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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

Commission file number 0-21059

ACE*COMM CORPORATION

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

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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 Backplane^TM

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

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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

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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

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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:

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.

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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.

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:

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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.

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 sh