet
equipment manufacturers, computer equipment manufacturers, telecom systems
integrators and other organizations. Each alliance is designed to accomplish
one or more of the following: develop products designed to meet the needs of
the alliance partner or its customers, establish a joint marketing relationship
to include ACE*COMMs products in systems sold by the partner, create a
reseller channel for ACE*COMMs products, or jointly provide customer support
to end users. These strategic alliances enable ACE*COMM to leverage
relationships within the industry to enhance its market development.

Each alliance typically involves a formal agreement between ACE*COMM and a
strategic alliance partner, pursuant to which the parties agree that ACE*COMM
will develop and sell products for use by the partner, or by its customers who
are in such cases the end users of ACE*COMMs products. Each agreement
specifies the terms of the alliance, which may include off-the-shelf products
and/or 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 ACE*COMM from time to time to purchase products, subject to
the terms of the overall agreement. The products are generally purchased and
paid for by the partner 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 ACE*COMM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.

ACE*COMM classifies its alliances into OEM and reseller categories. The
following is a list of ACE*COMMs current significant strategic alliances:

OEM

Strategic alliance partners in this category encompass original equipment
manufacturers that embed ACE*COMMs technologies into their solutions for
end-users.

Compagnie Financiere Alcatel(Alcatel) ACE*COMMs Convergent Mediation
solutions collect usage information from specific Alcatel switches owned and
operated by carriers, providing the billing information carriers need. In 2003,
ACE*COMM became an Alcatel Connected Partner for the provision of mediation
technology to enable usage-sensitive billing for service providers who operate
X.25, frame relay, ATM, and VoIP networks.

Cisco Systems, Inc. ACE*COMM has developed the Cisco Billing and Measurement
Server, or BAMS, based on its Convergent Mediation products. BAMS is a
software application platform designed to co-exist within the framework of the
Cisco products VSC3000, SC2200, and other applications where the VSC core
software application is utilized.

Gluon Networks, Inc. ACE*COMM provides its Convergent Mediation technology
for embedding into Gluons CLX local switching solution for telecom service
providers.

Marconi Corporation, PLC ACE*COMM provides Convergent Mediation solutions
that work in conjunction with Marconis ServiceOn Management® suite of
products.

Motorola, Inc. ACE*COMM provides Convergent Mediation solutions, integrated
into the Mobile Data Gateway switch, that collect and format call detail
records for electronic transmission to a billing center.

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##### 



Resellers

Strategic alliance partners in this category encompass leading hardware and
software vendors or integrators who are resellers for ACE*COMMs products.

Westlake Global Technology Solutions, Inc. ACE*COMM has signed a master
reseller agreement with Westlake for the importing and distribution of ACE*COMM
products in China.

NetSource America Inc. ACE*COMM has signed NetSource as a reseller to offer
NetPlus® as part of its suite of software solutions and outsourced services
focused on managing communications and IT infrastructures to large enterprises
in the Midwest.

Northrop Grumman Corporation (formerly TRW, Inc). ACE*COMM provides
subcontract services for its Convergent Mediation platform to Northrop Grumman
for the real-time usage data management, warehousing and analysis requirements
of a digital radio service in the United Kingdom.

General Dynamics Corporation As a General Dynamics subcontractor for network
management products, ACE*COMM installs and supports NetPlus® at multiple
military facilities.

Siemens AG ACE*COMM sells its Enterprise telemanagement operations support
and Convergent Mediation solutions outside the United States through Siemens
AG, who serves as a prime contractor.

MOSECO Jordan ACE*COMMs alliance agreement with MOSECO Jordan covers sales
and support activities to address the operations support systems requirements
of the Middle East regions communications service providers.

Unisys Corporation ACE*COMM has an arrangement with Unisys to collectively
design and deploy NetPlus® as part of an overall Unisys offering to state
government customers.

Fujitsu Consulting, Inc. The partnership is focused on the integration of
ACE*COMMs Convergent Mediation solutions into carrier environments around the
world.

Science Applications International Corporation, or SAIC ACE*COMM provides
mediation expertise to SAICs broad consulting experience to supply
comprehensive mediation solutions to large carriers  particularly in the
wireless sector.

Backlog

ACE*COMM defines backlog as signed contracts or purchase orders for delivery of
its products generally within the next year. Our backlog at June 30, 2003,
2002, and 2001 equaled approximately $4.3 million, $4.9 million, and $5.7
million, respectively. ACE*COMM has experienced fluctuations in its backlog at
various times. We anticipate that $3.2 million of the backlog at June 30,
2003, will be shipped during fiscal 2004. Although we believe that our entire
backlog consists of firm orders, ACE*COMMs backlog as of any particular date
may not be indicative of actual revenue for any future period because of the
possibility of customer changes in delivery schedules and delays inherent in
the delivery of complex systems. Backlog, as defined, does not include
contracts that require the further issuance of purchase orders.

ACE*COMMs contracts are large and technically complicated and require a
significant commitment of management and financial resources from its
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 involve substantial lead-time. Accordingly,
ACE*COMM may experience significant variations in revenue from quarter to
quarter, as a result of delays in contract signing or contract order
deliveries. In addition, contracts that involve software deliveries may
involve customization 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.

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Competition

Competition in the markets for our products is driven by rapidly changing
technologies, evolving industry standards, frequent product introductions and
enhancements, and rapid changes in customer requirements. To maintain and
improve our competitive position, we must continue to develop and introduce
value-added, timely and cost-effective new products, features and services that
keep pace with technological developments and emerging industry standards. In
addition, we must consistently address the increasingly sophisticated needs of
our customers. We expect continued intense competition in the
telecommunications, Internet service provider and enterprise network markets.

We believe that the principal competitive factors in these markets include:
product performance that meets customer expectations, specialized project
management capabilities, in-house technical expertise, compliance with industry
quality standards, in-house customer support, product features that include
adaptability, scalability and flexibility, the ability to integrate with other
products, adjustable functionality and ease-of-use, product reputation,
responsiveness to customer needs, and timeliness of implementation. To remain
competitive, we will have to respond promptly and effectively to the challenges
of each technological change within our industry, as well as to our
competitors innovations.

In the telecommunications and Internet service provider markets, ACE*COMMs
current and prospective competitors include:



| |  |  | large service providers who develop full-system
products internally, tailored to their particular
specifications,                                                        
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | other companies, such as Comptel Corporation,
Narus, Inc., and Xacct Technologies, that can provide data
collection, mediation components, and data storage
capabilities,
|
| |  |  | vendors that supply more inclusive products, such
as Intec, and EDB4tel,                                                                                                 
|
| |  |  | telecommunications equipment manufacturers that
provide network products, such as Lucent Technologies, Inc.,
and Ericsson,                                               
|
| |  |  | companies that provide OSS software applications
for carriers, such as MetaSolv Software, Inc.,                                                                          
|
| |  |  | companies that supply product components, such as
Ericcson-Hewlett-Packard and Fujitsu,                                                                                  
|
| |  |  | companies that provide billing and customer care
applications, such as Amdocs Limited and Portal Software, Inc.,
and                                                     
|
| |  |  | companies that develop custom solutions, such as
EDS Inc. and Computer Sciences Corporation.                                                                             

ACE*COMM generally ranks its competition in the overall mediation market into
the following three segments: single system mediation that is IP-focused,
complex mediation that is circuit-switched and packet-capable, and complex
mediation with other OSS functionality. Regarding the first of the three
market segments, single system mediation that is
IP-focused, we believe our
products demonstrate distinct advantages to the single-system, IP-focused
service provider, as our products can expand to fulfill wider system needs.
Regarding the second of the three segments, complex mediation that is
circuit-switched and packet-capable, we believe our advantages are derived
from our considerable experience in and ability to handle multiple protocol
system deployments. ACE*COMM believes it stands up well against other vendors
in the third, complex mediation with other OSS functionalitysegment. The
competing vendors in this segment are those with close ties to large switch or
OSS vendors. We believe that we match these competitors feature-for-feature,
and also offer switch/OSS vendor independence.

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In the enterprise network market, ACE*COMMs current and prospective
competitors include:



| |  |  | companies that provide products for telephony
networks, such as Paetec Communications, Inc., Peregrine
Systems, Inc., Stonehouse Technologies, Inc., and Veramark
Technologies, Inc.,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | companies that provide products for data networks,
such as Remedy Corp. and Computer Associates International,
Inc., and                                                             
|
| |  |  | system integrators such as Accenture, Cap Gemini
Ernst & Young and KPMG.                                                                                                             

ACE*COMMs NetPlus® EOSS, like all OSS solutions, can be considered high-priced
when compared to conventional element and network management systems. However,
we believe that pricing can be misleading since an effective OSS has the
potential to radically improve IT effectiveness and efficiency. ACE*COMM
believes that the competitive advantages of the NetPlus® solution lie in its
ability to improve IT operations, achieve significant cost savings by
identifying excessive usage patterns or incorrect billing; provide a bridge
between older PBX based voice equipment and newer VoIP based systems, and
provide a significant amount of customization support to enable NetPlus® to
interface to existing management and network infrastructure. ACE*COMM also
provides highly integrated capabilities across the FCAPS (fault, configuration,
accounting, performance, and security management) functionality mapping, but
does so from an enterprise perspective. Consequently, we believe that NetPlus®
defines what is essentially a new market: Enterprise OSS.

ACE*COMM 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 ACE*COMMs products, the
price at which competitors offer comparable products and services, the extent
of competitors responsiveness to customer needs, and the ability of our
competitors to hire, retain and motivate key personnel. ACE*COMM competes with
a number of companies that have substantially greater financial, technical,
sales and marketing capabilities in addition to other resources, as well as
greater name recognition. As a result, ACE*COMM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 ACE*COMM. There can be no assurance that our current or
potential competitors will not develop products comparable or superior to those
developed by ACE*COMM, or adapt more quickly than ACE*COMM to new technologies,
evolving industry trends or changing customer requirements.

Research and Product Development

ACE*COMMs research and development efforts are focused on developing new
products to meet the growing needs of our customers and on improving existing
products by incorporating new features and technologies. ACE*COMM 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 ACE*COMM works closely with customers, end users and
leading technology vendors, in tailoring new features that are subsequently
incorporated into future versions of products available to all customers.
ACE*COMM continually reviews opportunities to license technologies from third
parties when appropriate based on timing and cost considerations. Research and
development expenses were $0.3 million, $0.8 million and $1.7 million in 2003,
2002, and 2001, respectively. As a percent of revenues, research and
development expenses were approximately 3% in 2003, 4% in 2002 and 7% in 2001.

Proprietary Rights and Licenses

ACE*COMM currently holds a patent on its N*USAGE® technology and also 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 other
products. ACE*COMM believes that, patent protection is effective for some
product technologies, but because of the rapid pace of technological change in
the telecommunication and software industries, patent protection for other
products is a less significant factor in ACE*COMMs success than the knowledge,
ability and experience of ACE*COMMs employees, the frequency of product
enhancements and the timeliness and quality of support services

-14-



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##### 



provided by ACE*COMM.

ACE*COMM 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 ACE*COMMs software
products is usually restricted to specified locations and is subject to terms
and conditions prohibiting unauthorized reproduction or transfer of the
software products. ACE*COMM also seeks to protect its software, including the
source code, as a trade secret and as copyrighted work.

ACE*COMM cannot guarantee that the steps taken to protect its proprietary
rights will be adequate to deter misappropriation of its intellectual property,
and ACE*COMM may not be able to detect unauthorized use and take appropriate
steps to enforce its intellectual property rights. If third parties infringe
upon or misappropriate ACE*COMMs copyrights, trademarks, trade secrets or
other proprietary information, ACE*COMM could be seriously harmed. In
addition, although ACE*COMM believes that its proprietary rights do not
infringe on the intellectual property rights of others, other parties may
assert infringement claims against ACE*COMM or claim that it has violated their
intellectual property rights. Claims against ACE*COMM, either successful or
unsuccessful, could result in significant legal and other costs that may be a
distraction to management. ACE*COMM has primarily focused on intellectual
property protection within the United States but has expanded that scope to
selected international markets. Protection of intellectual property outside
the United States will sometimes require additional filings with local patent,
trademark, or copyright offices, as well as the implementation of contractual
or license terms different from those used in the United States. Protection of
intellectual property in many foreign countries is weaker and less reliable
than in the United States. If our business expands into foreign countries,
costs and risks associated with protecting our intellectual property abroad
will increase.

Employees

At June 30, 2003, ACE*COMM employed 97 full and part-time employees. None of
ACE*COMMs employees are represented by a labor union. ACE*COMM has
experienced no work stoppages and believes that its employee relations are
good.

Risk Factors Affecting Future Operating Results



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

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



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

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



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

Our business and financial results are highly dependent on the
telecommunications industry and the capital spending of our customers. Over
the past three years capital spending by telecommunication companies has
decreased and may continue to decrease in the near future. Various
commentators have attributed the decrease in spending to the decline in the
telecommunications industry in particular and economic conditions in general,
principal telecommunications products and services increasingly becoming
commodities that cannot easily be distinguished, intense competition in the
development of new technology or other features, increasing competition from
smaller but rapidly developing alternative carriers, decreasing prices for
telecommunication services and equipment, and regulatory rate structures that
have

-15-



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##### 



become less dependent on the level of carriers capital expenditures. The
reduction of spending by companies in the telecommunication industries has
caused, and may continue to cause, a significant reduction in ACE*COMMs
revenues.



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

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



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

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



| |  | Many of our telecommunications customers involve credit risks for us
| |  | --------------------------------------------------------------------

Many of our customers present potential credit risks, and we are dependent on a
small number of major customers. The majority of our customers are in the
telecommunication services industry and government sector, or are in the early
stages of development when financial resources may be limited. Five customers
represented 77% of ACE*COMMs gross trade receivables balance as of June 30,
2003, with one international customer representing 31% of ACE*COMMs gross
trade receivables balance as of June 30, 2003. Because we depend on a small
number of major customers, and many of our customers present potential credit
risks for different reasons, our results of operations could be adversely
affected by non-payment or slow-payment of receivables. We have also
experienced significant losses for doubtful accounts. For a more detailed
discussion of doubtful accounts please read the section labeled Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Provision for Doubtful Accounts.



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

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



| |  | Failure to complete the i3 Mobile Merger would have an adverse effect on us
| |  | ---------------------------------------------------------------------------

We may not be able to complete our proposed merger with i3 Mobile if we
experience a material adverse effect on our business or if other conditions
precedent are not met. If we were unable to complete the merger, it would have
a negative impact on our liquidity and ability to execute our acquisition
strategy.



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

-16-



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



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

Our failure to accurately estimate the resources required for a project or a
failure to complete contractual obligations in a manner consistent with the
projected plan may result in lower than expected project margins or project
losses, which would negatively impact operating results. Our sales are
typically formalized in agreements that include customization of the underlying
software and services. These agreements require projections related to
allocation of employees and other resources. Additionally, we may fix the
price of an arrangement before the final requirements are finalized. On
occasion, we have and may be required in the future to commit unanticipated
additional resources to complete projects, and the estimated fixed price may
not include this unanticipated increase of resources. If our original
projections are not met, project losses may occur that would have a negative
impact on our operating results.



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

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

ITEM 2.     PROPERTIES

ACE*COMM leases space at two principal office locations: Gaithersburg, Maryland
and Montreal, Canada. ACE*COMM believes that its facilities are adequate for
its current needs and that suitable additional space will be available as
required. The Gaithersburg office is ACE*COMMs corporate headquarters and is
used for product assembly, software and engineering development, professional
services and support, sales, and administration. The following sets forth
information concerning ACE*COMMs significant facilities:

|                         |  |         |        |                  |  |                   |  |                                                                                                        
|------------------------ |  | ------- | ------ | ---------------- |  | ----------------- |  | -------------------------------------------------------------------------------------------------------
|                         |  | Square  |        |                  |  | Current          
|Location                 |  | Footage |        | Lease Expiration |  | Annual Rent      
|                         |  |         |        |                  |  |                  
|Gaithersburg, Maryland   |  |         | 24,289 |                  |  | November 30, 2008 |  | $550,000 (subject
to annual increases
of approximately
$17,000 and
allocated operating
costs each year)
|Montreal, Quebec, Canada |  |         | 3,415  |                  |  | June 30, 2006     |  | $72,000                                                                                                

ITEM 3.     LEGAL PROCEEDINGS

ACE*COMM is not a party to any material legal proceedings.

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

No matter was submitted to a vote of its security holders during the
fourth quarter of 2003.

-17-



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##### 



PART II

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

Common Stock Prices

ACE*COMMs common stock is traded on the Nasdaq Small-Cap Market under the
symbol ACEC. The following table sets forth for the periods indicated the
highest and lowest bid prices at the 4:00 close for the shares of common stock
reported on the Nasdaq Small-Cap Market.

|            |  |                     |      |      |  |      |      |     |  |   |      |  |  |   |      | 
|----------- |  | ------------------- | ---- | ---- |  | ---- | ---- | --- |  | - | ---- |  |  | - | ---- | 
|            |  | Year Ended June 30,
|            |  |                    
|            |  | 2003                |      | 2002
|            |  |                     |      |     
|            |  | High                |      | Low  |  | High |      | Low
|            |  |                     |      |      |  |      |      |    
|1st Quarter |  | $                   | 1.05 |      |  | $    | 0.48 |     |  | $ | 1.65 |  |  | $ | 1.12 | 
|2nd Quarter |  |                     | 1.19 |      |  |      | 0.32 |     |  |   | 1.49 |  |  |   | 1.05 | 
|3rd Quarter |  |                     | 1.11 |      |  |      | 0.86 |     |  |   | 1.50 |  |  |   | 1.12 | 
|4th Quarter |  |                     | 1.09 |      |  |      | 0.55 |     |  |   | 1.41 |  |  |   | 0.95 | 

As of September 16, 2003, the market price of ACE*COMM common stock was $1.87.

Common Stockholders

As of September 16, 2003, there were 9,818,356 common shares outstanding and
held by 102 shareholders of record.

Dividends

ACE*COMM has never declared or paid cash dividends on the Common Stock.
ACE*COMM 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
within the discretion of the Board of Directors and will depend on the future
earnings, capital requirements, financial condition and future prospects of
ACE*COMM and such other factors, as the Board of Directors may deem relevant.
Under the term of its line of credit, ACE*COMM cannot pay or declare dividends
without the approval of its bank.

Equity Compensation Plan Information

The following table shows information about the securities authorized for
issuance under ACE*COMMs equity compensation plans as of June 30, 2003:

|                                                           |  |                         |           |                      |  |                                 |      |  |  |     |           | 
|---------------------------------------------------------- |  | ----------------------- | --------- | -------------------- |  | ------------------------------- | ---- |  |  | --- | --------- | 
|                                                           |  |                         |           |                      |  |                                 |      |  |  | (c)
|                                                           |  | (a)                     |           | (b)                  |  | Number of securities remaining 
|                                                           |  | Number of securities to |           | Weighted-average     |  | available for future issuance  
|                                                           |  | be issued upon exercise |           | exercise price of    |  | under equity compensation plans
|                                                           |  | of outstanding options, |           | outstanding options, |  | (excluding securities          
|                                                           |  | warrants and rights     |           | warrants and rights  |  | reflected in column (a))       
|                                                           |  |                         |           |                      |  |                                
|Equity compensation
plans approved by
security holders     |  |                         | 1,599,094 |                      |  | $                               | 3.12 |  |  |     | 1,125,962 | 
|Equity compensation
plans not approved
by security holders |  |                         | 40,000    |                      |  | $                               | 1.56 |  |  |     | 0         | 
|Total                                                      |  |                         | 1,639,094 |                      |  | $                               | 3.12 |  |  |     | 1,125,962 | 

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Item 6.     SELECTED FINANCIAL DATA

The selected financial data presented below for each of ACE*COMMs fiscal years
in the five-year period ended June 30, 2003 and as of June 30, 2003, 2002,
2001, 2000, and 1999 are derived from the audited financial statements of
ACE*COMM.

|                              |         |   |                                      |       |      |   |        |       |      |   |        |       |   |   |        |      |  |   |        |      | 
|----------------------------- | ------- | - | ------------------------------------ | ----- | ---- | - | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ---- |  | - | ------ | ---- | 
|                              |         |   | Year Ended June 30,                 
|                              |         |   |                                     
|                              |         |   | 2003                                 |       | 2002 |   | 2001   |       | 2000 |   | 1999  
|                              |         |   |                                      |       |      |   |        |       |      |   |       
|                              |         |   | (in thousands except per share data)
|Statement of Operations Data: |         |   |                                      |       |      |   |        |       |      |   |        |       |   |   |        |      |  |   |        |     
|Revenue                       |         | $ | 13,794                               |       |      | $ | 18,094 |       |      | $ | 24,179 |       |   | $ | 33,766 |      |  | $ | 29,657 |     
|Gross profit                  |         |   | 6,255                                |       |      |   | 8,982  |       |      |   | 10,844 |       |   |   | 19,413 |      |  |   | 15,892 |     
|Net (loss) income             |         | $ | (1,982                               | )     |      | $ | (3,988 | )     |      | $ | (6,927 | )     |   | $ | 2,198  |      |  | $ | 618    |     
|Net (loss) income per share:  |         |   |                                      |       |      |   |        |       |      |   |        |       |   |   |        |      |  |   |        |     
|                              | Basic   |   | $                                    | (0.21 | )    |   | $      | (0.43 | )    |   | $      | (0.75 | ) |   | $      | 0.24 |  |   | $      | 0.07 | 
|                              |         |   |                                      |       |      |   |        |       |      |   |        |       |   |   |        |      |  |   |        |     
|                              | Diluted |   | $                                    | (0.21 | )    |   | $      | (0.43 | )    |   | $      | (0.75 | ) |   | $      | 0.23 |  |   | $      | 0.07 | 
|                              |         |   |                                      |       |      |   |        |       |      |   |        |       |   |   |        |      |  |   |        |     

|                          |  |                |       |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|------------------------- |  | -------------- | ----- | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                          |  | June 30,      
|                          |  |               
|                          |  | 2003           |       | 2002 |  | 2001 |        | 2000 |  | 1999
|                          |  |                |       |      |  |      |        |      |  |     
|                          |  | (in thousands)
|Balance Sheet Data:       |  |                |       |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Cash and cash equivalents |  | $              | 1,570 |      |  | $    | 3,530  |      |  | $    | 5,770  |  |  | $ | 4,386  |  |  | $ | 3,424  | 
|Working capital           |  |                | 3,941 |      |  |      | 4,702  |      |  |      | 7,879  |  |  |   | 13,335 |  |  |   | 7,959  | 
|Total assets              |  |                | 8,244 |      |  |      | 10,402 |      |  |      | 14,943 |  |  |   | 22,785 |  |  |   | 18,699 | 
|Long-term liabilities     |  |                |      |      |  |      | 44     |      |  |      | 323    |  |  |   | 597    |  |  |   | 74     | 
|Total liabilities         |  |                | 3,419 |      |  |      | 4,071  |      |  |      | 4,686  |  |  |   | 5,866  |  |  |   | 5,220  | 
|Stockholders equity      |  |                | 4,825 |      |  |      | 6,331  |      |  |      | 10,257 |  |  |   | 16,919 |  |  |   | 13,479 | 

Selected Quarterly Financial Data

The following table presents certain unaudited statement of operations data for
each quarter of 2003 and 2002. This data has been derived from ACE*COMMs
unaudited financial statements and has been prepared on the same basis as
ACE*COMMs audited financial statements, which appear in this Annual Report on
Form 10-K. In the opinion of ACE*COMMs management, this data includes 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, ACE*COMMs financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K.

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|                              |         |   |                                      |      |          |   |           |      |          |   |           |       |          |   |           |       |          |   |        |       |   |   |       |       |   |   |       |       |   |   |       |       |  
|----------------------------- | ------- | - | ------------------------------------ | ---- | -------- | - | --------- | ---- | -------- | - | --------- | ----- | -------- | - | --------- | ----- | -------- | - | ------ | ----- | - | - | ----- | ----- | - | - | ----- | ----- | - | - | ----- | ----- | -
|                              |         |   | Fiscal Three Months Ended           
|                              |         |   |                                     
|                              |         |   | 2003                                 |      | 2002    
|                              |         |   |                                      |      |         
|                              |         |   | Sept. 30,                            |      | Dec. 31, |   | March 31, |      | June 30, |   | Sept. 30, |       | Dec. 31, |   | March 31, |       | June 30,
|                              |         |   | 2002                                 |      | 2002     |   | 2003      |      | 2003     |   | 2001      |       | 2001     |   | 2002      |       | 2002    
|                              |         |   |                                      |      |          |   |           |      |          |   |           |       |          |   |           |       |         
|                              |         |   | (in thousands except per share data)
|Statement of
Operations Data: |         |   |                                      |      |          |   |           |      |          |   |           |       |          |   |           |       |          |   |        |       |   |   |       |       |   |   |       |       |   |   |       |      
|Revenue                       |         | $ | 4,091                                |      |          | $ | 4,071     |      |          | $ | 2,369     |       |          | $ | 3,263     |       |          | $ | 4,396  |       |   | $ | 4,601 |       |   | $ | 5,025 |       |   | $ | 4,072 |      
|Gross profit                  |         |   | 2,318                                |      |          |   | 2,200     |      |          |   | 260       |       |          |   | 1,477     |       |          |   | 2,020  |       |   |   | 2,324 |       |   |   | 2,557 |       |   |   | 2,080 |      
|Net income (loss)             |         |   | 91                                   |      |          |   | 81        |      |          |   | (1,853    | )     |          |   | (301      | )     |          |   | (1,438 | )     |   |   | (958  | )     |   |   | (633  | )     |   |   | (959  | )    
|Net income (loss)
per share:  |         |   |                                      |      |          |   |           |      |          |   |           |       |          |   |           |       |          |   |        |       |   |   |       |       |   |   |       |       |   |   |       |      
|                              | Basic   |   | $                                    | 0.01 |          |   | $         | 0.01 |          |   | $         | (0.19 | )        |   | $         | (0.03 | )        |   | $      | (0.15 | ) |   | $     | (0.10 | ) |   | $     | (0.07 | ) |   | $     | (0.10 | )
|                              |         |   |                                      |      |          |   |           |      |          |   |           |       |          |   |           |       |          |   |        |       |   |   |       |       |   |   |       |       |   |   |       |      
|                              | Diluted |   | $                                    | 0.01 |          |   | $         | 0.01 |          |   | $         | (0.19 | )        |   | $         | (0.03 | )        |   | $      | (0.15 | ) |   | $     | (0.10 | ) |   | $     | (0.07 | ) |   | $     | (0.10 | )
|                              |         |   |                                      |      |          |   |           |      |          |   |           |       |          |   |           |       |          |   |        |       |   |   |       |       |   |   |       |       |   |   |       |      

ACE*COMMs quarterly operating results have in the past and will in the future
vary significantly as a result of the timing of contract execution, receipt of
purchase orders, and performance of the work or completion of delivery. Large
contracts or orders are typically preceded by long sales cycles and,
accordingly, the timing of such a contract or order has been and will continue
to be difficult to predict. Certain contracts or orders require additional
tailoring to customer requirements and, accordingly, vary in timing of
delivery. The failure to obtain or delays in the completion of one or more
large contracts or orders, for any reason, could have a material adverse effect
on ACE*COMMs results of operations and financial condition.

The timing of large contracts or orders depends on a variety of factors
affecting the capital spending decisions of ACE*COMMs customers, which in turn
can affect ACE*COMMs quarterly operating results. These factors include
changes in governmental regulation, changes in the customers competitive
environment, changes in industry-specific economic conditions, pricing policies
by ACE*COMM or its competitors, personnel changes, demand for ACE*COMMs
solutions, the number, timing and significance of new technologies developed by
either ACE*COMM or its competitors, the ability of ACE*COMM 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.

ACE*COMM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 ACE*COMMs products generally involves a
significant commitment of customer capital and management time. The sales
cycle associated with the purchases of ACE*COMMs products is subject to a
number of additional significant risks, including customers budgetary
constraints and internal acceptance reviews, over which ACE*COMM has little or
no control. The delivery cycle varies depending on the extent to which the
contract or order requires tailoring to a customers requirements and the
extent to which such requirements are fixed in advance or developed over time.

ACE*COMMs revenues in any quarter are substantially dependent on orders
booked, products delivered, and services performed. Because ACE*COMMs
operating expenses are based, in part, on anticipated revenue levels and
because a high percentage of ACE*COMMs expenses are relatively fixed, a delay
in the recognition of revenue from even a limited number of contracts, or the
absence of anticipated orders, or a delay in adjusting operating expenses to
lower actual or anticipated revenues could cause significant variation in
operating results from quarter-to-quarter and could cause net income to fall
significantly short of anticipated levels.

Based upon all of the foregoing, ACE*COMM 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 ACE*COMM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.

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|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview

ACE*COMM derives revenues primarily from the sale of its products, including
hardware and software, and related services. ACE*COMM enters into formal
arrangements that provide for single or multiple deliverables of hardware,
software and services. These arrangements are formalized by either a simple
purchase order or by more complex contracts such as development, reseller or
master agreements. These arrangements are generally U.S. dollar denominated and
typically have an aggregate value of several thousand to several million
dollars and vary in length from 30 days to several years, as in the case of
master agreements. Agreements spanning several years are normally implemented
in smaller statements of work or orders that are typically deliverable within
three to twelve months.

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

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

More frequently, ACE*COMM is entering into multiple element arrangements that
do not involve significant modification or customization of the related
software. In these instances, ACE*COMM allocates revenue to each element of
the arrangement based on objective evidence of the elements fair value based
on internal price listings developed by ACE*COMM. Revenue for software
licenses is recognized upon delivery, which usually occurs upon transfer of
title, when a signed agreement exists, the fee is fixed and determinable, and
collection of the resulting receivable is probable.

Revenue for a given period typically reflects products delivered or services
performed during the period with respect to relatively large financial
commitments from a small number of customers. During 2003, ACE*COMM had 12
major customers, which ACE*COMM defines as generating $250,000 or more in
revenues, that together represented approximately 76% of total revenues.
Siemens AG, ACE*COMMs largest customer in fiscal year 2003, represented
approximately 20% of total revenues, and Northrop Grumman contributed
approximately 10% of total revenues. During 2002, ACE*COMM had 20 major
customers representing 86% of total revenues. Siemens AG represented
approximately 17% of total revenues and Northrop Grumman contributed 11% of
total revenues earned during 2002. During 2001, ACE*COMM had 23 major
customers representing 93% of total revenues. The average revenues earned per
major customer were $0.9 million in 2003, $0.8 million in 2002 and $1.0 million
in 2001.

During the past three fiscal years, ACE*COMM has experienced significant net
losses from operations, primarily due to reduced demand from its North American
telecommunications customers. Management expects this lower demand to continue
in the foreseeable future. To offset the effects of the current lower North
American demand, ACE*COMM continues to target sales efforts toward what it
believes to be a growing market for its Convergent Mediation solutions outside
of North America. To date ACE*COMM has experienced an increase in revenue from
outside of North America, in particular China, but the increase has not been
sufficient to offset the decline in revenues from the North American market.

ACE*COMM has been and continues to be focused on streamlining the organization
to meet its objectives, conserve cash and control expenses. During the past
three fiscal years the number of full time employees has been reduced by

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approximately 53%. This reduction was designed to reduce costs without
materially impacting ACE*COMMs ability to maintain its historical levels of
customer involvement and technological innovation, especially in areas of focus
such as China. Additionally, ACE*COMM has significantly reduced other
operating expenses such as rent, travel, consulting and professional fees. The
results of these cost reduction measures has been a significant decline in the
amount of the losses sustained in each of the last three fiscal years.

Recently, ACE*COMM entered into an Agreement and Plan of Merger with i3 Mobile,
Inc. under which ACE*COMM has agreed to acquire i3. The acquisition is to be
effected through the issuance of a to-be-determined number of shares of
ACE*COMMs common stock in exchange for each share of common stock of i3 Mobile
outstanding immediately prior to the consummation of the transaction. The
exchange ratio will be based on a formula valuing ACE*COMMs common stock at
market value at the time of mailing of the proxy statement, less a discount,
and valuing i3 Mobile at an amount equal to its cash, net of specified
liabilities and commitments at the mailing date. The consummation of the
transaction is subject to the approval of the shareholders of i3 Mobile and
ACE*COMM, as well as customary closing conditions.

We expect the merger with i3 Mobile, if consummated, to provide ACE*COMM with
significant cash resources to devote to internal development or acquisition of
new technologies of complementary businesses. We plan to continue pursuing new
business opportunities in the form of acquisitions or alliances with other
companies, although there can be no assurances as to the timing or
effectiveness of any such arrangements. These arrangements could include:
technology and marketing alliances driven by product development requirements
and sales opportunities, as well as business combinations that would strengthen
ACE*COMMs product offerings and market potential.

Critical Accounting Policies

In December 2001, the SEC requested that all registrants include a discussion
of its critical accounting policies. ACE*COMMs significant accounting
policies are more fully described in Note 2 to ACE*COMMs consolidated
financial statements. However, certain of our accounting policies are
particularly important to the portrayal of our financial position and results
of operations or require the application of significant judgment by our
management. The following is a brief discussion of these critical accounting
policies:

Revenue Recognition

ACE*COMM derives revenues primarily from products, where a combination of
hardware, proprietary licensed software, and services are offered to customers.
These products are typically formalized in a multiple element arrangement
involving application of existing software capabilities or modification of the
underlying software and implementation services. ACE*COMMs software licenses
to end-users generally provide for an initial license fee to use the product in
perpetuity. Under certain contracts, ACE*COMM licenses its software to
resellers for subsequent application of existing software and resale. Our
customers, including resellers, do not possess the right to return or exchange
products.

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

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

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

Allowance for Bad Debts

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

Results of Operations

The following sets forth selected consolidated data as a percentage of revenue
for each of the following years ended June 30:

|                                     |                                     |  |                      |      |      |  |       |      |   |  |       |      |  
|------------------------------------ | ----------------------------------- |  | -------------------- | ---- | ---- |  | ----- | ---- | - |  | ----- | ---- | -
|                                     |                                     |  | Years Ended June 30,
|                                     |                                     |  | 2003                 |      | 2002 |  | 2001 
|                                     |                                     |  |                      |      |      |  |      
|Revenue                              |                                     |  | 100.0                | %    |      |  | 100.0 | %    |   |  | 100.0 | %   
|Costs and expenses:                  |                                     |  |                      |      |      |  |       |      |   |  |       |     
|                                     | Cost of revenue                     |  |                      | 54.7 | %    |  |       | 50.4 | % |  |       | 55.1 | %
|                                     | Selling, general and administrative |  |                      | 57.0 | %    |  |       | 67.5 | % |  |       | 66.9 | %
|                                     | Research and development            |  |                      | 2.5  | %    |  |       | 4.3  | % |  |       | 6.8  | %
|                                     |                                     |  |                      |      |      |  |       |      |   |  |       |     
|Income (Loss) from operations        |                                     |  | (14.2                | )%   |      |  | (22.2 | )%   |   |  | (28.8 | )%  
|Net interest income (expense)        |                                     |  | (0.2                 | )%   |      |  | 0.2   | %    |   |  | 0.1   | %   
|                                     |                                     |  |                      |      |      |  |       |      |   |  |       |     
|Income (Loss) before income taxes    |                                     |  | (14.4                | )%   |      |  | (22.0 | )%   |   |  | (28.7 | )%  
|Provision (Benefit) for income taxes |                                     |  | 0.0                  | %    |      |  | 0.0   | %    |   |  | 0.0   | %   
|                                     |                                     |  |                      |      |      |  |       |      |   |  |       |     
|Net Income (Loss)                    |                                     |  | (14.4                | )%   |      |  | (22.0 | )%   |   |  | (28.7 | )%  
|                                     |                                     |  |                      |      |      |  |       |      |   |  |       |     

Revenues

Total revenues in 2003 were $13.8 million compared to $18.1 million in 2002 and
$24.2 million in 2001. Total revenues decreased $4.3 million or 24% in 2003
and $6.1 million or 25% in 2002, in each case as compared to the prior year.

Revenue growth depends, in part, on the overall demand for ACE*COMMs products.
Because ACE*COMMs sales are primarily to telecommunication and Internet
service providers and enterprises, its ability to generate revenue also depends
on specific conditions affecting those providers and their willingness to make
significant expenditures to improve their data collection and processing. The
decrease in revenues over the past three years reflects the continuing weak
general economic conditions and, more specifically, weak economic conditions in
the domestic
telecommunication and Internet service provider markets and reduced willingness
to make significant capital investments in improving their networks and data.
Customers in this market often rely on the capital markets to meet their
ongoing cash flow requirements and support their growth.

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During 2003, companies in this market continued to encounter reduced demand for
their products and difficulty in accessing capital markets, resulting in the
continuing reduction of their demand for ACE*COMMs products. In addition,
several of ACE*COMMs North American customers filed for bankruptcy during
2002. Consequently, revenues from sales to telecommunication and Internet
service providers, representing approximately 53% of total revenues, decreased
25% to $7.3 million in 2003, as compared to the prior year. Revenues from sales
to enterprises, representing approximately 47% of total revenues, decreased 23%
to $6.5 million in 2003, as compared to the prior year. The decline in sales
to enterprises is primarily the result of the completion of large orders
received in 2002 that were not replaced with new orders in 2003. Our
enterprise sales efforts have also been affected by the same weak economic
conditions. ACE*COMM has experienced increased competition from
telecommunication equipment manufacturers who are seeking to diversify sales
from the telecommunications and internet service provider markets to the
overall enterprise market.

During 2002, service providers in the telecommunication and Internet market
continued to experience reduced demand for their products and difficulty in
accessing capital markets and, as a result, ACE*COMM experienced decreased
demand for Convergent Mediation products. Revenues from sales to
telecommunication and Internet service providers representing approximately 53%
of total revenues decreased 34% to $9.7 million, as compared to the prior year.
Also, revenues from sales to enterprises representing approximately 47% of
total revenues decreased 12% to $8.4 million in 2002, as compared to the prior
year.

Cost of Revenues

ACE*COMMs cost of revenue consists primarily of direct labor costs, direct
material costs, and allocable indirect costs and to a lesser extent, amortized
capitalized software development costs, and inventory obsolescence costs. The
expenses for services provided by certain alliance partners in connection with
the installation and integration of ACE*COMMs products may also be included.

Cost of revenues were $7.5 million in 2003, $9.1 million in 2002 and $13.3
million in 2001, representing 55%, 50%, and 55% of total revenues in each year,
respectively. Cost of revenues decreased $1.6 million or 17% in 2003, as
compared to the prior year, reflecting a decrease in labor and labor related
costs, as ACE*COMM further decreased staffing levels in response to the
continuing decline in demand for ACE*COMMs products within the
telecommunications sector. Cost of revenues decreased in 2002 reflecting a
reduction in labor and labor related costs in response to unfavorable economic
conditions and decline in demand.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of costs to support
ACE*COMMs sales and administrative functions. Sales expenses consist
primarily of salary, commission, travel, trade show, bid and proposal, and
other related selling and marketing expenses required to sell our products to
target markets. General and administrative expenses consist of provision for
doubtful accounts and unallocated costs related to information systems
infrastructure, facilities, finance and accounting, legal, human resources and
corporate management.

Selling, general and administrative expenses were $7.9 million in 2003, $12.2
million in 2002, and $16.2 million in 2001, representing 57%, 68% and 67% of
total revenues in each year, respectively. Selling, general and administrative
expenses decreased $4.4 million or 36% in 2003 and decreased $3.9 million or
24% in 2002, as compared to each prior corresponding period. The decrease in
2002 and 2003 is primarily the result of a continuing effort to reduce
expenses, which includes Company and employee initiated reductions in
personnel, and reductions in rent, travel, consulting and professional fees.

Research and Development Expenses

Research and development expenses consist of personnel costs and the associated
infrastructure costs required to support the design and development of
ACE*COMMs products.

Research and development expenses were $0.3 million in 2003 compared to $0.8
million in 2002 and $1.7 million in

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2001. Research and development expenses
decreased $0.4 million or 56% in 2003 and $0.9 million or 53% in 2002, as
compared to each prior corresponding period. Research and development expenses
represented 3% of revenues in 2003, 4% of revenues in 2002, and 7% of revenues
in 2001. The decrease in research and development in 2002 and 2003, over the
prior corresponding periods, reflects a decrease in resources applied to
research and development.

ACE*COMM was selective in approving new projects and in some instances
discontinued projects that were not related to the development of Convergent
Mediation TM solutions. In some instances ACE*COMM charges its customers for
development which it includes in cost of revenues. Based upon the uncertain
North American market, ACE*COMM decided to explore opportunities to license or
acquire new technology from third parties as a strategy for expanding its
product offerings. ACE*COMM did not capitalize software development costs in
2003, 2002 or in 2001 because ACE*COMMs product development methodology
generally establishes technological feasibility near the end of the development
process.

Provision for Doubtful Accounts

ACE*COMM recognized a net provision for doubtful accounts of $0.1 million in
2003, compared to a net provision for doubtful accounts of $0.7 million in 2002
and of $0.8 million in 2001, representing a decrease of $0.6 million in 2003
and of $0.1 million in 2002 in each case as compared to the corresponding
period of the prior year.

During 2003, very few of ACE*COMMs customers experienced negative
financial impact to the extent which would require ACE*COMM to provide
extensively for their respective accounts which occurred in 2002 and 2001,
thereby resulting in significantly decreased bad debts for 2003. Beginning in
2001 and continuing through 2002, some of ACE*COMMs telecommunication and
Internet service provider customers elected to reorganize under Chapter 11 of
the bankruptcy code, were unable to obtain adequate financing, or were affected
by unfavorable economic conditions in their respective markets. The impact of
these economic conditions on our customers, and in particular the bankruptcy
filing by Winstar, adversely affected ACE*COMMs ability to collect outstanding
accounts receivables, resulting in increased bad debts in 2002 and 2001. The
provision for doubtful accounts associated with customers that filed for
bankruptcy was $0.7 million in 2002 and $0.7 million for 2001.

ACE*COMM believes that these difficulties will not continue to be
encountered with its current customers. However, existing or future customers
ability to pay ACE*COMM may be adversely impacted by unfavorable economic
conditions or by other factors.

Liquidity and Capital Resources

Asset and Cash Flow Analysis

At June 30, 2003 ACE*COMMs primary source of liquidity were cash and cash
equivalents of $1.6 million, and also a $3.5 million working capital line of
credit. Cash and cash equivalents were $1.6 million at June 30, 2003, $3.5
million at June 30, 2002, and $5.8 million on June 30, 2001. The cash and cash
equivalents balance decreased by $1.9 million, or 54%, in 2003 and decreased by
$2.3 million, or 39%, in 2002, in each case as compared to the corresponding
period of the prior year. The decrease in both of these years was primarily the
result of funding operating losses offset by non- cash items such as
depreciation and amortization expenses. Cash and cash equivalents were 19% of
total assets at June 30, 2003 compared to 34% at June 30, 2002.

Working capital was $3.9 million at June 30, 2003, $4.7 million at June 30,
2002, and $7.9 million at June 30, 2001. Working capital decreased $0.8
million, or 16%, in 2003 and decreased $3.2 million, or 41%, in 2002, in each
case as compared to the corresponding period of the prior year. The decreases
in working capital in 2003 and 2002 are primarily the result of operating
losses, net of depreciation and amortization in excess of purchased assets.

Accounts receivables increased $1.0 million, or 25% to $4.8 million at June 30,
2003. Five customers represented 77% of ACE*COMMs gross trade receivables
balance as of June 30, 2003, with one international customer representing 31%
of ACE*COMMs gross trade receivables balance as of June 30, 2003. The increase
in accounts receivable is primarily the result of an increase in international
customers who traditionally have taken longer to pay and to an increase in
instances where payments are scheduled over an extended period of time, in no
case greater than one year.

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##### 



ACE*COMMs operating activities used $2.5 million in cash during 2003, used
$1.7 million in cash during 2002, and generated cash of $1.8 million in 2001.
The changes between years in cash flows from operating activities are
principally due to changes in net income (loss) after adjustments for non-cash
charges such as depreciation and changes in working capital amounts. Changes
in accounts receivable balances are typically the most significant component of
working capital and fluctuate as a result of the timing and volume of
ACE*COMMs revenues and other factors.

Net cash used for investing activities was $0.1 million, $0.3 million, and $0.5
million in 2003, 2002, and 2001, respectively, representing capital purchases
of computer equipment.

ACE*COMMs financing activities generated cash of $0.7 million in 2003, used
cash of $0.2 million in 2002, and generated cash of $0.06 million in 2001.
ACE*COMM had positive cash flows from financing activities in 2003 as a result
of additional borrowings and net cash generated from a strategic partner
acquiring 475,000 shares of ACE*COMMs common stock. No significant financings
took place during 2002 or 2001. Additionally, borrowings and other financial
obligations resulted in a net cash outflow of $0.2 million in 2003, $0.3
million in 2002 and $0.2 million in 2001.

Cost Containment Program

As a result of declining revenues during the past three fiscal years, ACE*COMM
has initiated numerous cost reduction measures which have significantly lowered
operating expenses. During the past three fiscal years the number of full time
employees has been reduced by approximately 53%. This reduction was designed to
reduce costs without materially impacting ACE*COMMs ability to maintain its
historical levels of customer involvement and technological innovation,
especially in areas of focus such as China Additionally, ACE*COMM has developed
contingency plans to reduce expenses further, should revenues decline below
projected levels.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments as
of June 30, 2003 and the effect such commitments could have on our liquidity
and cash flows in future periods.

|                       |  |                        |       |      |  |             |     |           |  |       |       |  |  |   |       |         |  |   |     | 
|---------------------- |  | ---------------------- | ----- | ---- |  | ----------- | --- | --------- |  | ----- | ----- |  |  | - | ----- | ------- |  | - | --- | 
|                       |  | Payments Due by Period
|                       |  |                       
|                       |  | (amounts in thousands)
|                       |  |                       
|                       |  |                        |       |      |  | Less than 1 |     |           |  |       |       |  |  |   |       | After 5
|Contractual Obligation |  | Total                  |       | year |  | 1-3 years   |     | 4-5 years |  | years
|                       |  |                        |       |      |  |             |     |           |  |      
|Operating Leases       |  | $                      | 3,464 |      |  | $           | 653 |           |  | $     | 1,313 |  |  | $ | 1,234 |         |  | $ | 264 | 

ACE*COMM has commercial commitments of an accounts receivable backed line of
credit that expired July 1, 2003 and was renewed on July 31, 2003. $0.4
million was outstanding as of June 30, 2003. ACE*COMM also has issued standby
letters of credit for security deposits for office space and to guarantee
service contracts and is summarized in the following table. The standby
letters of credit have a one-year term and renew annually.

|                             |  |                                            |         |             |  |           |         |           |  |       |   |  |  |        |   |  |  |   |   | 
|---------------------------- |  | ------------------------------------------ | ------- | ----------- |  | --------- | ------- | --------- |  | ----- | - |  |  | ------ | - |  |  | - | - | 
|                             |  | Amount of Commitment Expiration Per Period
|                             |  |                                           
|                             |  | Total                                      |         |             |  |           |         |           |  |       |   |  |  |        |   |  |  |  
|                             |  | Amounts                                    |         | Less than 1 |  |           |         |           |  |       |   |  |  | Over 5
|Other Commercial Commitments |  | Committed                                  |         | year        |  | 1-3 years |         | 4-5 years |  | years
|                             |  |                                            |         |             |  |           |         |           |  |      
|Standby Letters of Credit    |  | $                                          | 464,000 |             |  | $         | 464,000 |           |  | $     |  |  |  | $      |  |  |  | $ |  | 

Line of Credit

ACE*COMM has a loan and security agreement with Silicon Valley Bank, renewed
effective July 31, 2003 for a one year period. Under this agreement, ACE*COMM
may borrow based upon the amount of its approved borrowing base of eligible
accounts receivable, up to a maximum of $3.5 million. The line of credit has
sub limits of $500,000 for letters

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##### 



of credit and $1.25 million for U.S. Export
Import Bank usage. ACE*COMM can draw up to 80% of its eligible accounts
receivable under the master line, and up to 90% of its eligible foreign
accounts receivable under the U.S. Export Import Bank sub limit line. Amounts
borrowed bear interest at a rate equal to the banks prime rate plus 200 basis
points per annum, with a minimum rate of 4.75% per annum, charged on the
average daily balance of advances outstanding, payable monthly and calculated
on a 360-day year basis. ACE*COMM also pays certain costs and expenses of the
bank in administering the line, and paid non-refundable fees of $31,250 in 2002
and $41,250 in 2003. The receivables comprising the borrowing base must not be
more than 90 days aged, must not be in dispute, and must conform to other
eligibility requirements. ACE*COMMs obligations under the Agreement are
secured by a security interest in all of ACE*COMMs assets and intellectual
property. Advances made to ACE*COMM are payable in full upon demand in the
event of default under the agreement. As of September 16, 2003, there were
outstanding borrowings of $220,000 under this agreement, and an eligible
borrowing base of $275,000.

The loan and security agreement with Silicon Valley Bank replaced a prior
agreement with the Bank, which enabled ACE*COMM to borrow against recently
acquired equipment and fixed assets.

Financial covenants under the loan and security agreement require ACE*COMM to
maintain a minimum tangible net worth covenant which must be complied with on a
monthly basis and to maintain a $750,000 monthly unrestricted cash requirement.

Under the terms of its corporate headquarters office lease, ACE*COMM maintains
a letter of credit under its line of credit with the Bank, which names the
landlord as the sole beneficiary and which may be drawn on by the landlord in
the event of a monetary default by ACE*COMM under the lease. The letter of
credit required under the lease for fiscal year 2003 is $135,000. The letter
of credit will decrease in fiscal year 2005 to $124,333 and will continue to
decrease annually thereafter through fiscal year 2008. As of the date of this
filing, ACE*COMM was not subject to any draw against this letter of credit by
the landlord. ACE*COMM also maintains other customer related letters of credit
issued by the Bank to support specific terms and conditions of customer orders.
The aggregate of these customer related letters of credit total approximately
$329,000 at June 30, 2003 and they, too, are secured under ACE*COMMs line of
credit with the Bank.

Liquidity Position

ACE*COMM has no significant commitments for capital expenditures at June 30,
2003, had $1.6 million of cash on hand at June 30, 2003 and has borrowing
availability under its line of credit. ACE*COMM believes that these factors,
excluding any cash resources from the pending i3 Mobile merger, will support
ACE*COMMs working capital requirements for the next twelve months.

|         |  |                                                                                                                                                                                                                                                                                           
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                                                                                                                                                                                
|         |  |                                                                                                                                                                                                                                                                                           
|         |  | None.                                                                                                                                                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                                                                           
|ITEM 8.  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                           
|         |  | ACE*COMMs Financial Statements, together with the independent
accountants reports thereon, appear at pages F-1 throughF-19 of
this Form 10-K.                                                                                                                                           
|         |  |                                                                                                                                                                                                                                                                                           
|ITEM 9.  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                                           
|         |  | On June 30, 2003, ACE*COMM filed on Form 8-K, announcing that
ACE*COMM engaged the services of Grant Thornton, LLP as its new
independent auditors, replacing Ernst & Young LLP. We had no
disagreements with Ernst & Young LLP on matters related to
accounting and financial disclosure.

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##### 



|         |  |                                      
|-------- |  | -------------------------------------
|ITEM 9A. |  | DISCLOSURE OF CONTROLS AND PROCEDURES

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

There were no significant changes made in ACE*COMMs internal controls over
financial reporting that occurred during ACE*COMMs fourth fiscal quarter that
has materially affected, or is reasonably likely to materially affect,
ACE*COMMs internal control over financial reporting.

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##### 



PART III

|         |  |                                                   
|-------- |  | --------------------------------------------------
|ITEM 10. |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors

|                    |  |     |    |       |  |          |      |                            |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------------------- |  | --- | -- | ----- |  | -------- | ---- | -------------------------- |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name of             |  |     |    |       |  |          |      |                            |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Director            |  |     |    |       |  | Director |      | Class of                   |  |    
|or Nominee          |  | Age |    | Since |  | Director |      | Recent Business Experience
|                    |  |     |    |       |  |          |      |                           
|George T. Jimenez   |  |     | 67 |       |  |          | 1983 |                            |  | III |  | Chief Executive Officer
of ACE*COMM since 1996,
and Treasurer from 1983
to present. President
from 1983 to September
1999 and July 2001 to
present. Mr. Jimenez has
been Chairman of the
Board of Directors since
1983.                                                                                                                                                                                                           
|                    |  |     |    |       |  |          |      |                            |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Paul G. Casner, Jr. |  |     | 65 |       |  |          | 1983 |                            |  | II  |  | Executive Vice President,
Chief Operating Officer
of DRS Technologies,
Inc., a defense
electronics corporation,
since June 2000.
Executive Vice President,
Operations, DRS, from
December 1998 to May
2000; President of DRS
Electronic Systems Group,
a division of DRS
Technologies, from 1994
to 1998; and Chairman and
Chief Executive Officer
of Technology
Applications & Service
Company from March 1991
to September 1993.
|                    |  |     |    |       |  |          |      |                            |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Gilbert A. Wetzel   |  |     | 71 |       |  |          | 1992 |                            |  | I   |  | Managing Director, Mayer
& Associates, a human
resources consulting
firm, since 1999.
Executive Vice President,
Right Management
Consultants, from 1994 to
1999; retired Chairman
and Chief Executive
Officer of Bell of
Pennsylvania and Diamond
State Telephone and
founder and retired Chief
Executive Officer of
Geographic Business
Publishers, Inc.                                                                         
|                    |  |     |    |       |  |          |      |                            |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|Harry M. Linowes    |  |     | 75 |       |  |          | 1999 |                            |  | I   |  | Business management
consultant. Senior
Partner (1992 to
retirement in 1996) and
a Managing Partner (1986 to
1992) of BDO Seidman,
Accountants and
Consultants.                                                                                                                                                                                                                                                                    

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##### 



Executive Officers

|                   |  |     |    |                  |  |                                                                        
|------------------ |  | --- | -- | ---------------- |  | -----------------------------------------------------------------------
|Name               |  | Age |    | Current Position
|                   |  |     |    |                 
|George T. Jimenez  |  |     | 67 |                  |  | Chairman of the Board, Chief Executive Officer, President
and Treasurer
|Joseph A. Chisholm |  |     | 62 |                  |  | Senior Vice President and Chief Operating Officer                      
|Steven R. Delmar   |  |     | 47 |                  |  | Senior Vice President and Chief Financial Officer                      
|Loretta L. Rivers  |  |     | 46 |                  |  | Corporate Secretary and Director of Human Resources                    

George T. Jimenez is the Chief Executive Officer of ACE*COMM and has served as
Treasurer and a Director of ACE*COMM since its inception in 1983. Mr. Jimenez
served as President from 1983 to September 1999 and July 2001 to the present.

Joseph A. Chisholm joined ACE*COMM in February 2001 as Vice President of
Engineering, and was named Chief Operating Officer in August 2001. In January
2003, Mr. Chisholm was also named a Senior Vice President. Mr. Chisholm served
as Vice President of Engineering and Operations for GE Capital Spacenet
Services from 1994 until his retirement in 1998.

Steven R. Delmar joined ACE*COMM as a consultant in July 2001 and was appointed
the Chief Financial Officer as of October 1, 2001. In January 2003, Mr. Delmar
was also named a Senior Vice President. Prior to joining ACE*COMM, Mr. Delmar
held various executive positions with Microlog Corporation, a communications
software company, including fifteen years as Executive Vice President and Chief
Financial Officer. He was most recently co-President and a Director of
Microlog.

Loretta L. Rivers has been Corporate Secretary since 1989 and was also named
Director of Human Resources in January 2001. Ms. Rivers has served in various
capacities with ACE*COMM since its inception in 1983.

Martin Demers, who was elected as Senior Vice President and Chief Marketing
Officer on November 14, 2000 and held various senior positions since joining
ACE*COMM in 1996, left ACE*COMM on August 29, 2003.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires ACE*COMMs
officers and directors, and persons who own more than ten percent of a
registered class of ACE*COMMs equity securities, to file reports of ownership
and changes in ownership of such securities with the Securities and Exchange
Commission and the Nasdaq. Officers, directors and greater than ten-percent
beneficial owners are required by applicable regulations to furnish ACE*COMM
with copies of all Section 16(a) forms they file.

Based solely upon a review of the copies of the forms furnished to ACE*COMM, or
written representations from certain reporting persons that no Forms 5 were
required, we believe that all filing requirements applicable to our officers
and directors and ten-percent beneficial owners were complied with during the
2003 fiscal year except that (i) a Form 4, covering a single transaction, was
filed late by Mr. Jimenez, and (ii) a Form 4, covering a single transaction,
was filed late by Ms. Rivers.

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##### 



ITEM 11.
     EXECUTIVE COMPENSATION

Cash Compensation

Cash compensation paid or accrued for services in all capacities for 2001, 2002
and 2003 fiscal years for the Chief Executive Officer and each of the other
three most highly compensated executive officers of ACE*COMM for fiscal 2003
whose salary and bonus exceeded $100,000 (the Named Executive Officers) is
set forth in the following table.

Summary Compensation Table

|                          |  |                        |      |           |  |       |         |           |  |         |        |           |  |            |   |           |  |              |         |     |  |   |        |    
|------------------------- |  | ---------------------- | ---- | --------- |  | ----- | ------- | --------- |  | ------- | ------ | --------- |  | ---------- | - | --------- |  | ------------ | ------- | --- |  | - | ------ | ---
|                          |  |                        |      |           |  |       |         |           |  |         |        |           |  |            |   |           |  | Long-Term    |         |     |  |  
|                          |  |                        |      |           |  |       |         |           |  |         |        |           |  |            |   |           |  | Compensation |         |     |  |  
|                          |  | Annual Compensation(1) |      | Awards    |  |       |         |          
|                          |  |                        |      |           |  |       |         |          
|                          |  |                        |      |           |  |       |         |           |  |         |        |           |  | Other      |   | Number of |  | All         
|Name                      |  |                        |      |           |  |       |         |           |  |         |        |           |  | Annual     |   | Shares    |  | Other       
|And                       |  | Fiscal                 |      |           |  |       |         |           |  |         |        | Compen-   |  | Underlying |   | Compen-  
|Principal Position        |  | Year                   |      | Salary(2) |  | Bonus |         | sation(3) |  | Options |        | sation(4)
|                          |  |                        |      |           |  |       |         |           |  |         |        |           |  |            |  
|George T. Jimenez         |  |                        | 2003 |           |  | $     | 173,769 |           |  | $       | 0      |           |  | $          | 0 |           |  |              | 0       |     |  | $ | 11,171 |    
|Chairman of the Board,    |  |                        | 2002 |           |  |       | 191,846 |           |  |         | 0      |           |  |            | 0 |           |  |              | 32,545  |     |  |   | 11,171 |    
|Chief Executive Officer,  |  |                        | 2001 |           |  |       | 200,000 |           |  |         | 0      |           |  |            | 0 |           |  |              | 9,650   |     |  |   | 11,171 |    
|President and Treasurer   |  |                        |      |           |  |       |         |           |  |         |        |           |  |            |   |           |  |              |         |     |  |   |        |    
|Joseph A. Chisholm(5)     |  |                        | 2003 |           |  |       | 130,327 |           |  |         | 0      |           |  |            | 0 |           |  |              | 0       |     |  |   | 0      |    
|Senior Vice President and |  |                        | 2002 |           |  |       | 144,462 |           |  |         | 8,491  |           |  |            | 0 |           |  |              | 119,409 | (6) |  |   | 0      |    
|Chief Operating Officer   |  |                        | 2001 |           |  |       |        |           |  |         |       |           |  |            |  |           |  |              |        |     |  |   |       |    
|Steven R. Delmar(7)       |  |                        | 2003 |           |  |       | 152,048 |           |  |         | 0      |           |  |            | 0 |           |  |              | 0       |     |  |   | 0      |    
|Senior Vice President and |  |                        | 2002 |           |  |       | 124,115 |           |  |         | 0      |           |  |            | 0 |           |  |              | 120,977 | (6) |  |   | 0      |    
|Chief Financial Officer   |  |                        | 2001 |           |  |       |        |           |  |         |       |           |  |            |  |           |  |              |        |     |  |   |       |    
|Martin Demers(8)          |  |                        | 2003 |           |  |       | 153,640 |           |  |         | 0      |           |  |            | 0 |           |  |              | 90,000  | (6) |  |   | 1,230  | (9)
|Senior Vice President and |  |                        | 2002 |           |  |       | 164,783 |           |  |         | 16,799 |           |  |            | 0 |           |  |              | 30,663  |     |  |   | 4,522  | (9)
|Chief Marketing Officer   |  |                        | 2001 |           |  |       | 169,185 |           |  |         | 21,782 |           |  |            | 0 |           |  |              | 41,688  |     |  |   | 84,751 | (9)

(1)     Includes salary deferrals under ACE*COMMs 401(k) plan.

(2)     Reflects a voluntary reduction in salary starting in February 2002,
for each of the named executive officers.

(3)     Does not include perquisites and personal benefits aggregating less
than 10% of the officers salary and bonus.

(4)     Consists of, as to all years, amounts paid in connection with a life
insurance policy and disability insurance for Mr. Jimenez. For fiscal 2003,
$6,975 was paid for life insurance and $4,196 was paid for disability
insurance.

(5)     Mr. Chisholm was elected an executive officer effective August 21,
2001.

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---



##### 



(6)     Of these shares, 90,000 each were granted to Messrs. Chisholm, Delmar
and Demers, respectively, as one-time grants, in connection with promotion or
hiring.

(7)     Reflects compensation beginning October 1, 2001, when Mr. Delmar
joined ACE*COMM.

(8)     Mr. Demers was elected an executive officer effective November 14,
2000. Mr. Demers left ACE*COMM on August 29, 2003.

(9)     Comprises commissions paid to Mr. Demers in the respective fiscal
years.

Option Grants

The following table shows, as to the Named Executive Officers, the options
to purchase Common Stock granted by ACE*COMM in fiscal 2003.

Option Grants in Last Fiscal Year

|                   |  |                           |        |                                      |  |           |       |            |  |                                                                                         |      |    |  |     |         |  |  |   |   |  |  |   |   |  |  |   |   | 
|------------------ |  | ------------------------- | ------ | ------------------------------------ |  | --------- | ----- | ---------- |  | --------------------------------------------------------------------------------------- | ---- | -- |  | --- | ------- |  |  | - | - |  |  | - | - |  |  | - | - | 
|                   |  | Individual Grants         |        |                                      |  |           |       |            |  |                                                                                         |      |    |  |    
|                   |  |                           |        |                                      |  |           |       |            |  |                                                                                         |      |    |  |    
|                   |  | Number
ofSharesUnderlying |        | Percentage
ofTotal OptionsGranted to |  | Exercise  |       |            |  | Potential
Realizable Value atAssumed Rates of Stock PriceAppreciation
for OptionTerm(1)
|                   |  | Options                   |        | Employees in                         |  | Price Per |       | Expiration |  |                                                                                        
|                   |  | Granted                   |        | Fiscal 2003                          |  | Share     |       | Date       |  | 0%                                                                                      |      | 5% |  | 10%
|                   |  |                           |        |                                      |  |           |       |            |  |                                                                                         |      |    |  |    
|George T. Jimenez  |  |                           | 0      |                                      |  |           |      |            |  |                                                                                         |     |    |  |     |        |  |  |   |  |  |  |   |  |  |  |   |  | 
|Joseph A. Chisholm |  |                           | 0      |                                      |  |           |      |            |  |                                                                                         |     |    |  |     |        |  |  |   |  |  |  |   |  |  |  |   |  | 
|Steven R. Delmar   |  |                           | 0      |                                      |  |           |      |            |  |                                                                                         |     |    |  |     |        |  |  |   |  |  |  |   |  |  |  |   |  | 
|Martin Demers      |  |                           | 90,000 | (2)                                  |  |           | 32.03 |            |  | $                                                                                       | 1.34 |    |  |     | 10/4/12 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 0 | 



---

(1)     Amounts are based on the 0%, 5%, and 10% annual compounded rates of
appreciation of the Common Stock price from the date of grant, prescribed by
the Securities and Exchange Commission, and are not intended to forecast future
appreciation of ACE*COMMs Common Stock. The prices of the Common Stock,
assuming such annual compounded rates of appreciation over the term of the
option, would be as follows:

|               |  |                |  |    |   |    |  |     |      |  |  |   |      | 
|-------------- |  | -------------- |  | -- | - | -- |  | --- | ---- |  |  | - | ---- | 
|Exercise price |  | Term of Option |  | 0% |   | 5% |  | 10%
|               |  |                |  |    |   |    |  |    
|$1.34          |  | 10 years       |  | $  | 0 |    |  | $   | 2.18 |  |  | $ | 3.48 | 

(2)     Option granted in connection with promotion to officer. Option shares
are fully vested on the date of grant and remain exercisable through the term
of the option, provided the officer continues to be employed by ACE*COMM. Mr.
Demers left ACE*COMM on August 29, 2003 and his options expire on November 29,
2003.

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##### 



Fiscal 2003 Stock Option Exercises and Year-End Option Values

The following table shows, as to the Named Executive Officers, the information
concerning exercises of stock options in the last fiscal year and 2003 fiscal
year-end option values.

Fiscal 2003 Stock Option Exercises and Year-End Option Values

|                   |  |                  |   |             |  |                                                                 |   |                                                               |  |  |         |  |  |  |        |  |  |   |   |  |  |   |   | 
|------------------ |  | ---------------- | - | ----------- |  | --------------------------------------------------------------- | - | ------------------------------------------------------------- |  |  | ------- |  |  |  | ------ |  |  | - | - |  |  | - | - | 
|                   |  | SharesAcquiredon |   | Value       |  | Number of SharesUnderlying UnexercisedOptions at FiscalYear-End |   | Value of UnexercisedIn-the-Money Options atFiscal Year-End(2)
|Name               |  | Exercise         |   | Realized(1) |  | Exercisable/Unexercisable                                       |   | Exercisable/Unexercisable                                    
|                   |  |                  |   |             |  |                                                                 |   |                                                              
|George T. Jimenez  |  |                  | 0 |             |  | $                                                               | 0 |                                                               |  |  | 56,675  |  |  |  | 72,549 |  |  | $ | 0 |  |  | $ | 0 | 
|Joseph A. Chisholm |  |                  | 0 |             |  |                                                                 | 0 |                                                               |  |  | 46,076  |  |  |  | 83,333 |  |  |   | 0 |  |  |   | 0 | 
|Steven R. Delmar   |  |                  | 0 |             |  |                                                                 | 0 |                                                               |  |  | 40,977  |  |  |  | 80,000 |  |  |   | 0 |  |  |   | 0 | 
|Martin Demers      |  |                  | 0 |             |  |                                                                 | 0 |                                                               |  |  | 138,101 |  |  |  | 57,000 |  |  |   | 0 |  |  |   | 0 | 



---

|(1) |  | Value realized represents the positive spread between the respective
exercise prices of the exercised options and the fair market value per
share on the respective dates of exercise.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Value for in-the-money options represent the positive spread between
the respective exercise prices of outstanding options and the market price
on June 30, 2003.                   

Employment Contracts, Termination of Employment and Change-of-Control Arrangements

ACE*COMM does not have any employment agreements with officers.

Compensation of Directors

Outside directors receive $12,000 each per fiscal year ($16,000 in the case of
the Chairman of the Audit Committee), payable in quarterly installments, and
are reimbursed for their travel expenses in attending board and committee
meetings. In addition, upon his election or appointment to serve, each outside
director receives an option to purchase 3,000 shares (4,000 shares in the case
of the Chairman of the Audit Committee) of ACE*COMMs common stock for each
year such director is elected or appointed to serve, at an exercise price equal
to the fair market value on the date of grant, pursuant to the 2000 Stock
Option Plan for Directors. Each option granted becomes exercisable in
installments of one-third of the option shares on each anniversary of the date
of grant, provided that the option holder still serves as a director on such
date or, if he ceases to be a director (other than by reason of termination for
cause) within 45 days prior to such date, he has served as a director for at
least 12 consecutive months as of such date. Each option expires upon the
earlier of five years from the date of grant, the expiration of six months
following death, resignation or removal other than for cause, and, immediately,
upon removal of a director for cause.

Compensation Committee Interlocks and Insider Participation

ACE*COMMs Compensation Committee is composed of three non-employee directors:
Messrs. Casner, Linowes and Wetzel. No current member of the Compensation
Committee is an officer or employee of ACE*COMM.

-33-



---



##### 



|         |  |                                                               
|-------- |  | --------------------------------------------------------------
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

|                                                                      |  |                       |           |                        |  |  |       |  
|--------------------------------------------------------------------- |  | --------------------- | --------- | ---------------------- |  |  | ----- | -
|                                                                      |  | Amounts and Nature of |           | Percent of Outstanding
|Name and Address(1)                                                   |  | Ownership             |           | Shares                
|                                                                      |  |                       |           |                       
|                                                                      |  |                       |           |                        |  |  |       |  
|Directors, Nominees and Named
Executive Officers                      |  |                       |           |                        |  |  |       |  
|                                                                     
|George T. Jimenez                                                     |  |                       | 1,968,108 | (2)                    |  |  | 19.83 | %
|                                                                      |  |                       |           |                        |  |  |       |  
|Paul G. Casner, Jr.                                                   |  |                       | 45,000    | (3)                    |  |  | *     |  
|                                                                      |  |                       |           |                        |  |  |       |  
|Harry M. Linowes                                                      |  |                       | 35,000    | (4)                    |  |  | *     |  
|                                                                      |  |                       |           |                        |  |  |       |  
|Gilbert A. Wetzel                                                     |  |                       | 86,000    | (5)                    |  |  | *     |  
|                                                                      |  |                       |           |                        |  |  |       |  
|Joseph A. Chisholm                                                    |  |                       | 82,076    | (6)                    |  |  | *     |  
|                                                                      |  |                       |           |                        |  |  |       |  
|Steven R. Delmar                                                      |  |                       | 75,977    | (7)                    |  |  | *     |  
|                                                                      |  |                       |           |                        |  |  |       |  
|Martin Demers                                                         |  |                       | 146,401   | (8)                    |  |  | 1.46  |  
|                                                                      |  |                       |           |                        |  |  |       |  
|All Directors, Nominees and Executive
Officers as a group (8 persons) |  |                       | 2,489,519 | (9)                    |  |  | 25.23 |  
|                                                                      |  |                       |           |                        |  |  |       |  
|Other 5% Stockholders                                                 |  |                       |           |                        |  |  |       |  
|                                                                      |  |                       |           |                        |  |  |       |  
|Public School Employees Retirement System                            |  |                       |           |                        |  |  |       |  
|5 North 5th Street                                                    |  |                       |           |                        |  |  |       |  
|Harrisburg, PA 17108-0125                                             |  |                       | 511,265   | (10)                   |  |  | 5.18  |  



---

|* Less than one percent of stock outstanding.
|---------------------------------------------



|(1) |  | Unless otherwise indicated, the address is c/o ACE*COMM Corporation, 704
Quince Orchard Road, Gaithersburg, Maryland 20878 and the designated
owner has voting and investment power with respect to the shares.                                          
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes 59,892 shares issuable upon the exercise of options. Does not
include 950 shares held by his mother-in-law, as to which his wife has
voting and investment power and as to which Mr. Jimenez disclaims
beneficial ownership.                    
|   
|(3) |  | Includes 25,000 shares issuable upon the exercise of options.                                                                                                                                                                                            
|   
|(4) |  | Includes 28,000 shares issuable upon the exercise of options. Does not
include 100 shares held by his wife in a retirement account, as to which
his wife has sole voting and investment power and as to which Mr. Linowes
disclaims beneficial ownership.
|   
|(5) |  | Includes 19,000 shares issuable upon the exercise of options.                                                                                                                                                                                            
|   
|(6) |  | Includes 76,076 shares issuable upon the exercise of options.                                                                                                                                                                                            

-34-



---



##### 





|(7)  |  | Includes 70,977 shares issuable upon the exercise of options.                                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------
|    
|(8)  |  | Includes 138,101 shares issuable upon the exercise of options.                                                          
|    
|(9)  |  | Includes 443,380 shares issuable upon the exercise of options. Includes
only shares held individually or through trusts.
|    
|(10) |  | Information based on corporate records.                                                                                 

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None

-35-



---



##### 



PART IV

ITEM 15.    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
|Reports of Independent Auditors                                                     |  |      | F-2 | 
|Balance Sheets as of June 30, 2003 and 2002                                         |  |      | F-4 | 
|Statements of Operations for the years ended June 30,
2003, 2002 and 2001           |  |      | F-5 | 
|Statements of Stockholders Equity for the years
ended June 30, 2003, 2002 and 2001 |  |      | F-6 | 
|Statements of Cash Flows for the years ended June 30,
2003, 2002 and 2001           |  |      | 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 |  | S-1

(a)(3)     EXHIBITS

|      |  |      |  |                                                                                                                        
|----- |  | ---- |  | -----------------------------------------------------------------------------------------------------------------------
|3.5   |  | (A)  |  | Articles of Amendment and Restatement dated August 19, 1996.                                                           
|      |  |      |  |                                                                                                                        
|3.6   |  | (A)  |  | By-laws of ACE*COMM as amended to date.                                                                                
|      |  |      |  |                                                                                                                        
|4.1   |  | (A)  |  | Form of Specimen of Common Stock Certificate.                                                                          
|      |  |      |  |                                                                                                                        
|10.1  |  | (D)  |  | Lease Between New Boston Fund and ACE*COMM as Tenant dated
December 30, 2002                                           
|      |  |      |  |                                                                                                                        
|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)                          
|      |  |      |  |                                                                                                                        
|10.35 |  | (C)* |  | 2000 Stock Option Plan for Directors                                                                                   
|      |  |      |  |                                                                                                                        
|23.1  |  | (D)  |  | Consent of Grant Thornton LLP, independent auditors                                                                    
|      |  |      |  |                                                                                                                        
|23.2  |  | (D)  |  | Consent of Ernst & Young LLP, independent auditors                                                                     
|      |  |      |  |                                                                                                                        
|31.1  |  | (D)  |  | Certification of Chief Executive Officer                                                                               
|      |  |      |  |                                                                                                                        
|31.2  |  | (D)  |  | Certification of Chief Financial Officer                                                                               
|      |  |      |  |                                                                                                                        
|32    |  | (D)  |  | Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

-36-



---



##### 



| |  |     |  |                                                                                                                                                       
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (A) |  | Incorporated by reference to the identically numbered
exhibit filed as an exhibit to ACE*COMM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 ACE*COMMs Form 10-K, filed
October 1, 1997.                     
| |  |     |  |                                                                                                                                                       
| |  | (C) |  | Incorporated by reference to ACE*COMMs Proxy Statement,
dated October 17, 2000.                                                                      
| |  |     |  |                                                                                                                                                       
| |  | (D) |  | Filed herewith                                                                                                                                        



---

|* |  | Identifies exhibit that consists of or includes a management contract
or compensatory plan or arrangement.
|- |  | ----------------------------------------------------------------------------------------------------------



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

|                   |  |                                                                                                                                                                                                                         
|------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date Filed         |  | Item Reported On                                                                                                                                                                                                        
|                   |  |                                                                                                                                                                                                                         
|June 30, 2003      |  | On June 24, 2003, ACE*COMM Corporation issued a press
release dismissing its independent auditors, Ernst &
Young LLP, and engaged the services of Grant
Thornton, LLP as its new independent auditors.                  
|                   |  |                                                                                                                                                                                                                         
|August 3, 2003     |  | On August 4, 2003 ACE*COMM Corporation issued a press
release announcing that it has entered into a
non-binding Letter of Intent with i3 Mobile, Inc. to
enter into a merger.                                           
|                   |  |                                                                                                                                                                                                                         
|September 17, 2003 |  | On September 15, 2003 ACE*COMM Corporation issued a
press release announcing that it had signed a
definitive agreement to merge with i3 Mobile, Inc., and
announcing it fourth quarter and fiscal 2003 year end
results.

-37-



---



##### 



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 29, 2003

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:

|                                               |  |                                                                                                |  |                   
|---------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ------------------
|Name                                           |  | Title                                                                                          |  | Date              
|                                               |  |                                                                                                |  |                   
|/s/ George T. Jimenez

(George T. Jimenez)     |  | Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)                |  | September 29, 2003
|                                               |  |                                                                                                |  |                   
|/s/ Steven R. Delmar

(Steven R. Delmar)       |  | Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer) |  | September 29, 2003
|                                               |  |                                                                                                |  |                   
|/s/ Paul G. Casner, Jr.

(Paul G. Casner, Jr.) |  | Director                                                                                       |  | September 29, 2003
|                                               |  |                                                                                                |  |                   
|/s/ Gilbert A. Wetzel)

(Gilbert A. Wetzel)    |  | Director                                                                                       |  | September 29, 2003
|                                               |  |                                                                                                |  |                   
|/s/ Harry M. Linowes

(Harry M. Linowes)       |  | Director                                                                                       |  | September 29, 2003

-38-



---



##### 



ACE*COMM CORPORATION

INDEX TO FINANCIAL STATEMENTS

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

|                                                                                        |  |      |     | 
|--------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                        |  | Page
|                                                                                        |  |     
|Reports of Independent Auditors                                                         |  |      | F-2 | 
|Balance Sheets as of June 30, 2003 and 2002                                             |  |      | F-4 | 
|Statements of Operations for the years ended
    June 30, 2003, 2002 and 2001           |  |      | F-5 | 
|Statements of Stockholders Equity for the
    years ended June 30, 2003, 2002 and 2001 |  |      | F-6 | 
|Statements of Cash Flows for the years ended
    June 30, 2003, 2002 and 2001           |  |      | F-7 | 
|Notes to Financial Statements                                                           |  |      | F-8 | 

F-1



---



##### 



REPORT OF GRANT THORNTON LLP, INDEPENDENT
AUDITORS

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

We have audited the accompanying balance sheets
of ACE*COMM Corporation as of June 30, 2003 and the related
statements of operations, stockholders equity, and cash
flows for the year ended June 30, 2003. These financial
statements and schedule are the responsibility of
ACE*COMMs management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform our audits 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 audits
provide 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, 2003, and the
results of its operations and its cash flows for the year ended
June 30, 2003, in conformity with accounting principles
generally accepted in the United States of America.

We have also audited Schedule II for the
year ended June 30, 2003. In our opinion, this schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the
information therein.



| |                       
| | ----------------------
| | /s/ Grant Thornton LLP

Vienna, VA 
 August 22, 2003

F-2



---



##### 



REPORT OF ERNST & YOUNG LLP, 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, 2002 , and the related
statements of operations, stockholders equity, and cash
flows for each of the two years in the period ended
June 30, 2002. Our audits also included the financial
statement schedule listed in the index at Item 15(a). These
financial statements and schedule are the responsibility of
ACE*COMMs management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform our audits 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 audits
provide 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, 2002, and the
results of its operations and its cash flows for each of the two
years in the period ended June 30, 2002, in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

McLean, VA

August 12, 2002


F-3



---



##### 



ACE*COMM CORPORATION

BALANCE SHEETS


(in thousands except share and per share
amounts)


|                                         |                                                                                                                       |                                            |     |         |       |  |       |         |        | 
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | --- | ------- | ----- |  | ----- | ------- | ------ | 
|                                         |                                                                                                                       |                                           
|                                         |                                                                                                                       | June 30,                                  
|                                         |                                                                                                                       |                                           
|                                         |                                                                                                                       | 2003                                       |     | 2002   
|                                         |                                                                                                                       |                                            |     |        
|Assets                                   |                                                                                                                       |                                            |     |         |       |  |       |        
|Current assets:                          |                                                                                                                       |                                            |     |         |       |  |       |        
|                                         | Cash and cash equivalents                                                                                             |                                            | $   | 1,570   |       |  | $     | 3,530   |       
|                                         | Accounts receivable, net                                                                                              |                                            |     | 4,825   |       |  |       | 3,866   |       
|                                         | Inventories, net                                                                                                      |                                            |     | 700     |       |  |       | 1,122   |       
|                                         | Prepaid expenses and other                                                                                            |                                            |     | 265     |       |  |       | 211     |       
|                                         |                                                                                                                       |                                            |     |         |       |  |       |        
|                                         |                                                                                                                       | Total current assets                       |     |         | 7,360 |  |       |         | 8,729  | 
|Property and equipment, net              |                                                                                                                       |                                            | 875 |         |       |  | 1,659 |        
|Other assets                             |                                                                                                                       |                                            | 9   |         |       |  | 14    |        
|                                         |                                                                                                                       |                                            |     |         |       |  |       |        
|                                         |                                                                                                                       | Total assets                               |     | $       | 8,244 |  |       | $       | 10,402 | 
|                                         |                                                                                                                       |                                            |     |         |       |  |       |        
|Liabilities and Stockholders
    Equity |                                                                                                                       |                                            |     |         |       |  |       |        
|Current liabilities:                     |                                                                                                                       |                                            |     |         |       |  |       |        
|                                         | Borrowings                                                                                                            |                                            | $   | 433     |       |  | $     | 209     |       
|                                         | Accounts payable                                                                                                      |                                            |     | 636     |       |  |       | 663     |       
|                                         | Accrued expenses                                                                                                      |                                            |     | 341     |       |  |       | 582     |       
|                                         | Accrued compensation                                                                                                  |                                            |     | 706     |       |  |       | 1,340   |       
|                                         | Deferred revenue                                                                                                      |                                            |     | 1,303   |       |  |       | 1,233   |       
|                                         |                                                                                                                       |                                            |     |         |       |  |       |        
|                                         |                                                                                                                       | Total current liabilities                  |     |         | 3,419 |  |       |         | 4,027  | 
|                                         | Other liabilities                                                                                                     |                                            |     |        |       |  |       | 44      |       
|                                         |                                                                                                                       |                                            |     |         |       |  |       |        
|                                         |                                                                                                                       | Total liabilities                          |     |         | 3,419 |  |       |         | 4,071  | 
|                                         |                                                                                                                       |                                            |     |         |       |  |       |        
|Commitments and contingencies (Note 12)  |                                                                                                                       |                                            |     |         |       |  |       |        
|Stockholders equity:                    |                                                                                                                       |                                            |     |         |       |  |       |        
|                                         | Preferred stock, $.01 par value, 5,000,000 shares
    authorized, none issued and outstanding                         |                                            |     |         |       |  |       |         |       
|                                         | Common stock, $.01 par value, 45,000,000 shares
    authorized, 9,807,440 and 9,328,044 shares issued and outstanding |                                            |     | 98      |       |  |       | 93      |       
|                                         | Additional paid-in capital                                                                                            |                                            |     | 21,933  |       |  |       | 21,462  |       
|                                         | Accumulated deficit                                                                                                   |                                            |     | (17,206 | )     |  |       | (15,224 | )     
|                                         |                                                                                                                       |                                            |     |         |       |  |       |        
|                                         |                                                                                                                       | Total stockholders equity                 |     |         | 4,825 |  |       |         | 6,331  | 
|                                         |                                                                                                                       |                                            |     |         |       |  |       |        
|                                         |                                                                                                                       | Total liabilities and stockholders equity |     | $       | 8,244 |  |       | $       | 10,402 | 
|                                         |                                                                                                                       |                                            |     |         |       |  |       |        

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

F-4



---



##### 



ACE*COMM CORPORATION

STATEMENTS OF OPERATIONS


(in thousands, except per share
amounts)


|                                             |         |                      |        |       |  |      |        |       |  |   |        |       | 
|-------------------------------------------- | ------- | -------------------- | ------ | ----- |  | ---- | ------ | ----- |  | - | ------ | ----- | 
|                                             |         |                     
|                                             |         | Years Ended June 30,
|                                             |         |                     
|                                             |         | 2003                 |        | 2002  |  | 2001
|                                             |         |                      |        |       |  |     
|Revenue                                      |         | $                    | 13,794 |       |  | $    | 18,094 |       |  | $ | 24,179 |      
|Cost of revenue                              |         |                      | 7,539  |       |  |      | 9,112  |       |  |   | 13,335 |      
|                                             |         |                      |        |       |  |      |        |       |  |   |        |      
|Gross profit                                 |         |                      | 6,255  |       |  |      | 8,982  |       |  |   | 10,844 |      
|Selling, general and administrative expense  |         |                      | 7,861  |       |  |      | 12,231 |       |  |   | 16,157 |      
|Research and development expense             |         |                      | 347    |       |  |      | 780    |       |  |   | 1,650  |      
|                                             |         |                      |        |       |  |      |        |       |  |   |        |      
|Loss from operations                         |         |                      | (1,953 | )     |  |      | (4,029 | )     |  |   | (6,963 | )    
|Interest (income) expense, net               |         |                      | 29     |       |  |      | (41    | )     |  |   | (36    | )    
|                                             |         |                      |        |       |  |      |        |       |  |   |        |      
|Loss before income tax provision             |         |                      | (1,982 | )     |  |      | (3,988 | )     |  |   | (6,927 | )    
|Income tax provision                         |         |                      |       |       |  |      |       |       |  |   |       |      
|                                             |         |                      |        |       |  |      |        |       |  |   |        |      
|Net loss                                     |         | $                    | (1,982 | )     |  | $    | (3,988 | )     |  | $ | (6,927 | )    
|                                             |         |                      |        |       |  |      |        |       |  |   |        |      
|Basic net loss per share                     |         | $                    | (0.21  | )     |  | $    | (0.43  | )     |  | $ | (0.75  | )    
|                                             |         |                      |        |       |  |      |        |       |  |   |        |      
|Diluted net loss per share                   |         | $                    | (0.21  | )     |  | $    | (0.43  | )     |  | $ | (0.75  | )    
|                                             |         |                      |        |       |  |      |        |       |  |   |        |      
|Shares used in computing net loss per share: |         |                      |        |       |  |      |        |       |  |   |        |      
|                                             | Basic   |                      |        | 9,557 |  |      |        | 9,308 |  |   |        | 9,230 | 
|                                             |         |                      |        |       |  |      |        |       |  |   |        |      
|                                             | Diluted |                      |        | 9,557 |  |      |        | 9,308 |  |   |        | 9,230 | 
|                                             |         |                      |        |       |  |      |        |       |  |   |        |      

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

F-5



---



##### 



ACE*COMM CORPORATION

STATEMENTS OF STOCKHOLDERS
EQUITY


(in thousands)


|                       |                                           |              |       |            |   |             |    |         |   |       |        |     |   |   |         |        |   |   |        |        |  
|---------------------- | ----------------------------------------- | ------------ | ----- | ---------- | - | ----------- | -- | ------- | - | ----- | ------ | --- | - | - | ------- | ------ | - | - | ------ | ------ | -
|                       |                                           |              |       |            |   |             |    |        
|                       |                                           | Common Stock |       |            |   |             |    |        
|                       |                                           |              |       | Additional |   |             |    |        
|                       |                                           |              |       | Paid-In    |   | Accumulated |    |        
|                       |                                           | Shares       |       | Par Value  |   | Capital     |    | Deficit |   | Total
|                       |                                           |              |       |            |   |             |    |         |   |      
|Balance, June 30, 2000 |                                           |              | 9,181 |            |   | $           | 92 |         |   | $     | 21,136 |     |   | $ | (4,309  | )      |   | $ | 16,919 |       
|                       | Exercise of common stock options          |              |       | 36         |   |             |    |        |   |       |        | 158 |   |   |         |       |   |   |        | 158    |  
|                       | Employee stock purchase plan              |              |       | 47         |   |             |    | 1       |   |       |        | 106 |   |   |         |       |   |   |        | 107    |  
|                       | Net loss for the year ended June 30, 2001 |              |       |           |   |             |    |        |   |       |        |    |   |   |         | (6,927 | ) |   |        | (6,927 | )
|                       |                                           |              |       |            |   |             |    |         |   |       |        |     |   |   |         |        |   |   |        |       
|Balance, June 30, 2001 |                                           |              | 9,264 |            |   |             | 93 |         |   |       | 21,400 |     |   |   | (11,236 | )      |   |   | 10,257 |       
|                       | Employee stock purchase plan              |              |       | 68         |   |             |    | 1       |   |       |        | 65  |   |   |         |       |   |   |        | 66     |  
|                       | Stock repurchases                         |              |       | (4         | ) |             |    | (1      | ) |       |        | (3  | ) |   |         |        |   |   |        | (4     | )
|                       | Net loss for the year ended June 30, 2002 |              |       |           |   |             |    |        |   |       |        |    |   |   |         | (3,988 | ) |   |        | (3,988 | )
|                       |                                           |              |       |            |   |             |    |         |   |       |        |     |   |   |         |        |   |   |        |       
|Balance, June 30, 2002 |                                           |              | 9,328 |            |   |             | 93 |         |   |       | 21,462 |     |   |   | (15,224 | )      |   |   | 6,331  |       
|                       | Employee stock purchase plan              |              |       | 49         |   |             |    |        |   |       |        | 37  |   |   |         |       |   |   |        | 37     |  
|                       | Stock repurchases                         |              |       | (45        | ) |             |    |        |   |       |        | (36 | ) |   |         |       |   |   |        | (36    | )
|                       | Issuance of Common Stock                  |              |       | 475        |   |             |    | 5       |   |       |        | 470 |   |   |         |        |   |   |        | 475    |  
|                       | Net loss for the year ended June 30, 2003 |              |       |           |   |             |    |        |   |       |        |    |   |   |         | (1,982 | ) |   |        | (1,982 | )
|                       |                                           |              |       |            |   |             |    |         |   |       |        |     |   |   |         |        |   |   |        |       
|Balance, June 30, 2003 |                                           |              | 9,807 |            |   | $           | 98 |         |   | $     | 21,933 |     |   | $ | (17,206 | )      |   | $ | 4,825  |       
|                       |                                           |              |       |            |   |             |    |         |   |       |        |     |   |   |         |        |   |   |        |       

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

F-6



---



##### 



ACE*COMM CORPORATION

STATEMENTS OF CASH FLOWS


(in thousands)


|                                                                                               |                                  |                                            |        |      |        |      |        |   |       |   |        |   |        |  
|---------------------------------------------------------------------------------------------- | -------------------------------- | ------------------------------------------ | ------ | ---- | ------ | ---- | ------ | - | ----- | - | ------ | - | ------ | -
|                                                                                               |                                  |                                           
|                                                                                               |                                  | Years ended June 30,                      
|                                                                                               |                                  |                                           
|                                                                                               |                                  | 2003                                       |        | 2002 |        | 2001
|                                                                                               |                                  |                                            |        |      |        |     
|Cash flows from operating
    activities:                                                      |                                  |                                            |        |      |        |      |        |   |       |   |        |  
|Net loss                                                                                       |                                  | $                                          | (1,982 | )    |        | $    | (3,988 | ) |       | $ | (6,927 | )
|Adjustments to reconcile net loss to net cash
    (used for) provided by operating activities: |                                  |                                            |        |      |        |      |        |   |       |   |        |  
|                                                                                               |                                  | Depreciation and amortization              |        |      | 876    |      |        |   | 1,248 |   |        |   | 1,752  |  
|                                                                                               |                                  | Provision for doubtful accounts            |        |      | 120    |      |        |   | 701   |   |        |   | 812    |  
|                                                                                               |                                  | Loss on disposal of property and equipment |        |      | 22     |      |        |   | 34    |   |        |   | 12     |  
|Changes in operating assets and liabilities:                                                   |                                  |                                            |        |      |        |      |        |   |       |   |        |  
|                                                                                               |                                  | Accounts receivable                        |        |      | (1,079 | )    |        |   | 36    |   |        |   | 6,403  |  
|                                                                                               |                                  | Inventories, net                           |        |      | 422    |      |        |   | 238   |   |        |   | 509    |  
|                                                                                               |                                  | Prepaid expenses and other assets          |        |      | (49    | )    |        |   | 312   |   |        |   | 240    |  
|                                                                                               |                                  | Accounts payable                           |        |      | (27    | )    |        |   | 424   |   |        |   | (1,299 | )
|                                                                                               |                                  | Accrued liabilities                        |        |      | (875   | )    |        |   | (402  | ) |        |   | (357   | )
|                                                                                               |                                  | Deferred revenue                           |        |      | 70     |      |        |   | (268  | ) |        |   | 731    |  
|                                                                                               |                                  | Other liabilities                          |        |      | (44    | )    |        |   | (69   | ) |        |   | (49    | )
|                                                                                               |                                  |                                            |        |      |        |      |        |   |       |   |        |  
|Net cash (used for) provided by operating
    activities                                       |                                  |                                            | (2,546 | )    |        |      | (1,734 | ) |       |   | 1,827  |  
|                                                                                               |                                  |                                            |        |      |        |      |        |   |       |   |        |  
|Cash flows from investing
    activities:                                                      |                                  |                                            |        |      |        |      |        |   |       |   |        |  
|Proceeds from sale of equipment                                                                |                                  |                                            | 8      |      |        |      |        |   |       |   |        |  
|Purchases of property and equipment                                                            |                                  |                                            | (122   | )    |        |      | (268   | ) |       |   | (502   | )
|                                                                                               |                                  |                                            |        |      |        |      |        |   |       |   |        |  
|Net cash used for investing activities                                                         |                                  |                                            | (114   | )    |        |      | (268   | ) |       |   | (502   | )
|                                                                                               |                                  |                                            |        |      |        |      |        |   |       |   |        |  
|Cash flows from financing
    activities:                                                      |                                  |                                            |        |      |        |      |        |   |       |   |        |  
|Borrowings (payments)                                                                          |                                  |                                            | 224    |      |        |      | (272   | ) |       |   | (145   | )
|Principal payments under capital lease obligation                                              |                                  |                                            |       |      |        |      | (28    | ) |       |   | (61    | )
|Proceeds from exercise of common stock options                                                 |                                  |                                            |       |      |        |      |       |   |       |   | 158    |  
|Proceeds from common stock issued                                                              |                                  |                                            | 475    |      |        |      |       |   |       |   |       |  
|Repurchase of common stock                                                                     |                                  |                                            | (36    | )    |        |      | (4     | ) |       |   |       |  
|Proceeds from employee stock purchase plan                                                     |                                  |                                            | 37     |      |        |      | 66     |   |       |   | 107    |  
|                                                                                               |                                  |                                            |        |      |        |      |        |   |       |   |        |  
|Net cash provided by (used for) financing
    activities                                       |                                  |                                            | 700    |      |        |      | (238   | ) |       |   | 59     |  
|                                                                                               |                                  |                                            |        |      |        |      |        |   |       |   |        |  
|Net (decrease) increase in cash and cash
    equivalents                                       |                                  |                                            | (1,960 | )    |        |      | (2,240 | ) |       |   | 1,384  |  
|Cash and cash equivalents at beginning of year                                                 |                                  |                                            | 3,530  |      |        |      | 5,770  |   |       |   | 4,386  |  
|                                                                                               |                                  |                                            |        |      |        |      |        |   |       |   |        |  
|Cash and cash equivalents at end of year                                                       |                                  | $                                          | 1,570  |      |        | $    | 3,530  |   |       | $ | 5,770  |  
|                                                                                               |                                  |                                            |        |      |        |      |        |   |       |   |        |  
|Supplemental disclosure of cash flow
    information:                                          |                                  |                                            |        |      |        |      |        |   |       |   |        |  
|                                                                                               | Cash paid during the period for: |                                            |        |      |        |      |        |   |       |   |        |   |       
|                                                                                               |                                  | Interest                                   |        | $    | 44     |      |        | $ | 50    |   |        | $ | 195    |  
|                                                                                               |                                  | Income taxes                               |        | $    |       |      |        | $ |      |   |        | $ | 9      |  

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

F-7



---



##### 



ACE*COMM CORPORATION

NOTES TO FINANCIAL STATEMENTS


NOTE 1  ORGANIZATION

ACE*COMM Corporation (the Company),
incorporated in Maryland in 1983, delivers enterprise
telemanagement applications and advanced Convergent
Mediation solutions to wired and wireless voice, data, and
Internet communications providers. ACE*COMMs technology
enables the capture, security, validation, correlation,
augmentation, and warehousing of data from network elements and
distributes it in appropriate formats to OSS (Operations
Support Systems) and BSS (Business Support
Systems) operations. ACE*COMMs products are tailored
to each customers needs, providing the capabilities to
extract knowledge from their networks  knowledge
they use to reduce costs, accelerate time-to-market for new
products and services, generate new sources of revenue, and push
forward with next-generation initiatives.

ACE*COMM has incurred significant net losses from
operations during fiscal years 2001, 2002, and 2003 primarily
due to decreased demand for its products from the North American
telecommunications market. As a result of declining revenues,
ACE*COMM has initiated numerous cost reduction measures which
have significantly lowered operating expenses. Additionally,
ACE*COMM has developed contingency plans to reduce expenses
further, should revenues decline below projected levels.

NOTE 2  SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

Use of estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates.
Significant estimates inherent in the preparation of the
accompanying financial statements include: managements
forecasts of contract costs and progress toward completion,
which are used to determine revenue recognition under the
percentage-of-completion method; estimates of allowances for
doubtful accounts receivable and inventory obsolescence; tax
valuation allowances; and estimates of the net realizable value
of capitalized software development costs.

Revenue recognition

ACE*COMM derives revenues primarily from
products, where a combination of hardware, proprietary software,
and services are offered to customers. These products are
typically formalized in a multiple element arrangement involving
significant modification or customization of the underlying
software and implementation services. ACE*COMMs software
licenses to end-users generally provide for an initial license
fee to use the product in perpetuity. Under certain contracts,
ACE*COMM licenses its software to resellers for subsequent
modification and resale. Our customers, including resellers, do
not possess the right to return or exchange products.

More frequently, ACE*COMM enters into a multiple
element arrangement that does not involve significant
modification or customization of the related software. In these
instances, ACE*COMM recognizes revenue in accordance with AICPA
Statement of Position 97-2, Software Revenue
Recognition,and allocates revenue to each element of
the arrangement based on objective evidence of the
elements fair value based on internal price listings
developed by ACE*COMM. Revenue is recognized upon delivery
(i.e., transfer of title), when a signed agreement exists, the
fee is fixed and determinable, and collection of the resulting
receivable is probable.

In situations when ACE*COMMs products
involve significant modification or customization of software,
or when ACE*COMMs systems integration and product
development are essential to the functionality of the software,
revenues relating to the software licenses and services are
aggregated and the combined revenues are recognized on a
percentage-of-completion basis. The hardware revenue on these
contracts is recognized upon transfer of title. Revenue
recognized using the percentage-of-completion method

F-8



---



##### 



NOTE 2  SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, Continued


is based on the estimated stage of completion of
individual contracts determined on a cost or level of efforts
basis.

While ACE*COMM occasionally sells unbundled
services, most of ACE*COMMs services are delivered in
conjunction with ACE*COMMs products. Revenue from
technical customer support and maintenance services is
recognized ratably over the term of the related agreement,
generally one year. Revenue from consulting services is
recognized on a time and material basis, as the services are
performed. Revenue from outsourcing or service bureau services
is recognized on a per-unit-of-volume basis as the services are
performed.

Revenue related to obligations to provide post
contract customer support is unbundled from the license and
recognized ratably over the term of the agreement.

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.

Cash and cash equivalents

ACE*COMM considers all investments with an
original maturity of three months or less to be cash equivalents.

Inventories

Inventories consist principally of purchased
materials to be used in the production of finished goods and 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 basis 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
ACE*COMM are reviewed for impairment whenever changes in
circumstances indicate the carrying value of an asset may not be
recoverable.

Capitalized software development
costs

ACE*COMM owns certain proprietary rights to
computer software systems that ACE*COMM 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, ACE*COMM capitalizes 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. 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. ACE*COMM 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 exclude dilution and is
computed by dividing net (loss) income by the weighted average
common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution

F-9



---



##### 



NOTE 2  SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, Continued


that could occur if securities or other contracts
to issue common stock were exercised or converted into common
stock.

Income taxes

ACE*COMM accounts for income taxes under
Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes. Deferred income tax assets
and liabilities are determined based upon differences between
the financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. A
valuation allowance reduces deferred tax assets when it is more
likely than not that some portion or all of the deferred tax
assets will not be realized.

Reclassifications

Certain prior year information has been
reclassified to conform to the current years presentation.

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
ACE*COMMs bank credit agreements approximate fair value
because the interest rates on these instruments change with
market interest rates.

Foreign Currency

The Companys functional currency for all
operations and foreign transaction is the U.S. dollar. Gains and
losses from the translation of foreign currency into U.S.
dollars are included in current results of operations. Gains and
losses resulting from foreign currency transactions are also
included in current results of operations.

Recently Issued Accounting
Pronouncements

In April 2002, the FASB issued SFAS 145,
Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 rescinds certain standards and
modifies certain standards related to the extinguishment of debt
and sale-leaseback transactions. The provisions of SFAS 145
are generally effective after May 15, 2002. The adoption of
this standard is not expected to have a material effect on the
financial statements of the Company.

In January 2003, the FASB issued Interpretation
Number 46, Consolidation of Variable Interest Entities
(FIN 46). This interpretation of Accounting
Research Bulletin No. 51, Consolidated Financial
Statements, addresses consolidation by business enterprises of
variable interest entities. Under current practice, two
enterprises generally have been included in consolidated
financial statements because one enterprise controls the other
through voting interests. FIN 46 defines the concept of
variable interests and requires existing
unconsolidated variable interest entities to be consolidated by
their primary beneficiaries if the entities do not effectively
disperse risks among the parties involved. This interpretation
applies immediately to variable interest entities created after
January 31, 2003. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. The
interpretation may be applied prospectively with a
cumulative-effect adjustment as of the date on which it is first
applied or by restating previously issued financial statements
for one or more years with a cumulative-effect adjustment as of
the beginning of the first year restated. Adoption of this
standard is not expected to have a material effect on the
Companys financial statements.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. SFAS No. 149 amends and
clarifies accounting and reporting for

F-10



---



##### 



NOTE 2  SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES, Continued


derivative instruments and hedging activities
under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 149 is
effective for derivative instruments and hedging activities
entered into or modified after June 30, 2003, except for
certain forward purchase and sale securities. For these forward
purchase and sale securities, SFAS No. 149 is effective for
both new and existing securities after June 30, 2003.
Adoption is not expected to have a material impact on the
Companys financial statements.

In May 2003, the Financial Accounting Standards
Board (FASB) issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity. SFAS No. 150 establishes
standards for issuer classification and measurement of certain
financial instruments with characteristics of both liabilities
and equity. Instruments that fall within the scope of SFAS
No. 150 must be classified as a liability. SFAS
No. 150 is effective for financial instruments entered into
or modified after May 31, 2003. For financial instruments
issued on or before May 31, 2003, SFAS No. 150 is
effective for the Company in the first quarter of fiscal year
2004. Adoption of this standard is not expected to have a
material effect on the Companys financial statements.

Stock Based Compensation

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

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

|                         |                                                                                                             |                                                               |        |       |       |      |        |        |       |   |        |        |       | 
|------------------------ | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------ | ----- | ----- | ---- | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                         |                                                                                                             |                                                              
|                         |                                                                                                             | Year ended June 30,                                          
|                         |                                                                                                             | (in thousands, except per share amounts)                     
|                         |                                                                                                             |                                                              
|                         |                                                                                                             | 2003                                                          |        | 2002  |       | 2001
|                         |                                                                                                             |                                                               |        |       |       |     
|Net loss                 |                                                                                                             | $                                                             | (1,982 | )     |       | $    | (3,988 | )      |       | $ | (6,927 | )     
|                         | Add: Total stock-based compensation expense
    reported in net loss                                        |                                                               |        |      |       |      |        |       |       |   |        |       |      
|                         | Deduct: Total stock-based compensation expense
    determined under fair value based method for all awards* |                                                               |        | (890  | )     |      |        | (1,489 | )     |   |        | (1,905 | )    
|Pro forma net loss       |                                                                                                             | $                                                             | (2,872 | )     |       | $    | (5,477 | )      |       | $ | (8,832 | )     
|                         |                                                                                                             |                                                              
|Earnings per share:      |                                                                                                             |                                                               |        |       |       |      |        |        |       |   |        |       
|                         | Basic and diluted  as reported                                                                             |                                                               | $      | (0.21 | )     |      | $      | (0.43  | )     |   | $      | (0.75  | )    
|                         | Basic and diluted  pro forma                                                                               |                                                               | $      | (0.30 | )     |      | $      | (0.59  | )     |   | $      | (0.96  | )    
|Weighted average shares: |                                                                                                             |                                                               |        |       |       |      |        |        |       |   |        |       
|                         |                                                                                                             | Weighted average common shares
    outstanding  
    Basic   |        |       | 9,557 |      |        |        | 9,308 |   |        |        | 9,230 | 
|                         |                                                                                                             | Weighted average common shares
    outstanding  
    Diluted |        |       | 9,557 |      |        |        | 9,308 |   |        |        | 9,230 | 



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

F-11



---



##### 



NOTE 3  ACCOUNTS
RECEIVABLE

Accounts receivable consist of the following (in
thousands):

|                                |  |          |       |      |  |   |       |  
|------------------------------- |  | -------- | ----- | ---- |  | - | ----- | -
|                                |  |         
|                                |  | June 30,
|                                |  |         
|                                |  | 2003     |       | 2002
|                                |  |          |       |     
|Billed                          |  | $        | 2,914 |      |  | $ | 1,908 |  
|Unbilled                        |  |          | 2,129 |      |  |   | 2,563 |  
|Allowance for doubtful accounts |  |          | (218  | )    |  |   | (605  | )
|                                |  |          |       |      |  |   |       |  
|                                |  | $        | 4,825 |      |  | $ | 3,866 |  
|                                |  |          |       |      |  |   |       |  

Unbilled receivables include costs and estimated
profit on contracts in progress that have been recognized as
revenue but not yet billed to customers under the provisions of
specific contracts. Substantially all unbilled receivables are
expected to be billed and collected within one year. ACE*COMM
recorded a provision for doubtful accounts of $120,000, credited
the allowance for recoveries of $14,000 and wrote-off $521,000
in uncollected accounts during the year ended June 30,
2003. During the year ended June 30, 2002, ACE*COMM
recorded a provision for doubtful accounts of $701,000 and
wrote-off $593,000 in uncollected accounts receivables. During
the year ended June 30, 2001, ACE*COMM recorded a provision
for doubtful accounts by $812,000, credited the allowance for
recoveries of $13,000, and wrote-off $797,000 in uncollected
accounts receivables.

NOTE 4  INVENTORIES

Inventories consist of the following (in
thousands):

|                           |  |          |      |      |  |   |       |  
|-------------------------- |  | -------- | ---- | ---- |  | - | ----- | -
|                           |  |         
|                           |  | June 30,
|                           |  |         
|                           |  | 2003     |      | 2002
|                           |  |          |      |     
|Inventories                |  | $        | 894  |      |  | $ | 1,316 |  
|Allowance for obsolescence |  |          | (194 | )    |  |   | (194  | )
|                           |  |          |      |      |  |   |       |  
|                           |  | $        | 700  |      |  | $ | 1,122 |  
|                           |  |          |      |      |  |   |       |  

Inventory write-offs during the years ended
June 30, 2003, 2002 and 2001 were $120,000, $170,000 and
$438,000 respectively.

NOTE 5  PROPERTY AND
EQUIPMENT

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

|                                               |  |          |        |      |  |   |        |  
|---------------------------------------------- |  | -------- | ------ | ---- |  | - | ------ | -
|                                               |  |         
|                                               |  | June 30,
|                                               |  |         
|                                               |  | 2003     |        | 2002
|                                               |  |          |        |     
|Lab test equipment                             |  | $        | 137    |      |  | $ | 137    |  
|Computer equipment                             |  |          | 5,852  |      |  |   | 6,157  |  
|Office equipment                               |  |          | 822    |      |  |   | 866    |  
|Leasehold improvements                         |  |          | 466    |      |  |   | 464    |  
|                                               |  |          |        |      |  |   |        |  
|                                               |  |          | 7,277  |      |  |   | 7,624  |  
|Less accumulated depreciation and amortization |  |          | (6,402 | )    |  |   | (5,965 | )
|                                               |  |          |        |      |  |   |        |  
|                                               |  | $        | 875    |      |  | $ | 1,659  |  
|                                               |  |          |        |      |  |   |        |  

Depreciation expense of property and equipment
amounted to $876,000, $1,064,000 and $1,191,000 during the years
ended June 30, 2003, 2002 and 2001, respectively.

F-12



---



##### 



NOTE 6  CAPITALIZED SOFTWARE
DEVELOPMENT COSTS

Capitalized software development costs are fully
amortized as of June 30, 2003 and 2002. Amortization
expense of capitalized software amounted to $0, $184,000 and
$554,000 during the years ended June 30, 2003, 2002 and
2001, respectively.

NOTE 7  BORROWINGS

ACE*COMMs borrowings consist of the
following (in thousands):

|                                                                                                                                                                               |  |          |      |      |  |   |      |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------- | ---- | ---- |  | - | ---- | -
|                                                                                                                                                                               |  |         
|                                                                                                                                                                               |  | June 30,
|                                                                                                                                                                               |  |         
|                                                                                                                                                                               |  | 2003     |      | 2002
|                                                                                                                                                                               |  |          |      |     
|Advances from the Loan and Security Agreement
    with Silicon Valley Bank at Bank prime plus 2%                                                                               |  | $        | 433  |      |  | $ |     |  
|Advances from equipment financing agreement with
    Silicon Valley Bank, principal plus interest (from 9.28% to
    9.98%) due in monthly installments through September 2003 |  |          |     |      |  |   | 220  |  
|                                                                                                                                                                               |  |          |      |      |  |   |      |  
|Total borrowings                                                                                                                                                               |  |          | 433  |      |  |   | 220  |  
|Less current portion                                                                                                                                                           |  |          | (433 | )    |  |   | (209 | )
|                                                                                                                                                                               |  |          |      |      |  |   |      |  
|Noncurrent portion                                                                                                                                                             |  | $        |     |      |  | $ | 11   |  
|                                                                                                                                                                               |  |          |      |      |  |   |      |  

Lines of Credit

ACE*COMM secured a new Loan and Security
Agreement (the Agreement or new
Agreement) with Silicon Valley Bank (the Bank)
effective on July 2, 2002 replacing a previous accounts
receivable purchase agreement with the Bank. Per the Agreement,
ACE*COMM may borrow up to $3.5 million through the
Banks approved borrowing base of eligible accounts
receivables. The $3.5 million line has sublimits of $500
thousand for Letters of Credit and $1.25 million for Export
Import Bank usage. The Bank will pay an advance rate of 80% of
the eligible accounts receivables under the master line, and an
advance rate of 90% of the eligible foreign accounts receivables
under the Export Import Bank Sublimit line. The costs of this
Agreement include an interest rate equal to the Banks
prime rate plus 200 basis points per annum (with a minimum rate
of 4.75% per annum) charged on the average daily balance of
advances outstanding, payable monthly and calculated on a
360-day year basis; additionally ACE*COMM is required to pay
certain costs and expenses of the Bank in administering the
line. The Agreement has a minimum tangible net worth covenant
which must be complied with on a monthly basis, the requirement
for which was $5.0 million for the months July, 2002
through March, 2003 and $4.3 million, $3.9 million,
and $4.8 million respectively for the months April through
June, 2003. ACE*COMMs obligations under the Agreement are
secured by a security interest in all of ACE*COMMs assets
and intellectual property. Advances made to ACE*COMM are payable
in full upon demand in the event of default under the agreement.
As of June 30, 2003, there were outstanding borrowings of
$0.43 million under this Agreement. The Agreement has a maturity
date of August 11, 2004, at which time all obligations are
due and payable in full unless, at the Banks discretion,
the Agreement is to be renewed and payments against the
outstanding amount owed continue in due course. As of
September 16, 2003, there were outstanding borrowings of
$220,000 under this agreement, and an eligible borrowing base of
$275,000.

On September 30, 2002, ACE*COMM had
$0.147 million outstanding on an Equipment Financing
Agreement (the Equipment Agreement) with the Bank,
the principal of which was being paid monthly with an amortized
payoff date of September 2003. ACE*COMM elected to draw against
the new Agreement and pay the then outstanding amount due under
the Equipment Agreement one year ahead of schedule in order to
take advantage of the lower interest fees being charged under
the new Agreement. The final amount paid on the Equipment
Agreement included a payment equal to 6.5% of the value of the
initial amount of each advance at the end of the financing
period for that advance.

F-13



---



##### 



NOTE 8  RETIREMENT
PLAN

ACE*COMM has a 401(k) plan available to employees
the first full month after commencement of their employment,
provided they are at least 21 years of age. ACE*COMM may
make contributions to the plan at its discretion. Contributions
expensed (forfeitures) by ACE*COMM during the years ended
June 30, 2003, 2002, and 2001, were approximately
($47,000), ($25,000) and $141,000 respectively.

NOTE 9  INCOME TAXES

The primary components of ACE*COMMs net
deferred tax assets and liabilities are as follows (in
thousands):

|                 |                                  |          |   |        |   |  |   |        |  
|---------------- | -------------------------------- | -------- | - | ------ | - |  | - | ------ | -
|                 |                                  |         
|                 |                                  | June 30,
|                 |                                  |         
|                 |                                  | 2003     |   | 2002  
|                 |                                  |          |   |       
|Tax assets:      |                                  |          |   |        |   |  |   |       
|                 | Allowance for doubtful accounts  |          | $ | 83     |   |  | $ | 230    |  
|                 | Inventories                      |          |   | 305    |   |  |   | 381    |  
|                 | Accrued expenses                 |          |   | 169    |   |  |   | 217    |  
|                 | Net operating loss carryforwards |          |   | 10,109 |   |  |   | 9,900  |  
|                 | Tax credit carryforwards         |          |   | 26     |   |  |   | 256    |  
|                 | Other                            |          |   | 44     |   |  |   | 11     |  
|                 |                                  |          |   |        |   |  |   |       
|                 | Gross deferred tax assets        |          |   | 10,736 |   |  |   | 10,995 |  
|                 |                                  |          |   |        |   |  |   |       
|                
|Tax liabilities: |                                  |          |   |        |   |  |   |       
|                 | Income on contracts              |          |   | (808   | ) |  |   | (998   | )
|                 | Depreciation                     |          |   | (30    | ) |  |   | (106   | )
|                 | Other                            |          |   |       |   |  |   | (10    | )
|                 |                                  |          |   |        |   |  |   |       
|                 | Gross deferred tax liabilities   |          |   | (838   | ) |  |   | (1,114 | )
|                 |                                  |          |   |        |   |  |   |       
|                 | Net deferred tax asset           |          |   | 9,898  |   |  |   | 9,881  |  
|                 | Valuation allowance              |          |   | (9,898 | ) |  |   | (9,881 | )
|                 |                                  |          |   |        |   |  |   |       
|                 | Net deferred tax                 |          | $ |       |   |  | $ |       |  
|                 |                                  |          |   |        |   |  |   |       

At June 30, 2003, ACE*COMM had net operating
loss carryforwards available to offset future taxable income of
approximately $26.6 million, which expire from 2006 through
2023. As of June 30, 2003, ACE*COMM also had a alternative
minimum tax credit carryforward of approximately $26,000
available to reduce future tax liabilities. These tax credits do
not expire.

Realization of the net deferred tax asset is
dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Based on historical net
operating losses and no assurance that ACE*COMM will generate
any earnings or any specific level of earnings in future years,
ACE*COMM established a valuation allowance on the net deferred
assets at June 30, 2003 and 2002. Approximately
$5.2 million of the valuation allowance as of both
June 30, 2003 and 2002, resulted from the tax benefit of
non-qualified stock options that is included within the deferred
tax benefit related to net operating loss carryforwards. When
the related valuation allowance is released, the tax benefit
will be credited directly to equity.

In 2001, ACE*COMM paid income taxes of $9,000.
There were no income taxes paid during 2002 or 2003.

F-14



---



##### 



NOTE 9  INCOME TAXES,
Continued


The differences between the tax provision
calculated at the statutory federal income tax rate and the
actual tax provision recorded for each year are as follows (in
thousands):

|                                                 |                            |                      |      |      |  |      |        |   |  |   |        |   | 
|------------------------------------------------ | -------------------------- | -------------------- | ---- | ---- |  | ---- | ------ | - |  | - | ------ | - | 
|                                                 |                            |                     
|                                                 |                            | Years ended June 30,
|                                                 |                            |                     
|                                                 |                            | 2003                 |      | 2002 |  | 2001
|                                                 |                            |                      |      |      |  |     
|Income tax (benefit) provision at statutory rate |                            | $                    | (674 | )    |  | $    | (1,247 | ) |  | $ | (2,355 | )
|State income taxes net of Federal benefit        |                            |                      | (78  | )    |  |      | (228   | ) |  |   | (266   | )
|Nondeductible expenses                           |                            |                      | 30   |      |  |      | 33     |   |  |   | 71     |  
|Change in valuation allowance                    |                            |                      | 722  |      |  |      | 1,442  |   |  |   | 2,550  |  
|                                                 |                            |                      |      |      |  |      |        |   |  |   |        |  
|                                                 | Actual (benefit) provision |                      | $    |     |  |      | $      |  |  |   | $      |  | 
|                                                 |                            |                      |      |      |  |      |        |   |  |   |        |  

NOTE 10  STOCKHOLDERS
EQUITY

Employee Stock Purchase Plan

In 1999, ACE*COMM adopted an Employee Stock
Purchase Plan (the Plan) to provide a method whereby
all employees have an opportunity to acquire a proprietary
interest in ACE*COMM 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 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 trading day of an
offering period. The maximum number of shares of common stock,
which may be issued under the Plan, is 480,000 shares. ACE*COMM
issued 49,268, 67,932, and 47,924 shares of common stock under
the plan in 2003, 2002, and 2001, respectively.

Stock Repurchases

During fiscal 2002 and 2003, ACE*COMM repurchased
a total of 48,872 shares of common stock at an average per share
price of $0.84. During the year ended June 30, 2003,
ACE*COMM repurchased 44,872 shares of common stock at an average
share price of $0.82. The stock repurchase program expired on
September 11, 2002.

Issuance of Common Stock

In December 2002, a new strategic partner,
Westlake Development Company, Inc. acquired 475,000 or 4.86% of
ACE*COMMs common stock at an aggregate purchase price of
$475,000. Sales to Westlake during 2003 were $1.2 million.
Billed accounts receivable due from Westlake as of June 30,
2003 was $426,000 and is included in the accounts receivable
balance on the accompanying financial statements.

Stock Options

Amended and Restated Omnibus Stock Plan
(Omnibus Plan)

In connection with the Shareholder-approved
Omnibus Plan, ACE*COMM may 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 ACE*COMM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. ACE*COMM may grant options under the
Omnibus Plan until September 2009.

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 of the Board of Directors. Options
and phantom stock options granted to date vest either
immediately or over a period of one

F-15



---



##### 



NOTE 10  STOCKHOLDERS
EQUITY, Continued


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. During
the years ended June 30, 2003 and 2001, ACE*COMM did not
grant any performance-based options. Certain options and phantom
stock options granted in 2002 were further subject to
accelerated vesting based on achievement of certain
pre-determined performance goals. The pre-determined performance
goals were not met for the year ended June 30, 2002. Vested
options and phantom stock options become exercisable immediately
upon vesting or within three years from the date of grant. As of
June 30, 2003, 2002 and 2001, there were outstanding
phantom stock options totaling 6,800, 27,800, and 7,882,
respectively, and no restricted stock or stock appreciation
rights had been granted. Compensation cost associated with the
2003, 2002, and 2001 phantom stock options was immaterial.

Amended and Restated Stock Option Plan for
Directors and 2000 Stock Option Plan for Directors
(Directors Plan)

The Shareholder-approved Directors Plan
provides for ACE*COMM to grant nonqualified stock options to
non-employee members of ACE*COMM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
ACE*COMMs Common Stock on the date of grant.

Options granted to Directors subsequent to
June 30, 1997, vest 3,000 shares each year from the date of
grant. Options granted starting November 2000, vest 3,000 shares
each year (4,000 shares in the case of the Chairman of the Audit
Committee) from the date of grant. Options become exercisable
immediately upon vesting. Options granted under the
Directors Plan generally expire five years from date of
grant.

F-16



---



##### 



NOTE 10  STOCKHOLDERS
EQUITY, Continued


Information relating to all the plans is
summarized as follows:

|                                     |  |              |           |                 |  |           |      |            |  |  |         |   |  |   |       | 
|------------------------------------ |  | ------------ | --------- | --------------- |  | --------- | ---- | ---------- |  |  | ------- | - |  | - | ----- | 
|                                     |  |              |           |                
|                                     |  | Omnibus Plan |           | Directors Plan
|                                     |  |              |           |                
|                                     |  |              |           | Weighted        |  |           |      | Weighted  
|                                     |  | Number       |           | Avg. Share      |  | Number    |      | Avg. Share
|                                     |  | of Shares    |           | Price           |  | of Shares |      | Price     
|                                     |  |              |           |                 |  |           |      |           
|Outstanding Options at June 30, 2000 |  |              | 1,753,464 |                 |  | $         | 5.02 |            |  |  | 98,500  |   |  | $ | 9.01  | 
|                                    
|Granted                              |  |              | 457,488   |                 |  |           | 3.48 |            |  |  | 21,000  |   |  |   | 3.84  | 
|Exercised                            |  |              | (26,550   | )               |  |           | 5.42 |            |  |  | (9,000  | ) |  |   | 1.55  | 
|Expired                              |  |              | (483,310  | )               |  |           | 4.36 |            |  |  |        |   |  |   |      | 
|                                     |  |              |           |                 |  |           |      |            |  |  |         |   |  |   |       | 
|Outstanding Options at June 30, 2001 |  |              | 1,701,092 |                 |  |           | 4.79 |            |  |  | 110,500 |   |  |   | 8.19  | 
|                                    
|Granted                              |  |              | 707,169   |                 |  |           | 1.33 |            |  |  | 9,000   |   |  |   | 1.22  | 
|Exercised                            |  |              |          |                 |  |           |     |            |  |  |        |   |  |   |      | 
|Expired                              |  |              | (864,682  | )               |  |           | 4.78 |            |  |  | (35,500 | ) |  |   | 8.18  | 
|                                     |  |              |           |                 |  |           |      |            |  |  |         |   |  |   |       | 
|Outstanding Options at June 30, 2002 |  |              | 1,543,579 |                 |  |           | 3.21 |            |  |  | 84,000  |   |  |   | 7.46  | 
|                                    
|Granted                              |  |              | 281,000   |                 |  |           | 0.86 |            |  |  |        |   |  |   |      | 
|Exercised                            |  |              |          |                 |  |           |     |            |  |  |        |   |  |   |      | 
|Expired                              |  |              | (300,485  | )               |  |           | 2.29 |            |  |  | (9,000  | ) |  |   | 17.50 | 
|                                     |  |              |           |                 |  |           |      |            |  |  |         |   |  |   |       | 
|Outstanding Options at June 30, 2003 |  |              | 1,524,094 |                 |  |           | 2.96 |            |  |  | 75,000  |   |  |   | 6.25  | 
|                                     |  |              |           |                 |  |           |      |            |  |  |         |   |  |   |       | 
|Options exercisable at June 30, 2001 |  |              | 694,151   |                 |  | $         | 5.49 |            |  |  | 51,836  |   |  | $ | 9.19  | 
|                                     |  |              |           |                 |  |           |      |            |  |  |         |   |  |   |       | 
|Options exercisable at June 30, 2002 |  |              | 627,297   |                 |  | $         | 4.06 |            |  |  | 50,001  |   |  | $ | 9.08  | 
|                                     |  |              |           |                 |  |           |      |            |  |  |         |   |  |   |       | 
|Options exercisable at June 30, 2003 |  |              | 803,265   |                 |  | $         | 3.64 |            |  |  | 62,000  |   |  | $ | 7.01  | 
|                                     |  |              |           |                 |  |           |      |            |  |  |         |   |  |   |       | 
|Options available for granting       |  |              | 955,962   |                 |  |           |      |            |  |  | 170,000 |   |  |   |       | 
|                                     |  |              |           |                 |  |           |      |            |  |  |         |   |  |   |       | 

The following table summarizes information about
stock options outstanding at June 30, 2003:

|                    |                |                     |  |             |           |                |  |                  |     |                |  |   |      |  |  |  |         |  |  |   |       | 
|------------------- | -------------- | ------------------- |  | ----------- | --------- | -------------- |  | ---------------- | --- | -------------- |  | - | ---- |  |  |  | ------- |  |  | - | ----- | 
|                    |                |                    
|Options Outstanding |                | Options Exercisable
|                    |                |                    
|                    |                | Weighted-           |  |             |           |               
|                    |                | Average             |  |             |           |               
|                    |                | Number              |  | Remaining   |           | Weighted-      |  | Number           |     | Weighted-     
|Range of            |                | Outstanding         |  | Contractual |           | Average        |  | Exercisable      |     | Average       
|Exercise Prices     |                | at June 30, 2003    |  | Life (yrs)  |           | Exercise Price |  | at June 30, 2003 |     | Exercise Price
|                    |                |                     |  |             |           |                |  |                  |     |               
|                    | $0.00  $1.78  |                     |  |             | 749,005   |                |  |                  | 8.6 |                |  | $ | 1.16 |  |  |  | 255,461 |  |  | $ | 1.34  | 
|                    | $1.79  $3.55  |                     |  |             | 274,144   |                |  |                  | 6.9 |                |  |   | 2.05 |  |  |  | 218,909 |  |  |   | 2.06  | 
|                    | $3.56  $5.33  |                     |  |             | 231,171   |                |  |                  | 5.2 |                |  |   | 4.28 |  |  |  | 121,017 |  |  |   | 4.51  | 
|                    | $5.34  $7.10  |                     |  |             | 246,949   |                |  |                  | 5.5 |                |  |   | 6.51 |  |  |  | 205,767 |  |  |   | 6.53  | 
|                    | $7.11  $12.43 |                     |  |             | 97,825    |                |  |                  | 3.9 |                |  |   | 9.76 |  |  |  | 64,111  |  |  |   | 10.54 | 
|                    |                |                     |  |             |           |                |  |                  |     |                |  |   |      |  |  |  |         |  |  |   |       | 
|                    |                |                     |  |             | 1,599,094 |                |  |                  |     |                |  |   |      |  |  |  | 865,265 |  |  |   |       | 
|                    |                |                     |  |             |           |                |  |                  |     |                |  |   |      |  |  |  |         |  |  |   |       | 

F-17



---



##### 



NOTE 10  STOCKHOLDERS
EQUITY, Continued


Financial Accounting Standards
No. 123

ACE*COMM measures 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.ACE*COMM
recorded no compensation cost associated with stock options in
2003, 2002 and 2001.

For the purposes of the pro forma amounts shown
in Note 2, 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 ACE*COMMs fair
value calculations are as follows:

|                        |  |      |     |      |  |      |       |   |  |  |       |  
|----------------------- |  | ---- | --- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                        |  | 2003 |     | 2002 |  | 2001
|                        |  |      |     |      |  |     
|Expected life (years)   |  |      | 3   |      |  |      | 3  8 |   |  |  | 3  8 |  
|Risk-free interest rate |  |      | 2   | %    |  |      | 5  6 | % |  |  | 5  6 | %
|Expected volatility     |  |      | 121 | %    |  |      | 106   | % |  |  | 123   | %
|Dividend yield          |  |      | 0   | %    |  |      | 0     | % |  |  | 0     | %

The weighted average fair value of stock options
granted under the stock option plans during the years ended
June 30, 2003, 2002 and 2001 was $0.41, $0.73, and $2.23
respectively.

NOTE 11  EARNINGS PER
SHARE

(in thousands, except per share
amounts)


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

|                           |                                                        |                      |       |        |   |      |       |        |   |   |       |        |  
|-------------------------- | ------------------------------------------------------ | -------------------- | ----- | ------ | - | ---- | ----- | ------ | - | - | ----- | ------ | -
|                           |                                                        |                     
|                           |                                                        | Years ended June 30,
|                           |                                                        |                     
|                           |                                                        | 2003                 |       | 2002   |   | 2001
|                           |                                                        |                      |       |        |   |     
|Basic EPS:                 |                                                        |                      |       |        |   |      |       |        |   |   |       |       
|(Loss) income (numerator): |                                                        |                      |       |        |   |      |       |        |   |   |       |       
|                           | Net (loss) income available to common
    shareholders |                      | $     | (1,982 | ) |      | $     | (3,988 | ) |   | $     | (6,927 | )
|                           |                                                        |                      |       |        |   |      |       |        |   |   |       |       
|Shares (denominator):      |                                                        |                      |       |        |   |      |       |        |   |   |       |       
|                           | Weighted average common shares                         |                      |       | 9,557  |   |      |       | 9,308  |   |   |       | 9,230  |  
|                           |                                                        |                      |       |        |   |      |       |        |   |   |       |       
|Basic EPS                  |                                                        | $                    | (0.21 | )      |   | $    | (0.43 | )      |   | $ | (0.75 | )     
|                           |                                                        |                      |       |        |   |      |       |        |   |   |       |       
|                          
|Diluted EPS:               |                                                        |                      |       |        |   |      |       |        |   |   |       |       
|(Loss) income (numerator): |                                                        |                      |       |        |   |      |       |        |   |   |       |       
|                           | Net (loss) income available to common
    stockholders |                      | $     | (1,982 | ) |      | $     | (3,988 | ) |   | $     | (6,927 | )
|                           |                                                        |                      |       |        |   |      |       |        |   |   |       |       
|Shares (denominator):      |                                                        |                      |       |        |   |      |       |        |   |   |       |       
|                           | Weighted average common shares                         |                      |       | 9,557  |   |      |       | 9,308  |   |   |       | 9,230  |  
|                           | Stock options*                                         |                      |       |       |   |      |       |       |   |   |       |       |  
|                           |                                                        |                      |       |        |   |      |       |        |   |   |       |       
|                           | Total weighted shares and equivalents                  |                      |       | 9,557  |   |      |       | 9,308  |   |   |       | 9,230  |  
|                           |                                                        |                      |       |        |   |      |       |        |   |   |       |       
|Diluted EPS                |                                                        | $                    | (0.21 | )      |   | $    | (0.43 | )      |   | $ | (0.75 | )     
|                           |                                                        |                      |       |        |   |      |       |        |   |   |       |       



|  |                                                                                                                                                                                                                                                                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Due to the loss incurred during the years ended
    June 30, 2003, 2002 and 2001 zero incremental shares
    related to stock options are included in the calculation of
    Diluted EPS because the effect would be antidilutive. The total
    number of potentially dilutive shares not included in the EPS
    calculation at June 30, 2003 due to antidilution was 82,762.

F-18



---



##### 



NOTE 12  COMMITMENTS AND
CONTINGENCIES

ACE*COMM has a $135,000 letter of credit
arrangement with the Bank which guarantees ACE*COMMs
performance to its landlord. The letter of credit is secured by
the Loan and Security Agreement with the Bank; the requirement
will decrease annually beginning in November 2004 and continue
to decrease annually through November 2007 to the amount of
$91,932.

ACE*COMM leases office space under non-cancelable
operating leases. Lease terms range from four 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, ACE*COMM
leases equipment under operating leases that, in the aggregate,
are not significant.

ACE*COMM is committed for the payment of minimum
rentals under operating lease agreements through the year 2009
in the following amounts (in thousands):

|                     |      |        |  |   |       | 
|-------------------- | ---- | ------ |  | - | ----- | 
|Year ending June 30, |      | Amount
|                     |      |       
|                     | 2004 |        |  | $ | 653   | 
|                     | 2005 |        |  |   | 655   | 
|                     | 2006 |        |  |   | 658   | 
|                     | 2007 |        |  |   | 616   | 
|                     | 2008 |        |  |   | 618   | 
|                     | 2009 |        |  |   | 264   | 
|                     |      |        |  |   |       | 
|                     |      |        |  | $ | 3,464 | 
|                     |      |        |  |   |       | 

The total rental expense under operating leases
was $629,000, $941,000, and $1,058,000 for the years ended
June 30, 2003, 2002 and 2001, respectively.

NOTE 13  BUSINESS AND CREDIT
CONCENTRATIONS

ACE*COMM sells its products worldwide from its
headquarters in Gaithersburg, Maryland. The following is a
breakdown of ACE*COMMs revenue by geographic area (in
thousands):

|                       |               |      |       |        |  |      |       |        |  |   |        |        | 
|---------------------- | ------------- | ---- | ----- | ------ |  | ---- | ----- | ------ |  | - | ------ | ------ | 
|                       |               | 2003 |       | 2002   |  | 2001
|                       |               |      |       |        |  |     
|U.S.                   |               | $    | 6,049 |        |  | $    | 9,933 |        |  | $ | 14,792 |       
|Canada and Mexico      |               |      | 947   |        |  |      | 1,594 |        |  |   | 1,199  |       
|Asia                   |               |      | 2,280 |        |  |      | 1,563 |        |  |   | 587    |       
|Europe: Germany        |               |      | 2,728 |        |  |      | 3,001 |        |  |   | 5,545  |       
|Europe: Other          |               |      | 370   |        |  |      | 416   |        |  |   | 656    |       
|South America          |               |      | 425   |        |  |      | 64    |        |  |   | 249    |       
|Africa and Middle East |               |      | 995   |        |  |      | 1,523 |        |  |   | 1,151  |       
|                       |               |      |       |        |  |      |       |        |  |   |        |       
|                       | Total revenue |      | $     | 13,794 |  |      | $     | 18,094 |  |   | $      | 24,179 | 
|                       |               |      |       |        |  |      |       |        |  |   |        |       

During the years ended June 30, 2003 and
2002, one customer comprised 20% and 17% of total revenue.
Another customer comprised 10%, 11% and 6%, respectively, of
ACE*COMMs total revenues during the years ended
June 30, 2003, 2002, and 2001. Total revenues earned
outside of the US represent 56% of total revenue earned for the
year ended June 30, 2003.

In addition, five customers represented
approximately 77% of ACE*COMMs gross accounts receivable
balances as of June 30, 2003. A single customer accounted
for 31% of the gross accounts receivable balance at
June 30, 2003. To reduce credit risk, ACE*COMM conducts
ongoing credit evaluations of its customers and, based upon the
results of those evaluations, requires letters of credit or
other pre-payment arrangements. ACE*COMM maintains accounts
receivable allowances to provide for potential credit losses.

F-19



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##### 



NOTE 14  SUBSEQUENT
EVENTS

On September 12, 2003, ACE*COMM entered into
an Agreement and Plan of Merger with i3 Mobile, Inc., a
Delaware corporation, pursuant to which ACE*COMM has agreed to
acquire i3. The acquisition is to be effected through the
issuance of a to-be-determined number of shares of ACE*COMM
common stock in exchange for each share of common stock of i3
outstanding immediately prior to the consummation of the
transaction and the assumption of i3s outstanding stock
options and warrants based on such exchange ratio. The exchange
ratio will be based on a formula valuing ACE*COMMs common
stock at market value at the time of mailing of the proxy
statement, less a discount, and valuing i3 at an amount equal to
its cash, net of specified liabilities and commitments at the
mailing date. The consummation of the transaction is subject to
the approval of the shareholders of i3 and ACE*COMM, as well as
customary closing conditions.

If consummated, the Company will account for the
Merger as a financing transaction and in doing so record the
issuance of its common stock at fair value and
i3 Mobiles cash on hand and liabilities assumed.
Because i3 Mobile ceased all revenue producing operations
in March 2003 and the Company has no intention to revive
i3 Mobiles business subsequent to the Merger, the
Merger does not possess the characteristics of a business
combination found in both Regulation S-X and Financial
Accounting Standard No. 141, Business Combinations.

Schedule II  Valuation
and Qualifying Accounts

|                          |                                 |            |   |            |  |            |   |            |  |            |   |        |  |  |   |         |  |  |   |         | 
|------------------------- | ------------------------------- | ---------- | - | ---------- |  | ---------- | - | ---------- |  | ---------- | - | ------ |  |  | - | ------- |  |  | - | ------- | 
|                          |                                 | Balance at |   | Charged to |  | Recoveries |   |            |  | Balance at
|                          |                                 | Beginning  |   | Costs and  |  | of Prior   |   |            |  | End of    
|Description               |                                 | of Period  |   | Expenses   |  | Write-offs |   | Write-offs |  | Period    
|                          |                                 |            |   |            |  |            |   |            |  |           
|Year ended June 30, 2003: |                                 |            |   |            |  |            |   |            |  |            |   |        |  |  |   |         |  |  |   |        
|                          | Allowance for doubtful accounts |            | $ | 605,000    |  |            | $ | 120,000    |  |            | $ | 13,491 |  |  | $ | 520,781 |  |  | $ | 218,060 | 
|                          | Reserve for obsolete inventory  |            | $ | 194,154    |  |            | $ | 120,000    |  |            | $ |       |  |  | $ | 120,437 |  |  | $ | 193,717 | 
|                         
|Year ended June 30, 2002: |                                 |            |   |            |  |            |   |            |  |            |   |        |  |  |   |         |  |  |   |        
|                          | Allowance for doubtful accounts |            | $ | 497,000    |  |            | $ | 701,000    |  |            |   |        |  |  | $ | 593,000 |  |  | $ | 605,000 | 
|                          | Reserve for obsolete inventory  |            | $ | 204,183    |  |            | $ | 160,000    |  |            | $ |       |  |  | $ | 170,029 |  |  | $ | 194,154 | 
|                         
|Year ended June 30, 2001: |                                 |            |   |            |  |            |   |            |  |            |   |        |  |  |   |         |  |  |   |        
|                          | Allowance for doubtful accounts |            | $ | 469,000    |  |            | $ | 812,000    |  |            | $ | 13,000 |  |  | $ | 797,000 |  |  | $ | 497,000 | 
|                          | Reserve for obsolete inventory  |            | $ | 187,354    |  |            | $ | 455,000    |  |            | $ |       |  |  | $ | 438,171 |  |  | $ | 204,183 | 

F-20