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

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended December 31, 2003.

OR

For the transition period from __________ to _________

Commission file number 0-21059

ACE*COMM CORPORATION

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

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ACE*COMM CORPORATION
INDEX

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PART I. FINANCIAL INFORMATION

Item 1. CONSOLIDATED FINANCIAL STATEMENTS

ACE*COMM CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)

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

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

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

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

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

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ACE*COMM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Use of estimates

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

Recently Issued Accounting Pronouncements

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

Stock Based Compensation

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

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

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

NOTE 2 — ACCOUNTS RECEIVABLE

Accounts receivable consists of the following (in thousands):

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

NOTE 3 — STOCKHOLDERS’ EQUITY AND MERGER

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

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

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

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

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

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

NOTE 4 — INCOME TAXES

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

NOTE 5 — SUBSEQUENT EVENTS

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

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

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

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

Overview

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Critical Accounting Policies

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

Revenue Recognition

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

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

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

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

Allowance for Bad Debts

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

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Results of Operations

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

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

Revenue

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

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

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

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

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Cost of Revenue

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

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

Selling, General and Administrative Expenses

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

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

Research and Development Expenses

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

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

Liquidity and Capital Resources

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

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

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

ACE*COMM recognized a net provision for doubtful accounts of $90 thousand and $60 thousand during the six months ended December 31, 2003 and 2002, respectively. At December 31, 2003, approximately 47% of the Company’s billed accounts receivable was older than ninety days and was primarily comprised of international customers. ACE*COMM expects that internation