As filed with the Securities and Exchange Commission on March 30, 2004



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-KSB

|(Mark one)                                                    |                                                                                          
|------------------------------------------------------------- | -----------------------------------------------------------------------------------------
|ý                                                             | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.          
|For the fiscal year ended December 31, 2003                  
|OR                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|For the transition period
from                             to

Commission File No: 000-46494

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PRIMAL SOLUTIONS, INC.(Exact Name of Small Business Issuer in its Charter)

|Delaware(State or Other Jurisdiction
of Incorporation or Organization) |  | 7372(Primary Standard Industrial
Classification Code Number) |  | 36-4170318(I.R.S. Employer
Identification No.)
|---------------------------------------------------------------------- |  | ------------------------------------------------------------ |  | ----------------------------------------------

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|18881 Von Karman Avenue
Suite 500
Irvine, California(Address and telephone number of Principal Executive Offices) |  | 92612(Zip Code)
|----------------------------------------------------------------------------------------------------------------- |  | ---------------
|(949) 260-1500(Issuer's Telephone Number, Including Area Code)                                                   

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Check
whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchanged Act during the past 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 ý    No o

Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB.    ý

|State issuer's revenues for its most recent fiscal year:                                                                                                                                                                                                  |  | $ | 6,516,665  |  |     
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ---------- |  | ----
|State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of
such common equity, as of March 17, 2004 |  | $ | 4,582,237  |  |     
|Number of shares of Common Stock ($0.01 par value) outstanding as of the close of business on March 17, 2004:                                                                                                                                             |  |   | 21,018,083 |  |     
|Transitional Small Business Disclosure Format                                                                                                                                                                                                             |  |   | Yes o      |  | No ý



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PRIMAL SOLUTIONS, INC. AND SUBSIDIARY        TABLE OF CONTENTS

|         |  |                                                                                                                 |  | Page
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|PART I  
|Item 1.  |  | Business                                                                                                        |  | 3   
|Item 2.  |  | Property                                                                                                        |  | 19  
|Item 3.  |  | Legal Proceedings                                                                                               |  | 19  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                             |  | 19  
|PART II 
|Item 5.  |  | Market for Common Equity and Related Stockholder Matters                                                        |  | 19  
|Item 6.  |  | Management's Discussion and Analysis                                                                            |  | 20  
|Item 7.  |  | Financial Statements                                                                                            |  | 31  
|Item 8.  |  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                            |  | 31  
|Item 8A. |  | Controls and Procedures                                                                                         |  | 31  
|PART III
|Item 9.  |  | Directors, Executive Officers, Promoters and Control Persons, Compliance With Section 16(a) of the Exchange Act |  | 33  
|Item 10. |  | Executive Compensation                                                                                          |  | 35  
|Item 11. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 40  
|Item 12. |  | Certain Relationships and Related Transactions                                                                  |  | 43  
|Item 13. |  | Exhibits and Reports on Form 8-K                                                                                |  | 43  
|Item 14. |  | Principal Accountant Fees and Services                                                                          |  | 46  

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PART I

Item 1. Business

Business Overview

Primal Solutions, Inc. was formed in 1996 as Primal Systems, Inc. During 1999, Primal Systems, Inc. was merged with and into a wholly-owned
subsidiary of Avery Communications, Inc. ("Avery"), ACI Telecommunications Financial Services, and the surviving company changed its name to Primal Solutions, Inc. In
February 2001, Primal Solutions, Inc. was spun-off as a separate public company by Avery.

Industry Background and OSS Evolution

During
2000 to 2002, the communications industry experienced a world-wide economic downturn caused by several factors including overbuilding of capacity, high debt levels,
and price erosion. Capital spending in many segments of the communications market declined as large, established Communications Service Providers ("CSPs") focused on improving financial results, and
as the number of start-up or emerging CSPs declined through market consolidation and lack of sustainable, profitable business models.

During
2003, the communications industry showed signs of improvement and increased capital spending in certain segments. Specifically, the communications industry demonstrated more
willingness to increase spending in regards to operations support systems ("OSS") relating to next generation internet protocol networks ("IP networks"), although CSPs continued to exhibit great
caution related to overall spending.

As
the communications industry looks forward, we believe that CSPs are facing some of the most severe challenges in their histories. We believe that competition will force CSPs
simultaneously to cut costs and expand the services they offer.

Historically,
large existing CSPs evolved their networks and OSS slowly and systematically over long periods of time. Generally, their networks and OSS were designed and optimized
primarily for a single service offering. As CSPs began to evolve the services they offered, often parallel networks and OSS were implemented to facilitate those additional services. In general,
services were made available if and when they fit into the OSS and network management models. Because of this approach, the introduction of new services by CSPs traditionally has been slow and
expensive. If major new capabilities in the OSS or network were required for these new services, the time to market for the new services could often be measured in years.

As
competition has become more prevalent, CSPs have attempted to add new and distinct services, bundle services in new ways, become more competitive in pricing, provide near real time
customer access to information, and improve customer relationship management. In short, customer needs and desires, instead of technical capabilities, have become a significant driving force in
determining what services the CSPs offer. Additionally, pricing and bundling of services have become more points of differentiation among CSPs, and information from the OSS is needed quicker and in
different and new formats for different customers.

CSPs
initially reacted to these challenges, in increasingly shorter timeframes, by adding OSS systems that provided incremental functionality, but without true integration of the OSS
systems. As additional OSS systems were added, problems such as data integrity issues across these systems and inflexible system architectures created challenging OSS system evolution issues,
introduced additional costs, and slowed time-to-market for new services as convergent systems were introduced to replace multiple "legacy" systems.

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The
traditional architecture of existing OSS billing systems present a major implementation challenge for a truly convergent OSS. Future OSS architectures that utilize databases, product
catalogs, and mediation systems external to the billing system provide substantial OSS implementation benefits and simplify OSS evolution.

As
competition continues to evolve, we believe that CSPs will be required to reduce costs and continue to expand service offerings. This leads to a new set of challenges, such as, how
can the functionality of the OSS be increased while reducing costs, increasing throughput, and improving operating performance; what can be done to extend the life of existing systems that remain a
part of the OSS; can the new OSS infrastructure easily evolve as new services are offered and evolve in their complexity; can the intelligence in the OSS and network be capitalized on to increase
revenue and profitability; and what role will service level agreements ("SLA") and quality of service ("QoS") requirements play in usage billing for services? We anticipate that these and other
challenges will drive CSPs to attempt to create dynamic mediation environments that enable the transfer of information, in whatever format is required, to whichever systems, processes, customers or
trading partners that need the information.

We
believe, an effective mediation strategy becomes the foundation for the evolution of the OSS into the next generation multi-service environment. Multi-service mediation acts as the
conduit between and the building block for service activation, pre-paid and post paid accounting, event rating, and integration of detailed usage information into customer relationship
management systems.

Our Business Focus

Primal Solutions, Inc., and its wholly-owned subsidiary Wireless Billing Systems, ("Primal" or the "Company") deliver software and service solutions that
allow CSPs to generate revenue from their IP networks. Our communications software products and services enable usage-based billing for IP network services without requiring the CSP to undertake
expensive changes or upgrades to existing back office billing and customer care systems. At the heart of our solutions is Access IM®, our multi-service mediation platform.

We
have focused our marketing and product strategy around IP networks. We believe that the greatest opportunity for growth in sales of both our products and services will be for CSPs
utilizing IP networks for multiple services including voice, data, and video.

Our Primary Markets

The primary markets that show signs of growth opportunities for our products and services are cable multiple service operators ("Cable MSO"); rural broadband
CSPs, including rural utilities, municipal agencies and real estate developers investing in broadband systems such as fiber-to-the-home ("FTTH") networks; and
managed network service providers that provide enhanced voice and data services to business customers on a single IP network. A discussion of each of our key market segments follows:

Cable MSOsCable MSOs traditionally have provided video content (television, movies, and similar content). Competitive
challenges are forcing Cable MSOs to add other services, such as voice and data services. Cable MSOs 'bundle' multiple products such as video, high-speed internet access and telephony to increase per
customer revenue and to reduce customer turnover known as "churn". We believe that MSOs will continue to add new services and leverage their investments in IP networks. Currently, services that are
being deployed by Cable MSOs over IP networks include voice over IP networks ("VOIP"), telephony and enhanced high speed services. These services often require a component of usage management for
billing and customer care. However, changes to back office systems, including billing and customer care systems, can be very expensive, disruptive and challenging.

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Our
solutions can be deployed for cable MSOs requiring the ability to bill for services based on usage, while integrating with existing back office systems.

Rural BroadbandMany rural communities in North America lack broadband services and comprehensive communication services,
which widely available in large metropolitan service areas. The lack of broadband services is seen as a competitive disadvantage for these communities in trying to attract businesses and maintaining
quality of life. In many communities, municipalities, electric utilities and planned community developers are planning the deployment of broadband network services (enhanced voice, digital video and
ultra high speed Internet) using the latest broadband technologies, like fiber to the home. In addition to high speed internet access and full featured telephony and video services, applications such
as online gaming, tele-medicine, remote learning, tele-work, hosted business network services and other solutions that require next generation broadband networks may be enabled
on these networks.

Managing
and billing for multiple services can present unique challenges to rural broadband service providers. Customers in these communities prefer to have a single bill from a single
trusted service provider. Our solutions enable rural broadband service providers to provide enhanced customer service and a single bill for broadband network services.

Managed Service Network ProvidersCompanies of all sizes are pursuing ways to lower operating costs by outsourcing their voice
and data services. They may be able to realize substantial savings if they converge their voice and data networks, outsource management of network services and focus on their own core business.
Service providers who manage network services for enterprises must collect detailed usage from a variety of multi-service network elements, and manage these complex networks. Managed network service
providers face multiple challenges with these new business models. The ability to manage sophisticated data and IP networks for their enterprise customers, manage data integrity and reliability,
especially critical usage and billing data, the ability to support new pricing and billing models, and providing SLA and QoS based pricing that dynamically charges according to the quality and the
quantity of network services used are examples of some of the challenges being faced. Our solutions enable managed network service providers to manage usage aspects of those networks and to perform
usage based billing for those services.

Our Products and Services

Our
products include Access IMmulti-service billing and network mediation; Connect RTRmulti-service real-time rating; Connect
Prepaymulti-service prepaid billing; and Connect CCB®integrated customer care and billing.

Our
services include application management and hosting, consulting, training and implementation support, and maintenance and support services relating to our products.

We
license our products and solutions to our customers. License agreements can be based on up-front payment for the right to use products or on a recurring subscription-based
payment, such as a monthly payment based on transactions processed or customers managed through our products. In addition to licensing software products to our customers, there is also an opportunity
to provide our products in a managed service arrangement where we may host, manage, maintain and support the operating and business support software applications for the CSP. We believe there is a
growing interest by CSPs to look to software vendors, such as Primal, for subscription based licensing arrangements and/or outsourcing services to accelerate the introduction of new services into
their markets, decrease operating costs, and increase overall operational efficiency.

We
provide both individual product solutions, as well as bundled solutions that are tailored to specific market needs. Connect IXC is an example of a bundled solution that
integrates mediation, rating, and web portal solutions to allow a CSP to quickly roll-out a new service and generate a usage-

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based
billing record that can in turn be used by the CSP's existing billing system. Our bundled solutions simplify and quicken the rollout of new services by reducing the number of different systems
potentially required to generate billing records for the new services and, thereby, allowing the CSP to begin generating revenue sooner from these new services.

Access IMMulti-service billing and network mediationAccess IM serves as a vital link
between a CSP's network and its business support systems such as billing, network management, fraud control and customer service systems. Access IM is designed as a scalable,
high-availability software. It can be installed on a single server or multiple servers,
depending on the business needs and network design of the CSP. It is a production tested product at CSPs, both large and small, and is in its seventh major release.

Connect RTRMulti-service real time ratingConnect RTR enhances network usage data and can assign monetary value
to a call, event or session based on a criterion, such as distance, duration, time of day and quality of service associated with a customer or user of a network. Connect RTR provides the ability to
receive and rate events, such as CDRs, in real-time or in batch mode according to rate plans defined by the user, and can be integrated with existing post-pay or pre-pay
billing systems. Connect RTR can be installed as a stand-alone product to allow a CSP to use it with an existing mediation or billing system, or can be integrated with our mediation and billing
products.

Connect PrepayMulti-service prepaid billingConnect Prepay allows a subscriber to establish a debit account with
a CSP. As the subscriber uses a service, such as placing a voice call, the subscriber's account is charged for services in "real-time" as they are used. Connect Prepay can be deployed as a
stand-alone solution for prepaid services such as long distance calling cards and other usage-based services, or can be integrated with existing customer care or billing systems.

Connect CCBIntegrated multi-service customer care and billingConnect CCB is our integrated modular customer
care and billing software solution for voice, data, and video services. The modules include orders care, payment processing, credit and collections, invoice processing, electronic bill presentment and
payment, reporting and flow-through provisioning. This solution provides integrated functionality for CSPs to manage customers and a full range of communications products and services.
Connect CCB can be licensed as a stand-alone product, or bundled as an integrated solution with the Access IM mediation and Connect RTR rating products.

Services

Our services consist of application management and hosting services, consulting services, training programs, implementation services, and providing maintenance
and support for customers who purchase our software products.

Our
newly introduced application management and hosting services consist of providing the necessary personnel and expertise for the day-to-day management and
maintenance of our products. We may manage software products that are physically located at our premises, a third-party co-location facility or at our customers' premises. Application
management and hosting services are generally provided under a separate application management agreement between our customers and us. These agreements generally state the services that are included
under the
application management program and the minimum commitment required for assisting our clients in the upkeep and running of their products.

Our
consulting services consist of business consulting, training and implementation management. Professional consulting consists of business requirements documentation, and analysis of
the suitability of software systems for our customers' business.

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Our
training programs can be classroom programs or one-on-one training for our customers. Training programs can be provided at our headquarters or at our
customer's locations. Our training programs are designed to provide users with the ability to deploy, use and maintain our products.

Our
implementation services consist of program management and technical expertise necessary to integrate our products with our customers' networks. These services sometimes include
modification or customization of our software products to suit our customer's business needs.

Maintenance
and support services are generally provided under maintenance agreements that are renewed on an annual basis or in conjunction with monthly license agreements. These
agreements entitle our customers to telephone technical support and routine software maintenance upgrades. We provide these services from our headquarters in Irvine, California, and from our offices
in Amsterdam, The Netherlands.

Sales and Marketing

Our sales and marketing efforts are concentrated on CSPs that provide services using IP networks. We primarily use a direct sales approach, in which we understand
customers' needs and work with them to define how our products will meet their business needs. We also utilize an indirect sales channel approach, in which we have relationships with leading
manufacturers of IP network infrastructure products. Many of our sales efforts are based on providing a joint solution between us and our partners that enables CSPs to introduce enhanced services over
IP networks.

Our
direct sales force concentrates its efforts on the North America market. Many of our business partners have international sales forces and sales channels and, through these partners,
we are
extending our sales reach to international markets, particularly in the Asia-Pacific and Latin American regions.

We
derive a majority of our revenues from products delivered or services performed in the United States of America. Products delivered or services performed outside the United States of
America represented approximately 16% and 22% of our total revenues in fiscal years 2003 and 2002, respectively. See Note 10 of the Notes to the Consolidated Financial Statements for a summary
of our 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.

Due
to the complex nature of our products and services, the duration of a sales cycle can range from 60 days to over a year. A significant amount of that time is consulting with
our business partners to present the appropriate solution to our prospects and customers.

Business Relationships and Alliances

To assist us in developing, marketing, and distributing our product-based solutions effectively, we have established relationships and alliances with current and
emerging industry leaders, such as Cisco Systems, Inc. (Cisco), Sylantro Systems Corp., Broadsoft Corporation, Telica and ETI Software, Inc. We believe that these partnerships provide us
with a method to extend our product capabilities to meet the needs of our partners and their customers, establish joint marketing relationships to include our products in solutions sold by our
partners, and create a reseller channel for our products, or jointly provide customer support to end-users. The desired benefit is to enhance marketability of our products and those of our
partners through leveraging industry relationships.

Competition

The market for our products is very competitive. We expect competition to increase in the future. Our principal competitors include mediation system providers,
billing and customer care system

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providers,
operation support system providers, system integrators and service bureaus, and the internal information technology departments of larger communications companies, which may elect to
develop functionalities similar to those provided by our products in-house rather than buying them from outside suppliers.

Many
of our current and future competitors may have advantages over us, including:



Our
current and potential competitors have established, and may continue to establish in the future, cooperative relationships among themselves or with third-parties that would increase
their ability to compete with us. In addition, competitors may be able to adapt more quickly than we can to new or emerging technologies and changes in customer needs, or to devote more resources to
promoting and selling their products.

Research and Development

Our research and development organization is responsible for developing new software products, product architecture, core technologies, product testing, quality
assurance and ensuring the compatibility of our products with hardware, switch network, and software platforms. In addition, this organization supports some pre-sales and customer support
activities. Our research and development organization is divided into teams based around our products. In addition, our product management and professional services staff helps our research and
development organization identify potential new product features. For the years ended December 31, 2003 and 2002, our research and development costs were $1.0 million and
$1.5 million, respectively.

Intellectual Property

We rely upon a combination of U.S. patent, copyright, trade secret and trademark law to protect its intellectual property. We currently have two U.S. patents
related to its billing and mediation technology. In addition, we have eight U.S. registered trademarks and one U.S. copyright. While we rely on patent, copyright, trade secret and trademark law to
protect its technology, we believe that factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements and reliable product maintenance
are more essential to establishing and maintaining a technology leadership position. There can be no assurance that others will not develop technologies that are similar or superior to our technology.

We
generally enter into confidentiality or license agreements with its employees, consultants and corporate partners, and generally control access to and distribution of its software,
documentation and other proprietary information. Despite our efforts to protect proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use its products or technology or
to develop products with the same functionality as our products. Policing unauthorized use of its products is difficult, and we cannot be certain that the steps we have taken will prevent
misappropriation of its technology, particularly in foreign countries where the laws may not protect proprietary rights as fully as do the laws of the United States of America. In addition, certain of
our license agreements require it to place the source code for its products into escrow. Such agreements generally provide that these parties will have a limited, non-exclusive right to
use this code if (1) there is a bankruptcy proceeding by or against Primal, (2) we cease to do business without a successor or (3) we discontinue providing maintenance and
support.

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Our
success and ability to compete are substantially dependent upon its internally developed technology. However, portions of our products incorporate software developed and maintained
by third-party software vendors, such as operating systems, tools and database vendors. We may have to rely on third-party software vendors and developers to a larger degree in future products.
Although we believe we could find other sources for these products, any significant interruption in the supply of these products could adversely impact our sales unless and until it can secure another
source.

Employees

As of March 17, 2004, the Company had 46 full-time employees, none of whom is represented by a union. The Company believes that its
relationship with its employees is good.

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RISK FACTORS

Ownership of our common stock involves a high degree of risk, you should consider carefully the factors set forth below, as well as other
information contained in this report.

Risks Related to Our Business and Our Marketplace

We have a limited history as a provider of communications software products. As a result it is difficult to evaluate our business and prospects.

Primal was founded in 1996. We received our first revenues from licensing our communications software products and performing related services in 1999. Until
1999, substantially all of our revenues were derived from performing consulting services unrelated to our software products. Sales of our software products and related services accounted for
substantially all of our revenues since 1999. Because we have a limited operating history as a provider of communications software products, it is difficult to evaluate our business and prospects.

We have not achieved profitability on an annual basis and expect to continue to incur net losses in future quarters. If we do not achieve profitability, then our business may
not grow or continue to operate.

In order to become profitable, we must increase our revenues or decrease expenses. We may not be able to increase or even maintain our revenues, and we may not
achieve sufficient revenues or profitability in any future period. We recorded net losses of $279,000 and $463,000 for the years ended December 31, 2003, 2002, respectively. We had an
accumulated deficit of $12.7 million as of December 31, 2003, and we could incur net losses for the foreseeable future. We have reduced our fixed
operating expenses in 2003 and 2002, which included workforce reductions, downsizing of facilities and other miscellaneous cost reductions.

We
will need to generate additional revenues from the sales of our products and services or take steps to further reduce operating costs to achieve and maintain profitability. We expect
that we will face increased competition, which will make it more difficult to increase our revenues. Even if we are able to increase revenues, we may experience price competition that will lower our
gross margins and our profitability. Any increase in the percentage of our revenues attributed to indirect channels and services, both of which generally have lower margins, will lower our gross
margins.

If
we do achieve profitability, we cannot be certain that we can sustain or increase profitability on a quarterly or annual basis.

Our revenues are generated from a limited number of customers; our customer base is concentrated; and the loss of one or more of our customers could cause our business to
suffer.

A substantial portion of our license and services revenues has been, and is expected to continue to be, generated from a limited number of customers with large
financial commitments. Our total revenues from our two largest customers during the years ended December 31, 2003 and 2002, represented approximately 78% and 86%, respectively, of total
revenues. One customer individually accounted for 10% or more of our total revenues in 2003 and two customers individually accounted for 10% or more of our total revenues in 2002. As a result, if a
large contract is cancelled or deferred or an anticipated contract does not materialize, our business would be harmed.

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If we are unable to attract additional customers beyond our current limited number, our future success could be limited or adversely affected.

Our future success will depend on our ability to attract additional customers beyond our current limited number. The growth of our customer base could be
adversely affected by one or more of the following:



If the MSO market does not expand as we anticipate, our future growth and success could be limited.

The market for MSOs to provide communications services using IP networks is in early stages. We believe this market shows signs of growth opportunities for our
products and services. However the revenue opportunities in the MSO market is dependent on certain factors, including the following:



If
the market does not grow as we expect, our future growth and success could be limited.

Certain portions of the communications industry are experiencing consolidation, which may reduce the number of potential clients for our software.

Certain segments of the communications industry are experiencing significant consolidation, while other segments are expanding. We cannot be certain that we will
not lose clients as a result of consolidation of certain areas of the communications industry. In the future, there may be fewer potential clients requiring our products, increasing the level of
competition for new customers. In addition, larger consolidated CSPs have strengthened their purchasing power, which could create pressure on the prices and the margins we could realize. These
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. We have sought to address this situation by continuing to market our products and services to new clients and by working with major CSPs to provide products and services that they need to
remain competitive.

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If our clients in the emerging market segments do not receive sufficient financing, it could effect our ability to grow.

Some of our clients and potential clients are new entrants to the communications market and have limited or no operating histories and limited financial
resources. These clients often must obtain significant amounts of financing to fund operations and to deploy their networks. We frequently work with such companies prior to their receipt of financing.
If these companies fail to receive adequate financing, particularly after we have begun working with them, or they are not able to implement their business plans successfully, our results of
operations may be harmed. In addition, because of recent and current economic conditions, these companies are experiencing difficulty in obtaining adequate financing.

Our growth depends on the commercial acceptance of our products for IP networks, and it is uncertain to what extent the market will accept these products.

Our future growth depends on the commercial success of our products. Substantially all of our revenues are derived from licenses of these products, and related
services. Our business will be harmed if our target customers do not adopt and purchase these software products. The market for IP network mediation and rating software is in its early stages of
development. Our future financial performance will also depend on the successful development, introduction and customer acceptance of our software products for IP networks. We are not certain that our
target customers will widely adopt and deploy our software products in their communications operations. Our future revenues will also depend on our customers' licensing software for additional
subscribers or for additional event records. Their failure to do so could harm our business.

Our quarterly operating results may fluctuate in future periods and we may fail to meet expectations.

Our revenues and operating results may vary significantly from quarter to quarter due to a number of factors. In future quarters, our operating results may be
below the expectations of public market analysts and investors, and the price of our common stock may fall. Factors that could cause quarterly fluctuations include:



We
have difficulty predicting the volume and timing of orders from new customers. For example, we expect an increasing percentage of our total revenues will come from licenses of Access
IM, Connect RTR and Connect IXC and related services, but the markets for these products are in their early stages of development and are therefore unpredictable. Significant sales may also occur
earlier than expected, which could cause operating results for later quarters to compare unfavorably with operating results from earlier quarters.

Due
to the foregoing factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance.

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An increasing number of contracts we enter into are multiple year in length and include recurring fees related to licensing and services. If our customers exercise early
termination or experience a decline or lack of volume, our revenue could be harmed.

An increasing number of contracts we enter into are multiple year in length and include recurring license and service fees. Some of our contracts for new
customers could include a recurring licensing and services component that may vary based on usage and volume throughout the duration of the contract. Also, some of our contracts may include early
termination clauses that enable customers to
terminate those contracts without cause. If our customers exercise early termination or experience a decline or lack of volume, our revenue could be harmed.

Our lengthy sales cycle makes it difficult to anticipate the timing of sales, and revenue may vary from period to period.

The sales cycle associated with the purchase of our products is lengthy, and the time between the initial proposal to a prospective customer and the signing of a
license agreement can be as long as one year. Our products involve a commitment of capital, time and internal resources that may be significant to the customer. In addition, market conditions have
lengthened the sales cycles associated with our products. These delays may reduce our revenue in a particular period without a corresponding reduction in our costs, which could hurt our results of
operations for that period.

If we do not increase market awareness of our products, our business may not grow.

We sell our software products primarily through our direct sales force. Our financial success and our ability to increase revenues in the future may depend
considerably upon the productivity of our direct sales force. Our ability to increase revenues significantly will suffer if we fail to attract and retain qualified sales personnel.

During
2002 and 2003, we augmented our direct sales channel through additional third-party distribution arrangements, such as indirect sales channels, including system integrators,
hardware platform and software applications developers and service providers, domestic and foreign resellers and value-added resellers. However, there is no guarantee that we will successfully augment
these arrangements or that the expansion of indirect sales distribution methods will increase revenues. We may be at a serious competitive disadvantage if we fail to enhance these indirect sales
channels.

If our software products do not continue to be enhanced and continue to integrate and operate successfully with the communications equipment of the leading manufacturers, we
may be unable to maintain our existing customers and/or generate new sales.

If we do not continue to improve our software products and develop new software products that keep pace with competitive product introductions and technological
developments, satisfy diverse and rapidly evolving customer requirements and achieve market acceptance, we may be unable to maintain existing customers and/or attract new customers.

Additionally,
the success of our software products depends upon the continued successful integration and operation of our software products with the communications equipment of the
leading manufacturers. We currently target a customer base that uses a wide variety of communications network infrastructure equipment and software platforms, which are constantly changing. As such,
we must continually modify our software products as new communications equipment is introduced. If our products fail to satisfy these demanding and rapidly changing technical challenges, our existing
customers will be dissatisfied. As a result, we may be unable to generate future sales and our business will be materially adversely affected.

13

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We
have in the past experienced delays in releasing new software products and product enhancements and may experience similar delays in the future. These delays or problems in the
installation or implementation of our new releases may cause customers to forego purchases of our software products.

We face intense competition from companies that may have greater resources than we do, and if we are unable to effectively compete with them, then our business may suffer.

The market for our products is very competitive. The current economic downturn in the communications industry has caused fewer sales opportunities, which has
resulted in more competition for each sales opportunity that exists. We expect this trend to continue until the economic conditions in the communications industry improve. Our principal competitors
include mediation system providers, billing and customer care system providers, operation support system providers, system integrators and service bureaus, and the internal information technology
departments of larger communications companies, which may elect to develop functionalities similar to those provided by our product in-house rather than buying them from outside suppliers.

Many
of our current and future competitors may have advantages over us, including:



Our
current and potential competitors have established, and may continue to establish in the future, cooperative relationships among themselves or with third parties that would increase
their ability to compete with us. In addition, competitors may be able to adapt more quickly than we can to new or emerging technologies and changes in customer needs, or to devote more resources to
promoting and selling their products. If we fail to adapt to market demands and to compete successfully with existing and new competitors, our business and financial performance would suffer.

We depend on our intellectual property, and litigation regarding our intellectual property could harm our business.

Unauthorized use or misappropriation of our intellectual property could seriously harm our business. Our intellectual property includes our proprietary
technology, our trade secrets, patents, copyrights in our software products, and our trademarks. Our copyrights and patents are important to the protection of our software, and our trademarks are
important to the protection of our company and product names. These copyrights, patents and trademarks discourage unauthorized use of our software and our company and product names and provide us with
a way to enforce our rights in the event that this unauthorized use occurs. Third parties may infringe upon our intellectual property rights, and we may be unable to detect this unauthorized use or
effectively enforce our rights. Furthermore, the laws of certain countries in which we sell our products do not protect our software products and intellectual property rights to the same extent, as do
the laws of the United States. In addition, any legal action that we may bring to protect our intellectual property rights could be expensive and distract management from
day-to-day operations.

Claims by others that we infringe their proprietary technology could divert our resources, result in unexpected license fees and harm our business.

Third parties could claim that our current or future products or technology infringe their proprietary rights. An infringement claim against us could be costly
even if the claim is invalid, and

14

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could
distract our management from the operation of our business. Furthermore, a judgment against us could require us to pay substantial damages and could also include an injunction or other court
order that could prevent us from selling our product offering. If we faced a claim relating to proprietary technology or information, we might seek to license technology or information, or develop our
own, but we might not be able to do so. Our failure to obtain the necessary licenses or other rights or to develop non-infringing technology could prevent us from selling our products and
could seriously harm our business.

If our software contains errors or our software product development is delayed, our business will suffer.

We face possible claims and higher costs as a result of the complexity of our software products and the potential for undetected errors. Due to the importance of
our products to our customers' operations, undetected errors are of particular concern. Computer software such as ours always contains undetected errors. The implementation of our products, which we
accomplish through our services division, typically involves working with sophisticated software, computing and communications systems. If we experience difficulties with an implementation or do not
meet project milestones in a timely manner, we could be obligated to devote more customer support, engineering and other resources to a particular project and to provide these services at reduced or
no cost. If our software contains significant undetected errors or we fail to meet our customers' expectations or project milestones in a timely manner we could experience loss of or delay in
revenues, loss of customers, injury to our reputation, legal actions by customers against us, and increased service and warranty costs.

Our
license agreements with our customers generally contain provisions designed to limit our exposure to potential product liability claims, such as disclaimers of warranties and
limitations on liability for special, consequential and incidental damages. In addition, our license agreements generally cap the amounts recoverable for damages to the amount paid by the licensee to
us for the product or service, giving rise to the damages. However, all domestic and international jurisdictions may not enforce these limitations. We may encounter product liability claims in the
future. Product liability claims, whether or not successful, brought against us could divert the attention of management and key personnel, could be expensive to defend and may result in adverse
settlements and judgments.

Barriers to international expansion could limit our future growth.

We are considering an expansion of our international operations, and in the event we do so, we may face significant barriers to this expansion. Our failure to
manage our international operations effectively could limit the future growth of our business. International customers represented approximately 16% and 22% of our total revenue for the years ended
December 31, 2003 and 2002, respectively. We conduct our international sales primarily with partners with operations around the world. Any expansion of our existing international operations and
entry into additional international markets will require significant management attention and may require additional financing.

Our
international operations face numerous risks. Our products must be localizedcustomized to meet local user needsin order to be sold in particular foreign
countries. Developing local versions of our products for foreign markets is difficult and can take longer than we anticipate. We currently have limited experience in localizing products and in testing
whether these localized products will be accepted in the targeted countries. In addition, we have only a limited history of marketing, selling and supporting our products and services internationally.
As a result, we must focus on entering into strategic relationships with companies in international markets. If we are not able to maintain successful strategic relationships internationally or
recruit additional companies to enter into strategic relationships, our future growth could be limited.

15

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We also face certain other risks inherent in conducting business internationally, such as:



Any
of these factors could seriously harm our international operations and, consequently, our business.

To
date, a majority of our international revenue and costs have been denominated in United States dollars. However, future international revenue and costs may be denominated in
currencies other than the United States dollar. We have not engaged in any foreign exchange hedging transactions, and we are therefore subject to foreign currency risk.

If we acquire additional companies, products or technologies in the future, they could prove difficult to integrate, disrupt our business, dilute stockholder value or adversely
affect our operating results.

We may decide to make other investments in complementary companies, products or technologies. We may not realize the anticipated benefits of any other acquisition
or investment. The success of our acquisition program will depend on our ability to overcome substantial obstacles, such as the availability of acquisition candidates, our ability to compete
successfully with other acquirers seeking similar acquisition candidates, the availability of funds to finance acquisitions and the availability of management resources to oversee the operation of
acquired businesses. Furthermore, we may have to incur debt or issue equity securities to pay for any additional future acquisitions or investments, the issuance of which could be dilutive to us or
our existing stockholders. In addition, our profitability may suffer because of acquisition-related costs or future impairment costs for acquired goodwill and other intangible assets. We have limited
resources and we can offer no assurance that we will succeed in consummating any additional acquisitions or that we will be able to integrate and manage any acquisitions successfully.

We
have no present commitments, understandings or plans to acquire other companies.

If we fail to modify or improve our software products in response to evolving industry standards, our software products could rapidly become obsolete, which would harm our
business.

Future versions of hardware and software platforms embodying new technologies and the emergence of new industry standards could render our products obsolete. Our
future success will depend upon our ability to develop and introduce a variety of new products and product enhancements to address the increasingly sophisticated needs of our customers.

Our
products are designed to work on a variety of hardware and software platforms used by our customers. However, our products may not operate correctly on evolving versions of hardware
and software platforms, programming languages, database environments, accounting and other systems that our customers use. We must constantly modify and improve our products to keep pace with changes
made to these platforms and to back-office applications and other Internet-related applications. This

16

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may
result in uncertainty relating to the timing and nature of new product announcements, introductions or modifications, which may harm our business.

Governmental
regulations that limit the growth of the Internet or the communications industry could reduce our potential market.

The
communications carriers that constitute our clients are regulated at the federal, state and local levels. Federal and state regulations may inhibit the growth of the Internet or
communications industry, affect the development of Internet enhanced services of other markets, limit the number of potential clients for our services, impede our ability to offer competitive services
to the Internet and communications markets, or otherwise have a materially adverse effect on our business, financial condition, results of operations and cash flows.

The
Telecommunications Act of 1996, which in large measure deregulated the telecommunications industry, has caused, and is likely to continue to cause, significant changes in the
industry, including the entrance of new competitors, consolidation of industry participants and the introduction of bundled services, such as wireless, wireline, data, and video. Those changes could
in turn subject us to increased pricing pressures, decrease the demand for our products and services, increase our cost of doing business or otherwise have a materially adverse effect on our business,
financial condition, results of operations and cash flows.

Risks Related to Owning Our Stock

Future sales of our common stock may depress our stock price.

A significant number of shares of our common stock are freely tradable. If any of our stockholders sell substantial amounts of our common stock in the public
market, the market price of our common stock could fall. In addition, such sales could create the perception in the public of difficulties or problems with our software products and services. As a
result, these sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

Since first trading on March 14, 2001, our common stock has traded only sporadically and is expected to experience significant price and volume volatility in the future
which substantially increases the risk of loss to persons owning our common stock.

There has been no market for our common stock prior to our initial distribution. At best, only a limited market is expected to develop for our common stock.
Because of the limited trading market for our common stock, and because of the possible price volatility, you may not be able to sell your shares of common stock when you desire to do so. The
inability to sell your shares in a rapidly declining market may substantially increase your risk of loss because of such illiquidity and because the price for our common stock may suffer greater
declines because of its price volatility.

In
addition, the stock market has experienced extreme price and volume fluctuations, which have particularly affected the market prices of many Internet and computer software companies,
including ours, and which we believe have often been unrelated to the operating performance of these companies or our company.

We are not required to meet or maintain any listing standards for our common stock to be traded on the OTC Bulletin Board which could effect our stockholders' ability to access
trading information about our common stock.

The OTC Bulletin Board is separate and distinct from the Nasdaq Stock Market. Although the OTC Bulletin Board is a regulated quotation service operated by the
National Association of Securities Dealers, Inc. ("NASD") that displays real-time quotes, last sale prices, and volume information in

17

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over-the-counter
equity securities like our common stock, we are not required to meet or maintain any qualitative or quantitative standards for our common stock to be traded on
the OTC Bulletin Board. Our common stock does not presently meet the minimum listing standards for listing on the Nasdaq Stock Market or any national securities exchange which could effect our
stockholders' ability to access trading information about our common stock.

We do not intend to pay dividends; you will not receive funds without selling shares.

We have never declared or paid any cash dividends on our capital stock and do not intend to pay dividends in the foreseeable future. We intend to invest our
future earnings, if any, to fund our growth. Therefore, you will not receive any funds without selling your shares.

Because some stockholders will together beneficially own or have the right to vote 30.3% of our voting stock, the voting power of other stockholders may be limited.

Our executive officers and directors beneficially own or control, directly or indirectly, outstanding shares of common stock, which in the aggregate represent
approximately 30.3% of the outstanding shares of common stock. As a result, if some of these persons or entities act together, they may have the ability to control all matters submitted to our
stockholders for approval, including the election and removal of directors and the approval of any business combination. This may delay or prevent an acquisition or cause the market price of our stock
to decline. Some of these persons or entities may have interests different than yours. For example, they may be more interested in selling Primal to an acquirer than other investors or may want us to
pursue strategies that are different from the wishes of other investors.

Provisions in our charter documents and Delaware law may delay or prevent an acquisition of Primal.

Our certificate of incorporation and bylaws contain provisions that could make it harder for a third-party to acquire Primal without the consent of our board of
directors. The acquirer will not be able to cumulate votes at a meeting, which will require the acquirer to hold more shares to gain representation on the board of directors than if cumulative voting
were permitted. In addition, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15% stockholders that have not been approved by the board of
directors. These provisions and other similar provisions make it more difficult for a third-party to acquire us without negotiation.

Furthermore,
our board of directors could choose not to negotiate with an acquirer that it did not feel was in the strategic interests of Primal. If the acquirer was discouraged from
offering to acquire us or prevented from successfully completing a hostile acquisition by the anti-takeover measures, you could lose the opportunity to sell your shares at a favorable
price.

Our common stock may be subject to penny stock rules, which may make it more difficult for our stockholders to sell their common stock.

Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by the Securities and Exchange
Commission. Penny stocks generally are equity securities with a price of less than $5.00 per share. The penny stock rules require a broker-dealer, prior to a purchase or sale of a penny stock not
otherwise exempt from the rules, to deliver to the customer a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly
account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock the
broker-dealer make a special written determination that the penny stock is a

18

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suitable
investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in
the secondary market for a stock that becomes subject to the penny stock rules.

Item 2. Properties

We do not own any real estate properties, but lease approximately 13,500 square feet of general and administrative office space in Irvine, California. Our monthly
rent payment is approximately $31,000. Our lease expires in April 2007. We also lease an executive suite in Amsterdam, The Netherlands on a monthly basis. Our monthly rent payment for the
executive suite is approximately $700. In February 2004, we entered into a lease agreement for an additional 7,000 square feet which includes a data center and general and administrative office
space in Irvine, California with a monthly rent payment of approximately $9,000. This new additional lease expires May 2006.

Item 3. Legal Proceedings

We are not currently a party to any material legal proceeding.

Item 4. Submission of Matters to a Vote of Security Holders

None.

PART II

Item 5. Market for Common equity and Related Stockholder Matters

The common stock has been quoted and traded on a limited and sporadic basis on the OTC Bulletin Board operated by NASD under the trading symbol
"PSOL" since shortly after our spin-off from Avery in February 2001. The limited and sporadic trading does not constitute, nor should it be considered, an established
public trading market for the common stock. The following table sets forth the high and low bid prices for our common stock for the periods indicated, as reported by OTC Bulletin Board. Such
quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions.

BidHigh

LowYear ended December 31, 2003:First Quarter

$
0.13

$
0.04Second Quarter


0.07


0.05Third Quarter


0.16


0.04Fourth Quarter


0.35


0.10Year ended December 31, 2002:First Quarter

$
0.08

$
0.04Second Quarter


0.17


0.05Third Quarter


0.08


0.03Fourth Quarter


0.04


0.02


As
of March 17, 2004, there were approximately 394 holders of record of our common stock.

We
have never declared or paid any cash dividends on our common stock. For the foreseeable future, we expect to retain any earnings to finance the operation and expansion of our
business.

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Recent Sales of Unregistered Securities

In September 2003, the Board of Directors approved and completed the sale of 688,253 shares of our common stock to certain members of the Board of
Directors at a price equal to fair market value, exempt under Section 4(2) of the Securities Act of 1933, as amended.

In
December 2003, the Board of Directors approved and granted 35,000 shares of our common stock to an employee, exempt under Section 4(2) of the Securities Act of 1933, as
amended. As a result, during the year ended December 31, 2003, we recorded stock compensation expense for the fair market value of the granted stock.

Item 6. Management's Discussion And Analysis Of Financial Condition And Results Of Operations

The following discussion should be read in conjunction with our consolidated financial statements and related notes and the other financial information included
elsewhere in this prospectus.

A NOTE ABOUT FORWARD-LOOKING STATEMENTS

The statements, other than statements of historical fact, included in this report are forward-looking statements. Forward-looking statements generally can be
identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "plan," "seek," or "believe." We believe that the expectations reflected in
such forward-looking statements are accurate. However, we cannot assure you that such expectations will occur. Our actual future performance could differ materially from such statements. You should
not unduly rely on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we are not obligated to release publicly any revisions to these
forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.

Critical Accounting Policies

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. As such, we are
required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which we believe are the
most critical to aid in fully understanding and evaluating our reported financial results include the following:

Revenue RecognitionRevenues from sales of software licenses, which generally do not contain multiple elements, are recognized
upon shipment of the related product if the requirements of the American Institute of Certified Public Accountants Statement of Position 97-2,Software Revenue
Recognition, as amended ("SOP 97-2"), are met. If the requirements of SOP 97-2, including evidence of an arrangement, client acceptance, a fixed or
determinable fee, collectibility or vendor-specific objective evidence about the value of an element, are not met at the date of shipment, revenue recognition is deferred until such items are known or
resolved. Revenue from post-contract customer support is deferred and recognized ratably over the term of the contract. Revenues from services are recognized as the services are performed
under the agreements. Certain licensing and services arrangements with our customers are billed monthly and the associated revenue is recognized monthly.

Accounts ReceivableWe perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history
and the customer's current creditworthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a
provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have

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historically
been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our
accounts receivable are concentrated in a relatively few number of customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse
impact on the collectibility of our accounts receivables and our future operating results. See Risk Factor "Our revenues are generated from a limited number of customers; our customer base is
concentrated; and the loss of one or more of our customers could cause our business to suffer."

Accounting for the Impairment or Disposal of Long-Lived AssetsWe account for the impairment and disposition of
long-lived assets in accordance with the Statement of Financial Accounting Standards ("SFAS") No. 144,Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. In
accordance with SFAS No. 144, long-lived assets to be held are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. This
statement addresses financial accounting and reporting for the impairment of long-lived assets and for the disposal of long-lived assets. SFAS No. 144 superseded SFAS
No. 121 and became effective January 1, 2002. We evaluate the carrying value of intangible assets for impairment of value based on undiscounted future cash flows, which are subject to
change. We cannot guarantee that there will not be impairment in the future. Any future impairment charge would negatively affect our results of operations.

Change in Accounting for Goodwill and Other Intangible AssetsOn January 1, 2002 we adopted SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be
amortized. It also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of
a reporting unit below its carrying value, and, required the transitional testing of goodwill for impairment under the new standard by June 30, 2002. We have completed a review of each of our
reporting units, Systems and Services, and have concluded that the fair value of each reporting unit exceeds its carrying value, indicating no goodwill impairment was present as of January 1,
2002, September 30, 2002 and 2003. We believe no events or circumstances have changed subsequent to September 30, 2003 that would require us to re-evaluate the fair value of
our goodwill. We will continue to complete an annual testing of goodwill for impairment on September 30th of each year. Such fair value measurements involve significant estimates
and assumptions, including the future cash flows, comparable market multiples and discount rates. Changes in such estimates and assumptions could significantly affect the fair value and potential
impairment.

General

Primal Solutions, Inc., and its subsidiary Wireless Billing Systems, ("Primal" or the "Company") deliver software and service solutions that allow CSPs to
generate revenue from their IP networks. Our communications software products and services enable usage-based billing for IP network services without requiring the CSP to undertake expensive changes
or upgrades to existing back office billing and customer care systems. At the heart of our solutions is Access IM®, our multi-service mediation platform.

We
have focused our marketing and product strategy around IP networks. We believe that the greatest opportunity for growth in sales of both our products and services will be for CSPs who
utilize IP networks for multiple services including voice, data, and video

The
primary markets that show signs of growth opportunities for our products and services are cable multiple service operators ("Cable MSO"); rural broadband CSPs, including rural
utilities and municipal agencies investing in broadband systems such as fiber-to-the-home ("FTTH") networks; and managed network service providers that provide
enhanced voice and data services to business customers on a single IP network.

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Current Conditions

During 2003, we continued to focus on controlling costs as well as seeking new sales opportunities for our products and services through our direct sales force
and our partnerships with communications infrastructure providers. The markets for these products have been and continue to be very competitive. Sales opportunities in the United States of America
have continued to be limited due to the continued constrained economic conditions experienced by the communications industry. While sales opportunities have been more available in international
markets, such as Asia-Pacific, we have not been able to compete effectively against larger competitors who have a local presence in these international markets, or locally based competitors in these
international markets due to our lack of an international sales presence. During 2003, we successfully deployed our products and services into the tier-one Cable MSO and Rural Broadband
markets, which are two of our targeted markets domestically. Additionally, we launched our application management services during 2003, and anticipate that these services will become an increasingly
important element of our growth.

In
addition, during 2003 we (i) increased our Connect IXC deployment support to a tier-one Cable MSO customer to assist this customer in rolling out its VOIP service
to all of its cable markets during 2004; (ii) entered into an agreement to deploy Connect IXC for another tier-one Cable MSO for its rollout of VOIP service beginning in 2004;
(iii) successfully deployed Connect CCB, an integrated customer care and billing solution, and Connect IXC at a municipal utility to support its rollout of VOIP, cable television services, and
high-speed data services; (iv) assisted our largest customer in migrating from our legacy billing system to our new billing system; and (v) expanded our senior management team by
1) hiring a Senior Vice President of Services to launch our new application management and hosting services, as well as to provide professional services to all our existing and new customers,
and 2) hiring a Senior Vice President of Sales and Business Development to build and grow our direct sales force and channel sales capabilities.

During
2003, we increased our cash balances $66,000 to $1.25 million at December 31, 2003, and increased revenue $389,000 to $6.5 million for the twelve months ended
December 31, 2003. Despite our improvements, we do not expect to achieve profitability in the near future as we continue to invest in growing our business.

The
following discussion and analysis provides information that we believe is relevant for an assessment and understanding of our consolidated financial condition and results of
operations. The discussion should be read in conjunction with our consolidated financial statements and related notes and the other financial information included elsewhere in this report.

Spin-Off of Primal

As discussed elsewhere in this filing, we were spun-off as a separate public company by Avery in February 2001. On February 13, 2001 and
in connection with the Distribution Agreement, Avery distributed approximately 13.2 million shares of our common stock to Avery's securityholders (the "Distribution"). As part of the
Distribution:



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Selected Financial Information Line Item Explanations

Our revenues are primarily derived from the sale of software licenses and related services to communications and Internet carriers.

System
revenues consist of software license fees charged to our customers for their use of our software. Software license fees include one time and recurring license charges, and license
upgrade charges for our communications software products. Software license fees are volume sensitive and generally are based on the number of subscribers, call records, or number of events.

Service
revenues are generated by providing services relating to our software products. These services include maintenance fees, installation services, training, application management
and hosting services and custom software development.

Revenues
from sales of software licenses, which generally do not contain multiple elements, are recognized upon delivery of the related product if the requirements of SOP
97-2 are met. If the requirements of SOP 97-2, including evidence of an arrangement, client acceptance, a fixed or determinable fee, collectibility or vendor-specific objective
evidence about the value of an element, are not met at the date of delivery, revenue recognition is deferred until such items are known or resolved. Revenue from post-signing customer
support is deferred and recognized ratably over the term of the contract. Revenues from services are recognized as the services are performed under the agreements.

We
believe that future license revenues will be generated from three sources: license fees from new customers; license fees for new products to existing customers; and growth in the
subscriber base and call record or events volume, which may lead to increased revenue from these volume-based licenses.

System
cost of revenues includes hardware costs and software license fees paid to third-parties under equipment resale and technology license arrangements.

Service
cost of revenues includes all costs associated with the customer service organization, including staffing expenses, travel, communications costs, and other support costs related
with installing, training, providing help desk services, providing application management and hosting services and customization for our communications software products.

Operating
expenses are comprised of sales and marketing costs, research and development, and general and administrative costs.

Sales
and marketing costs include salaries and benefits, commissions, trade shows, advertising and promotional and presentation materials.

Research
and development costs consist of salaries and benefits and other support costs.

General
and administrative costs consist of general management and support personnel salaries and benefits, information systems costs, facilities costs, legal and accounting fees, travel
and entertainment costs and other support costs.

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Results of Operations for the Years Ended December 31, 2003 and 2002

The following table sets forth selected income statement lines in thousands of dollars.

Statement of Operations Data (in thousands)

|                                |  | Year Ended
December 31, |       | Change |  
|------------------------------- |  | ----------------------- | ----- | ------ | -
|
|REVENUES:                       |  |                         |       |        |  
|System revenue                  |  | $                       | 2,549 |        | $
|Service revenue                 |  |                         | 3,968 |        |  
|                                |  |                         |       |        |  
|Total revenues                  |  |                         | 6,517 |        |  
|COST OF REVENUES:               |  |                         |       |        |  
|System revenue                  |  |                         | 244   |        |  
|Service revenue                 |  |                         | 2,692 |        |  
|                                |  |                         |       |        |  
|Total cost of revenues          |  |                         | 2,936 |        |  
|                                |  |                         |       |        |  
|GROSS MARGIN                    |  |                         | 3,581 |        |  
|OPERATING EXPENSES:             |  |                         |       |        |  
|Research and development        |  |                         | 994   |        |  
|Sales and marketing             |  |                         | 1,050 |        |  
|General and administrative      |  |                         | 1,608 |        |  
|                                |  |                         |       |        |  
|Total operating expenses        |  |                         | 3,652 |        |  
|                                |  |                         |       |        |  
|LOSS FROM OPERATIONS            |  |                         | (71   | )      |  
|INTEREST AND OTHER EXPENSE, NET |  |                         | (205  | )      |  
|                                |  |                         |       |        |  
|LOSS BEFORE INCOME TAXES        |  |                         | (276  | )      |  
|INCOME TAX PROVISION            |  |                         | 2     |        |  
|                                |  |                         |       |        |  
|NET LOSS                        |  | $                       | (278  | )      | $
|                                |  |                         |       |        |  
|Supplemental data:              |  |                         |       |        |  
|Depreciation and Amortization   |  | $                       | 374   |        | $

Overview

During 2003, the deployment of software and services to two new customers resulted in $942,000 of revenue. We have shifted from a product and related services
software sales approach to a solutions-based approach to serve our customers better. We have also shifted our license and services pricing models for new customers from an up-front,
one-time license fee with associated software setup services, to a subscription-based recurring payment model based on the customer's subscribers and/or transaction volumes. As part of
this approach, we introduced our new application management and hosting services where we manage our applications for the customer allowing them to concentrate on their core business. Revenue from our
new products and services increased during 2003, while revenue from our legacy billing product declined during 2003. We believe this trend will continue as (i) we add new customers using our
new products and services, (ii) existing customers under subscription-based recurring revenue contracts increase the number of subscribers and transaction volumes associated with our new
products and services, and (iii) existing customers using our legacy billing product migrate to our new billing product and purchase new products and services from us. During 2003, we
experienced a decrease in gross margin as we incurred significant costs in assisting our largest customer in migrating to our new billing software platform and incurred start-up costs in
launching our new application management services business.

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We
are seeing signs of improvement in the markets for our solutions, in particular the Cable MSO and Rural Broadband, but the growth in overall capital expenditure by the communications
industry remains low. Because our sales are primarily to the CSPs, our ability to generate revenue also depends on market and economic conditions affecting those CSPs and on general economic
conditions.

Total Revenue

Total revenue increased to $6.5 million in 2003 from $6.1 million in 2002 primarily due to license, professional services and customization revenues
from the deployment of Connect IXC, Connect CCB and Access IM to new customers under multi-year contracts offset by a decrease in revenue from existing legacy customers, those using our
CRM billing software. Revenue from new customers increased to $942,000 in 2003 as compared to $62,000 in 2002 while revenue from existing customers decreased to $5.6 million in 2003 as compared
to $6.1 million in 2002. During 2003, we have shifted our software licensing model for new customers from an up-front one-time license fee to a subscription based
recurring license fee where the customer pays a monthly fee based on the number of subscribers and/or transaction volumes associated with our products. In addition, we deployed our offering of monthly
application management and hosting services to customers whereby we manage the applications for the customers so they can focus on their core business. Under this subscription-based recurring payment
pricing model, revenue from customers is expected to grow as their subscribers and/or transaction volumes grow and thus, revenue from these
customers is expected to be low in the early part of the contracts and higher in later years. Revenue from sales to new customers, where we are providing license and services under our new
subscription-based recurring payment pricing model, was $420,000 during 2003. The impact on revenues from our shift in our licensing and service models is expected to have a greater impact on our
revenues in 2004 as our customers increase their subscribers and transaction volumes from deploying our products and services into their markets. Our largest customer, who has been a user of our
legacy billing system is migrating to our new billing system and we expect this migration to be completed during 2004.

System
revenue increased to $2.5 million in 2003 from $2.1 million in 2002 primarily due to the increase in revenue from licensing and third-party software sales to new
customers.

Service
revenue remained consistent with the prior year due to an increase in revenue from new customers of $660,000 in 2003 offset by a decrease in revenue from existing customers of
$680,000 in 2003. These fluctuations are due to the addition of new customers in 2003 and the restructuring of contract renewals with existing customers, decrease in customization revenue from
existing customers, and a reduction in maintenance revenue. The decrease in service revenue from existing customers was primarily a result of the restructuring of an existing customer agreement in
December 2002.

We
anticipate that services revenue will increase in future periods as new customers request changes to our products to fit their unique business requirements such as certain custom
interfaces and custom functionality based on the individual customer needs, and as new customers deploy our products under an applications management and hosting model.

Service
revenue is primarily due to maintenance revenue, delivery of recurring professional services associated with our existing customer base, applications management and hosting
services, and the delivery of professional services associated with new customer contracts. In general, service revenue can fluctuate with the volume of new customer sales, as well as the renewal or
non-renewal of maintenance contracts or application management and hosting contracts on an annual basis. In addition, the services we provide to a customer can vary depending on the
solution which has been licensed, the complexity of the customer's information technology environment, the resources directed by the customers to their implementation projects, and the extent to which
consulting organizations provide services directly to customers.

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In
the year ended December 31, 2003, the Company had one customer that accounted for greater than 10% of the Company's total revenues in the amount of $4.5 million. In the
year ended December 31, 2002, the Company had two customers that accounted for greater than 10% of the Company's total revenues in the amount of $4.6 million and $713,000, respectively.

Cost of Revenues

Total cost of revenues increased to 45% of total revenues in 2003 as compared to 32% in 2002 primarily due to the partial migration of our largest customer to our
new billing system from our old legacy billing system in 2003, which resulted in non-recoverable one-time costs for us. Also contributing to the increase were
start-up costs associated with launching our application management business during 2003 for our initial customers. Primal believes that a substantial portion of the start-up
costs associated with our applications management business were one-time costs and that margins associated with this service should improve in future periods.

The
cost of system revenue increased in 2003 as compared to 2002 primarily due to the cost of third-party software associated with the sale of third-party software to new and existing
customers during 2003. Cost of system revenue consists primarily of computer hardware resale and license fees paid to third parties under technology license arrangements.

Cost
of service revenue, which consists primarily of the costs of applications management and hosting activities, consulting, training programs, implementation support, and customer
service and support, increased to 67% of service revenue in 2003 as compared to 48% of service revenue in 2002 because we sold more professional services for customers-related activities during 2003,
which resulted in more technical staff resources being used for customer services and customization. Additionally, we incurred one-time cost over-runs in assisting our largest
customer in its migration from our old legacy billing system to our new billing system and one-time start-up costs associated with launching of our application management
business during 2003.

During
2002 and 2003, the cost of service revenue was calculated using an allocation of costs associated with operational staff and technical staff based on time spent on
customer-related activities and research and development activities. As a result, cost of service revenue generally fluctuated each quarter with the volume of customer-related activities, including
installations and related consulting, training or other professional services rendered to new customers, and customer service and support activities rendered to existing customers. As discussed below,
during 2004, we anticipate changing the structure of our technical staff.

Research and Development

Our 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. We believe that the timely development of new products and enhancements is essential to
maintaining our competitive position in the marketplace. In our research and development effort we work closely with our customers, end-users and leading technology partners, in tailoring
new features which are subsequently incorporated into future versions of products available to all customers.

Research
and development expenses consist primarily of personnel, and related costs associated with our product development efforts. During 2002 and 2003, research and development
expenses were calculated using an allocation of costs associated with operational staff and technical staff based on time spent on customer-related activities and research and development activities.
As a result, research and development expenses generally fluctuated based on the need for technical staff to support customer-related activities. Research and development expenses decreased primarily
due to a decrease in the average number of full-time employees performing research and development activities in the current year due to technical staff performing installation and
professional services for new customers

26

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as
compared to the same period last year. Research and development expenses decreased to 15% of total revenues for 2003 as compared to 24% of total revenues for 2002 primarily to the increased portion
of the technical staff assigned to revenue related projects and thus included in cost of services. During 2004, we anticipate changing the structure of our technical staff. Historically, our technical
staff has been structured as a single group of professionals that are responsible for product development and deployment of professional services. Furthermore, the product development staff was
assigned to product teams. As we move forward, our technical staff will be separated into two separate groups, product development and professional services, specializing on the development of new
software products and the deployment of professional services to customers, respectively. We believe that the two separate groups will better achieve our business objectives for product development
and service revenue generation, because our resources will be better aligned to these purposes.

Sales and Marketing

Sales and marketing expenses primarily consist of employee salaries, benefits and commissions, and the cost of trade shows, seminars, promotional materials and
other sales and marketing programs. Sales and marketing expenses in 2003 remained relatively consistent with the prior year. We incurred slightly higher sales travel and marketing expenses, which were
offset by a reduction of sales and marketing employees as compared to the same period last year. In future periods, we anticipate that sales and marketing personnel and expenses may increase as we
invest in sales and marketing efforts to grow our business.

General and Administrative

General and administrative expenses consist primarily of employee salaries and related expenses for executive, finance, human resources, and administrative
personnel and other general administrative overhead. General and administrative expenses decreased primarily due to a decrease in administration staff and other operating costs, including operating
lease costs, facilities costs and depreciation. In future periods, general and administrative expenses may increase, due to increased staff, facilities and other operating costs as we may increase the
size of our operations to support growth in our business.

Depreciation
and amortization expense included in the results of operations decreased to $374,000 for the year ended December 31, 2003, as compared to $462,000 for the year ended
December 31, 2002, as certain assets acquired in 1999 became fully depreciated during 2003.

Interest and Other Expense, Net

Interest and other expense generally consists of interest income, interest expense and gain or loss on the sale of assets. It increased from the prior year period
primarily due to an increase in loss on sale of assets to $51,000 as compared to $9,500 in prior year as we disposed of obsolete computer equipment not in service.

Income Tax Provision

The income tax provision for the years ended December 31, 2003 and 2002 consisted of the minimum state taxes due to the operating loss for the year.

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Balance Sheet Data (in thousands)

|                                               |  | December 31, |       | Change |  
|---------------------------------------------- |  | ------------ | ----- | ------ | -
|
|Cash and cash equivalents                      |  | $            | 1,249 |        | $
|Accounts receivable                            |  |              | 640   |        |  
|                                               |  |              |       |        |  
|Cash, cash equivalents and accounts receivable |  |              | 1,889 |        |  
|Current Assets                                 |  |              | 2,078 |        |  
|Accounts payable and accrued expenses          |  |              | 912   |        |  
|Current portion notes payable                  |  |              | 303   |        |  
|Deferred revenue                               |  |              | 1,002 |        |  
|                                               |  |              |       |        |  
|Current Liabilities                            |  |              | 2,217 |        |  
|Working Capital Surplus (Deficit)              |  |              | (139  | )      |  
|Long term notes payable                        |  |              | 1,625 |        |  

Liquidity and Capital Resources

Overview

During 2003, liquidity improved indicated by the increase in combined balance of cash, cash equivalents and accounts receivable. In the third and fourth quarters
of 2003, we invested more heavily in the business as we positioned the Company for growth in the future primarily by expanding our services capabilities. This resulted in a decrease in working capital
caused by an increase in expenses at the end of 2003 as compared to 2002 resulting in an increase in accounts payables and accrued expenses and an increase in borrowings on our working capital line of
credit from Sunwest Bank. Subsequent to December 31, 2003, we have also been successful in restructuring the note with Corsair to relieve us from making a $1.4 million balloon payment at
the end of 2004 (see Subsequent Events).

Cash and Accounts Receivable

Our cash balance increased by 6% at year-end as compared to last year, and the combined balance of cash and accounts receivable increased 20%. The
timing of significant invoices to and collections from customers at the end or beginning of the periods can cause the balance of cash and accounts receivable to fluctuate inversely from quarter to
quarter. However, during 2003, such an inverse fluctuation did not occur.

Working Capital

Despite the increase in current assets, our working capital deficit, defined as current assets less current liabilities, increased at December 31, 2003 as
compared to December 31, 2002 primarily due to the increase in current liabilities being greater than the increase in current assets. The reason for the increase in current liabilities was
primarily due to 1) an increase in accounts payable, and in particular, accrued expenses as a result of a higher level of expenses at the end of 2003 as compared to 2002, and 2) an
$100,000 draw on our working capital line of credit from Sunwest Bank for working capital requirements in 2003.

Net
cash provided by operating activities decreased to $205,917 for the year ended December 31, 2003, as compared to $605,700 for the same period last year, primarily due to an
increase in accounts receivable because collections in December of 2003 were less than the collections in December of 2002; and the accounts receivable balance was higher at December 31, 2003
than at December 31, 2002.

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Net
cash used in investing activities increased to $(97,612) for the year ended December 31, 2003, as compared to $(89,412) for the same period last year, due to an increase in
purchases of property and equipment.

Net
cash used in financing activities increased to $(42,390) for the year ended December 31, 2003, as compared to $(20,611) for the same period last year, primarily due to an
increase of payments of notes payable.

In
February 2003, we drew $100,000 on our operating line of credit to finance a portion of the annual premium for an insurance policy. The loan is structured as a term loan with
interest-only payments due until its maturity in April 2004. The interest rate is an adjustable interest rate of 2.0% plus prime with a floor rate of 6.50% (6.50% at
December 31, 2003). At December 31, 2003, the balance of the loan was $100,000.

We
believe that existing cash balances, combined with cash generated from future operations, will be sufficient to support our working capital requirements through the next twelve
months. We may seek to raise additional funds from various sources including the issuance of debt, equity or equity-related securities to expand our sales capabilities, domestically and
internationally, increase our marketing efforts and improve our market perception. We cannot, however, be certain that additional financing will be available to us on acceptable terms when required,
or at all.

The
following table includes all the contractual obligations, including principal and interest payments, as of December 31, 2003:

|                            |  | Payments Due by Period
|--------------------------- |  | ----------------------
|
|Long-Term Debt              |  | $                     
|Operating Lease Obligations |  |                       
|                            |  |                       
|                            |  | $                     
|                            |  |                       

There
were no commercial commitments outstanding as of December 31, 2003.

Subsequent Events

In March 2004, we restructured the note payable to Corsair. The maturity of the note has been extended from December 2004 to December 2006.
We will continue to make principal and interest payments of $25,000 through December 2004, but beginning in January 2005 and continuing for 24 months until maturity, we will make
fully-amortized payments of approximately $60,000 to payoff the note completely with no balloon payment at maturity. We believe that the amendment of note terms allows us more flexibility in investing
in growing the business. At December 31, 2003, the balance of the note was $1.6 million.

In
February 2004, we entered into a lease agreement for an additional 7,000 square feet of general and administrative office space in Irvine, California with a monthly rent
payment of approximately $9,000. This new lease expires May 2006.

Recently Adopted Accounting Principles

On January 1, 2003, we adopted Statement of Financial Accounting Standards ("SFAS") No. 143,Accounting for Asset Retirement
Obligations,which addresses financial and reporting for obligations associated with the retirement of long-lived assets and related asset retirement costs. SFAS
No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for
legal obligations

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associated
with the retirement of tangible long-lived assets. The adoption of SFAS No. 143 did not have a material impact on our consolidated financial statements.

On
January 1, 2003, we adopted SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities, which
addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes EITF Issue 94-3,Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost, as defined in EITF Issue
94-3, was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value.
The adoption of SFAS No. 146 for exit or disposal activities did not have a material impact on our consolidated financial statements.

On
January 1, 2003, we adopted Financial Accounting Standards Board Interpretation ("FIN") No. 45,Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 requires increased financial statement disclosures by a guarantor about
its obligations under certain guarantees it has issued. FIN No. 45 also requires that a guarantor recognize a liability for the fair value of a certain guarantees made after December 31,
2002. We adopted the disclosure provisions of FIN No. 45 at December 31, 2002, with no impact on our financial position or results of operations.

In
January 2003, the FASB issued FIN No. 46,Consolidation of Variable Interest Entities. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires a variable interest entity to be consolidated by us if we are subject
to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN
No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was
established. We did not have any variable interest entities as of December 31, 2002 and 2003. The adoption of FIN No. 46 did not have a material impact on our consolidated financial
statements.

Recently Issued Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ("SFAS
No. 150"). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 applies specifically to a number of financial instruments that companies have historically presented within their financial statements either as equity or between the liabilities
section and the equity section, rather than as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003. However, in November 2003, the FASB issued Staff Position No. 150-3, which defers the effective date for certain
provisions of the statement. Once
required in its entirety, SFAS No. 150 is not expected to have a material impact on our consolidated financial statements.

In
December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 ("FIN 46R"). FIN 46R clarifies the application of ARB No. 51, "Consolidated Financial Statements,"

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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 provided by any parties, including the equity holders. FIN 46R requires the consolidation of these entities, known as variable interest entities
("VIEs"), by the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity's expected losses, receive a majority of the entity's
expected residual returns, or both.

Among
other changes, the revisions of FIN 46R (a) clarified some requirements of the original FIN 46, which had been issued in January 2003, (b) eased some
implementation problems, and (c) added new scope exceptions. FIN 46R deferred the effective date of the Interpretation for public companies to the end of the first reporting period ending after
March 15, 2004, except that all public companies must, at a minimum, apply the unmodified provisions of the Interpretation to entities that were previously considered "special-purpose entities"
in practice and under the FASB literature prior to the issuance of FIN 46R by the end of the first reporting period ending after December 15, 2003. As of December 31, 2003 and 2002,
management believes that the Company is not the primary beneficiary of any VIE's.

Item 7. Financial Statements

Our consolidated financial statements required to be included in Item 7 are set forth in the Index to Financial Statements set forth on page F-1 of
this report.

Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

On April 22, 2003, we dismissed Deloitte & Touche LLP ("D&T") as our principal accountant effective on such date. On April 22, 2003, we appointed
Haskell & White LLP ("H&W") as our new principal accountant. D&T's report on our financial statements for fiscal years 2001 and 2002 did not contain an adverse opinion or a disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit
scope or accounting principles. The decision to change accountants was recommended and approved by our audit committee.

During
fiscal years 2001 and 2002 and the subsequent interim period through April 22, 2003, there were no disagreements with D&T on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of D&T, would have caused them to make reference to the subject
matter of the disagreement(s) in connection with their report, nor were there any reportable events as defined in Item 304(a)(l)(iv)(B) of Regulation S-B.

We
engaged H&W as our new independent accountant on April 22, 2003. During fiscal years 2001 and 2002 and the subsequent interim period through April 22, 2003, neither we
nor someone on our behalf engaged H&W regarding either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be
rendered on our financial statements, or any matter that was either the subject of a "disagreement" or a "reportable event," both as such terms are defined in Item 304 of Regulation S-B.

We
have requested D&T to furnish the registrant with a letter addressed to the Commission stating whether it agrees with the statements made by the registrant in this current report and,
if not, expressing the respects in which it does not agree. We have filed the letter as an exhibit to this report.

Item 8A. Controls and Procedures

The Company maintains a system of disclosure controls and procedures which are designed to ensure that information required to be disclosed by the Company in the
reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time

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periods
specified under the Securities and Exchange Commission's rules and forms. Based on an evaluation performed, the Company's certifying officers have concluded that the disclosure controls and
procedures were effective as of the end of the period covered by this report to provide reasonable assurance of the achievement of these objectives.

Notwithstanding
the foregoing, there can be no assurance that the Company's disclosure controls and procedures will detect or uncover all failures of persons within the Company to
disclose material information otherwise required to be set forth in the Company's reports.

We
do not believe that there has been any change in the Company's internal control over financial reporting during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

Executive Officers and Directors

The following table sets forth certain information regarding our executive officers and directors as of March 17, 2004:

|Name               |  | Age |  | Position                                                                        
|------------------ |  | --- |  | --------------------------------------------------------------------------------
|Joseph R. Simrell  |  | 46  |  | Director, Chairman of the Board, Chief Executive Officer and President          
|Todd R. Taylor     |  | 38  |  | Chief Financial Officer, Vice President Finance and Administration and Secretary
|D. Kurt Dahm       |  | 41  |  | Senior Vice President Sales and Business Development                            
|Bob Richardson     |  | 38  |  | Senior Vice President Services                                                  
|Michael G. Fowler  |  | 40  |  | Vice President Product Development                                              
|Tim Hoolihan       |  | 41  |  | Vice President Product Management and Marketing                                 
|David Haynes       |  | 39  |  | Director                                                                        
|John Faltys        |  | 40  |  | Director                                                                        
|Louis A. Delmonico |  | 63  |  | Director                                                                        
|John E. Rehfeld    |  | 63  |  | Director                                                                        

Joseph R. Simrell, Chairman of the Board, CEO and President.Mr. Simrell joined Primal in January 1999 as Chief
Financial Officer and Vice President of Finance and Administration. Mr. Simrell was elected as Chief Executive Officer and President as of January 31, 2003 (serving those positions on a
interim basis from January 31, 2003 to May 12, 2003, when he became the permanent Chief Executive Officer and President) and was elected Chairman of the Board as of February 3,
2003. Mr. Simrell has also served as Secretary from August 2000 and as Chief Financial Officer from January 1999 until August 2003. From August 1997 to
December 1998, Mr. Simrell served as an outside consultant to Primal. From November 1991 to July 1997, Mr. Simrell served as Executive Vice President and Chief
Financial Officer of GDI, an information technology company. Prior to 1991, Mr. Simrell held various management positions at BellSouth, InteGroup, and SCI.

Todd R. Taylor, CFO, VP Finance and Administration and Secretary.Mr. Taylor joined Primal in October 2000 as
the Controller. Mr. Taylor was elected to the position of and has served as the Chief Financial Officer and Secretary since August 2003. Prior to joining Primal, Mr. Taylor served
as the Controller for a mortgage banking firm and technical services firm from October 2000 until May 2001. From March 1998 until May 2001, Mr. Taylor served as the
Vice President and Controller of Impac Commercial Holdings, a publicly owned commercial mortgage-banking firm. From January 1996 to March 1998, Mr. Taylor was a senior accountant
at KPMG LLP where he specialized in the audits of publicly owned financial services firms, and prior to KPMG, from March 1992 to December 1995, Mr. Taylor assisted in establishing
internal controls and procedures at Imperial Credit Industries, Inc., a mortgage-banking firm, following its IPO. Mr. Taylor earned his Business Administration degree from California
State University at Fullerton, and is a certified public accountant.

D. Kurt Dahm, SVP Sales and Business Development.Mr. Dahm joined Primal in January 2004. Mr. Dahm is
responsible for building and growing our direct sales force and channel sales capabilities. From 1997 to 2003, Mr. Dahm was the Director of Marketing for Cisco Systems, Inc. where he was
responsible for Network Management marketing. From 1994 to 1997, Mr. Dahm was the SVP of Sales and co-founder of Open Horizon and responsible for sales and alliances.
Mr. Dahm earned bachelor

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degrees
in mechanical engineering and industrial engineering from Clarkson University in Potsdam, New York.

Bob Richardson, SVP Service.Mr. Richardson joined Primal in August 2003 as the Senior VP of Services
responsible for Customer Support and Consulting Services and launching Primal's new application management and hosting services. From December 2001 to August 2003, Mr. Richardson
was a consulting project manager for Sony Pictures Entertainment and responsible for the delivery of the billing and cash application portions of a custom accounting system. From January 1998
to October 2001, Mr. Richardson was the Founder and EVP for StrataSource, Inc and was responsible for defining the strategic direction of the company. Mr. Richardson earned his
bachelor of science in Computer Science degree from University of Southern California.

Michael G. Fowler, VP Product Development.Mr. Fowler joined Primal in February 1999 as Director of Development
and became Vice President of Development in May 2001. From 1998 to January 1999, Mr. Fowler served as Director of Development, CRM, at Corsair Communications, a software products
company focused on real-time business solutions for the global wireless industry. Prior to 1998, Mr. Fowler held various management positions at Subscriber Computing, Inc.
and Integrity Management Systems.

Tim Hoolihan, VP Product Management and Marketing.Tim Hoolihan has been with Primal since May 1998. He was appointed
Vice President, Marketing and Product Management in March 2003. In his current position he is responsible for overall product and marketing strategy for Primal. From June 1999 to
February 2003 he served as Senior Director, Product Management where he had product line responsibility for the Access IM® mediation product line and Outfront CRM
product, as well as responsibility for strategic partner initiatives. He joined the Company as Director, Internet Services and managed special client consulting engagements. Prior to joining Primal,
Mr. Hoolihan was a business consultant to technology companies, co-founded a venture-backed content aggregation service and was a commercial lawyer. He earned his bachelors and
graduate degrees from the University of California, Berkeley.

David Haynes.Mr. Haynes has served as a Director since August 2000, and he has served as a member of the Audit
Committee and Compensation Committee since July 2002. Mr. Haynes joined Primal in August 1997 as Vice President of Sales and served as Vice President of Sales and Marketing from
May 2000 until May 2002 when he resigned the position. From May 1997 to September 1997, Mr. Haynes
served as Senior Business Development Manager at Deloitte & Touche Consulting Group, a consulting firm. From January 1995 to April 1997, Mr. Haynes was Director of Sales at
GDI. From December 1988 to January 1995, Mr. Haynes was one of the founding associates of ITX Technologies, a software company. Mr. Haynes currently serves as the Executive
Vice President of Fabrication Concepts Corporation, a high-tech equipment manufacturer. Mr. Haynes has a Masters in Business Administration degree from Pepperdine University and a
bachelors degree in civil engineering from Saskatchewan University.

John Faltys.Mr. Faltys has served as a Director since November 1996 and a member of the Compensation Committee
since July 2002. Mr. Faltys founded Primal in November 1996 and served as the Chief Technology Officer until April 2001 when he resigned the position. Mr. Faltys has
also served as a Director since Primal's inception. In addition, Mr. Faltys served as President from inception to September 1999. Prior to founding Primal, Mr. Faltys was Vice
President of Software Development for GDI from November 1991 to September 1996. Mr. Faltys currently serves as President of PersistentWorldZ, Inc., an online game service
provider.

Louis A. Delmonico, Ph.D.Dr. Delmonico has served as a Director of Primal since April 2001 and as Chairman of
the Compensation Committee, and a member of the Audit Committee since July 2002. From 1999 to 2000, Dr. Delmonico served as Chairman and CEO of Motive, a software

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company.
Since September 1994, he has also served as the President of L. A. Delmonico Consulting Inc., an independent consulting firm. From September 1994 to May 1995,
Dr. Delmonico served as the Vice Chairman of the MacNeal Schwendler Corporation, a publicly traded NASDAQ listed engineering software and services company. From May 1987 to
August 1994, Dr. Delmonico served as the Chairman and CEO of PDA Engineering Inc., a publicly traded NASDAQ listed engineering software and services company. In addition, he is
currently an advisor to and a director of several private companies. Dr. Delmonico earned his bachelor degree in economics from St. John's University in New York, his Ms.S. in consumer behavior
from the University of Stockholm, Sweden and his Ph.D. in marketing from the University of Uppsala, Sweden.

John E. Rehfeld.Mr. Rehfeld has served as a Director, Chairman of the Audit Committee and member of the Compensation
Committee of Primal since July 2002. Since 1997, Mr. Rehfeld has served as the Chairman and CEO of Proshot Golf, Inc. From 1996 to 1997, Mr. Rehfeld served as the President
and CEO of Proxima Corporation, a NASDAQ listed public company. From 1993 to 1996, he served as the President and CEO of Etak, Inc. a business unit of News Corp. From 1989 to 1993, he served as
President and Chief Operating Officer of Seiko Instruments America. Mr. Rehfeld currently serves as a Director of six high technology companies, including Seiko Instruments America. He has also
previously served as an outside board member of four other companies, including Wonderware, a NASDAQ listed public company. Mr. Rehfeld is also a Federal Trade Commission Monitor overseeing the
sale of a business unit of MSC Software, and a Professor of Marketing in the Executive MBA Program at Pepperdine University. Mr. Rehfeld holds an MBA from Harvard and a BS in chemistry from
University of Minnesota.

Unless
otherwise specified herein, each Director is subject to election at Primal's annual meeting of stockholders. Primal's 2004 annual meeting of stockholders is scheduled to occur in
July 2004.

On
July 24, 2002, the Board of Directors formed an Audit Committee appointing Mr. John E. Rehfeld as Chairman and Dr. Louis A. Delmonico and Mr. David Haynes
as members. Mr. Rehfeld is the financial expert on the Audit Committee. We believe that Mr. Rehfeld is independent as that term is used in Item 7(d)(3)(iv) of Schedule 14A
under the Exchange Act of 1934, as amended. Because the Company is not a listed issuer, the members of the Audit Committee are not subject to the independence requirements of any national securities
exchange or association. Notwithstanding, we believe that a majority of our Audit Committee members satisfy the independence requirements of NASDAQ.

The
Company has not adopted a Code of Ethics for its principal executive, financial, and accounting officers. Historically, the Company has felt that such a policy is unnecessary given
its relatively small size, however, the Company is actively considering adopting a Code of Ethics.

The
Company does not have a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934, as amended.

Item 10. Executive Compensation

The following table sets forth certain information with respect to the compensation of our Chief Executive Officer and each of our other most highly compensated
executive officers who earned more than $100,000 for the fiscal years ended December 31, 2003, 2002 and 2001.

35

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Summary Executive Compensation Table

|                                                                                  |  |                |  | Annual Compensation |                         | Long Term Compensation
Awards |   |                      
|--------------------------------------------------------------------------------- |  | -------------- |  | ------------------- | ----------------------- | ----------------------------- | - | ---------------------
|
|William Salway(3)
Chief Executive Officer and President                           |  | 2003
2002
2001 |  | $                   | 139,079
200,000
200,000 |                               | $ | 
47,500
113,400     
|Joseph R. Simrell(4)
Chief Executive Officer and President                        |  | 2003
2002
2001 |  |                     | 195,833
150,000
133,200 |                               |   | 105,523
23,513
70,762
|Todd Taylor
Chief Financial Officer and Vice President Finance and Administration |  | 2003
2002
2001 |  |                     | 95,500
95,500
92,700    |                               |   | 35,131
14,018
10,000 
|Michael G. Fowler
Vice President Product Development                              |  | 2003
2002
2001 |  |                     | 133,900
133,900
130,975 |                               |   | 52,476
15,852
25,000 
|Tim Hoolihan
Vice President Product Management and Marketing                      |  | 2003
2002
2001 |  |                     | 120,000
119,013
105,788 |                               |   | 48,584
5,000
15,000  

---

Option / SAR Grants in the Last Fiscal Year

Option / SAR Grants in the Last Fiscal Year

|                  |  | Individual Grants
|----------------- |  | -----------------
|
|Joseph R. Simrell |  |                 
|Todd Taylor       |  | 153,500          
|Michael G. Fowler |  | 109,848          
|Tim Hoolihan      |  | 212,616          

None
of the options granted to executive officers during 2003 was exercised.

36

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Aggregated Option / SAR Exercises in the Last Fiscal Year and FY-End Option / SAR Values

|Name              |  | Shares Acquired on Exercise |  | Value Realized |  | Number of Securities Underlying Unexercised Options at FY-end (#) Exercisable / Unexercisable |  | Value of Unexercised In-The-Money Exercisable Options at FY-end ($)
|----------------- |  | --------------------------- |  | -------------- |  | --------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------
|Joseph R. Simrell |  |                            |  |               |  | /                                                                                           |  | $                                                                  
|Todd Taylor       |  |                            |  |               |  | 12,792 / 140,708                                                                              |  |                                                                    
|Michael G. Fowler |  |                            |  |               |  | 9,154 / 100,694                                                                               |  |                                                                    
|Tim Hoolihan      |  |                            |  |               |  | 17,718 / 194,898                                                                              |  |                                                                    

Employment Agreements

Effective January 28, 2003, Mr. Simrell entered into an employment agreement with Primal. Under the terms of the employment agreement,
Mr. Simrell serves as Chief Executive Officer and President of Primal. Following the expiration of the initial term of the employment agreement on December 31, 2003, the term
automatically extends for re-occurring 30-day periods. Mr. Simrell's base annual salary is $200,000. In addition, Mr. Simrell is entitled to receive bonuses based
on achievement of performance goals set by the Board. For 2003, Mr. Simrell is eligible to receive as his bonus an amount not to exceed an additional 50% of his base salary. Mr. Simrell
is also entitled to participate in such stock option, restricted stock, pension, profit sharing, life insurance, hospitalization, major medical, tuition reimbursement, medical flexible spending
accounts and other employee benefit plans provided by Primal from time to time.

The
employment agreement with Mr. Simrell contains certain covenants by him not to solicit the customers and employees of Primal during his employment and for one year thereafter.
A state court may determine not to enforce, or only partially enforce, these covenants.

Effective
January 27, 2003, Mr. Salway entered into an Employment Transition Agreement and General Release with Primal. Under the terms of the Employment Transition
Agreement and General Release, Mr. Salway was employed as a part-time employee of Primal for a transition period that terminated on July 31, 2003. During such transition
period, Mr. Salway was to assist in the transition of his responsibilities as Chief Executive Officer and President to his successor as designated by Primal. Mr. Salway's monthly
compensation is $16,667. In addition, he was entitled to medical and life insurance benefits, reimbursement of his apartment lease payments of up to $1,800 per month through March 31, 2003, and
moving expenses of up to $1,500 incurred in relocating his household from said apartment.

Primal
is also a party to a Change of Control Agreement with Mr. Simrell (the "Change Agreement"). The Change Agreement provides that Primal will tender certain "severance
payments" to Mr. Simrell if, within 12 months of a "change of control transaction," (i) Primal terminates his employment (except upon his death or disability, his reaching
Primal's mandatory retirement age, if any, or his providing Primal with other "cause to terminate" his employment) or (ii) Mr. Simrell voluntarily terminates his employment for "good
reason." Further, Primal is obligated to tender such payments if, not more than three months prior to the closing of a change in control transaction, (i) Primal terminates Mr. Simrell's
employment, and such termination arose in connection with or in anticipation of the change in control transaction or (ii) Mr. Simrell voluntarily terminated his employment for good
reason. Lastly, in anticipation of a change of control transaction, Primal's directors could adopt a resolution deeming that a change in control transaction has closed for purposes of activating the
Change Agreement obligations.

37

---

Under
the Change Agreement, a "change of control transaction" will have occurred if



Primal's
"cause to terminate" Mr. Simrell means his material, uncured breach of his employment agreement, his gross negligence or willful misconduct in the performance of his
duties and responsibilities, his appropriation (or attempted appropriation) of a material business opportunity of Primal or of its funds or properties; or his conviction of, or entry of a guilty plea
or plea of no contest, with respect to a felony.

Mr. Simrell's
"Good Reason" to resign means a material breach by Primal of its obligations under any employment-related agreement with Mr. Simrell or Primal's unilateral,
material reduction in the Mr. Simrell's title, status, overall position, responsibilities or duties, reporting relationship, and general working environment.

The
term of the Change Agreement is co-terminus with Mr. Simrell's employment by Primal. The "severance payment," to be paid within 10 days of
Mr. Simrell's termination of employment or execution of a relevant release with Primal, will consist of a single cash payment that the sum of:



38

---



Primal
will gross-up the severance payment to Mr. Simrell so that the net severance payment received shall be the equivalent to the severance payment that would have
been received if no excise tax had been imposed. However, Primal will reduce a severance payment by the amount of any other severance or termination benefits that it is obligated to pay to
Mr. Simrell.

Further,
during the 12 months that commence on the date that Mr. Simrell's employment terminates, Primal will continue to provide Mr. Simrell with uninterrupted
medical, dental, life, and disability coverage and provide equivalent coverage for his spouse and dependent children, if such coverage was provided immediately prior to the date of termination of his
employment. Primal may terminate such insurance coverage prior to the expiration of the 12-month period if Mr. Simrell obtains any such benefits pursuant to a subsequent employer's
benefit plans.

Lastly,
upon the occurrence of a change of control transaction, all outstanding unvested stock options and all previously granted unvested restricted stock awards granted to
Mr. Simrell shall accelerate and vest.

Compensation of Directors

During 2003, each non-employee member of our Board of Directors received a one-time grant of a warrant to purchase 250,000 shares of
Common Stock at an exercise price equal to the fair market value at the time of the grant. As a policy, each newly elected and re-elected non-employee member of the Board of Directors receives a grant
of a warrant to purchase 50,000 shares of Common Stock at an exercise price determined by our Board at the time of issuance. Beginning in 2003, each non-employee director of Primal also
receives an annual stipend
of $14,000 and $1,750 for each Board meeting attended. There are currently two standing Board committees, an audit committee and a compensation committee. Each non-employee member serving
on a Board committee also receives compensation of $250 for each individual committee meeting attended in conjunction with a Board meeting, up to $750 for attendance of multiple committee meetings,
and $750 for each committee meeting attended separate from a Board meeting. In addition, each non-employee director is entitled to reimbursement of travel expenses.

In
April 2003, the Company issued 250,000 warrants to each of the four non-employee Board members under Section 4(2) of the Securities Act of 1933, as amended.
The warrants were issued at an exercise price equal to the fair market value of the Company's common stock, vest over two years and expire in ten years. As the warrants were issued at fair market
value, the Company will not record any expense for the warrants issued in accordance with Accounting Principles Board Opinion No. 25.

The
Company periodically forms and maintains ad hoc committees for specific and limited purposes and duration. Such ad hoc committee members may receive nominal compensation for such
service.

The
non-employee directors of the Company may be granted nonstatutory stock options and restricted stock under the 2001 Flexible Incentive Plan.

39

---



Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The table following sets forth information regarding the beneficial ownership of common stock for each person who is known by us to be the beneficial owner of
more than five percent of our voting securities, for each of our directors and named executive officers, and all of our directors and executive officers as a group. Unless otherwise indicated in the
footnotes, each person named below has sole voting and investment power over the shares indicated.

As
of March 17, 2004, the Company had 21,018,083 shares of common stock outstanding.

Securities
Authorized for Issuance Under Equity Compensation Plans:

Equity Compensation Plan Information

|Plan category                                               |       | Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights |           | Weighted-average
exercise price of
outstanding options,
warrants and rights |      | Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
|----------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------------- | --------- | --------------------------------------------------------------------------- | ---- | -------------------------------------------------------------------------------------------------------------------------------------------
|
|Equity compensation plans approved by security holders:     |       |                                                                                             |           |                                                                             |      |                                                                                                                                            
|2001 Flexible Incentive Plan                                |       | 3,270,843                                                                                   |           | $                                                                           | 0.06 |                                                                                                                                            
|Equity compensation plans not approved by security holders: |       |                                                                                             |           |                                                                             |      |                                                                                                                                            
|Stock options issued to former officer(1)                   |       | 409,312                                                                                     |           | $                                                                           | 0.03 |                                                                                                                                            
|Warrants issued to consultant(2)                            |       | 100,000                                                                                     |           | $                                                                           | 0.03 |                                                                                                                                            
|Warrants issued to Board Members(3)                         |       | 1,000,000                                                                                   |           | $                                                                           | 0.05 |                                                                                                                                            
|                                                            | Total |                                                                                             | 4,780,155 |                                                                             | $    | 0.06                                                                                                                                       

---

For
purposes of this table, a person is deemed to be the "beneficial owner" of the number of shares of common stock that such person has the right to acquire within 60 days of
March 17, 2003 through the exercise of any option, warrant or right, through the conversion of any security, through

40

---

the
power to revoke a trust, discretionary account, or similar arrangement, or through the automatic termination of a trust, discretionary account or similar arrangement.

Name of Beneficial Owner / Management

Number of Shares

Percent of ClassDavid Mechler(1)

2,428,995

11.6
%Mark J. Nielsen(2)(14)

1,273,967

6.1
%Arun Anand(3)(14)

203,119

1.0
%Murari Cholappadi(4)(14)

203,119

1.0
%Sanjay Gupta(5)(14)

203,119

1.0
%John Faltys(6)(14)

2,027,280

9.6
%Joseph R. Simrell(7)(14)

1,554,876

7.3
%David Haynes(8)(14)

1,475,711

7.0
%Michael G. Fowler(9)

254,114

1.2
%Tim Hoolihan(10)

210,538

1.0
%Todd R. Taylor(11)

105,175

*Louis A. Delmonico(12)

315,000

1.5
%John E. Rehfeld(13)

763,235

3.6
%All executive officers and directors as a group (8 persons)(15)

6,795,929

30.3
%


---

41

---



Voting Control

As discussed elsewhere in this filing, the Company was spun-off as a separate public company by Avery in February 2001, pursuant to that
certain Primal Solutions, Inc. Preliminary Distribution Agreement (the "Distribution Agreement"), dated July 31, 2000, by and among Avery Communications, Inc., a Delaware
corporation, Primal Solutions, Inc., a Delaware corporation, John Faltys, Joseph R. Simrell, David Haynes, Mark J. Nielsen, Arun Anand, Murari Cholappadi, Sanjay Gupta, Thurston
Group, Inc., a Delaware corporation, Patrick J. Haynes, III and Scot M. McCormick (Messrs. John Faltys, Joseph R. Simrell, David Haynes, Mark J. Nielsen, Arun Anand, Murari Cholappadi,
and Sanjay Gupta are collectively referred to as the "Old Primal Stockholders"). (See Exhibit 2.1.)

As
part of the terms and conditions of the Distribution Agreement, Patrick J. Haynes III (in his capacity as the Chairman of Avery), Thurston Group, Inc. and each of its
affiliates, and Waveland, LLC (a limited liability company wholly owned by Mr. P. Haynes) and each of its affiliates (collectively, the "Haynes Parties"), granted to the Old Primal Stockholders
an irrevocable proxy to vote all the shares of the Primal common stock that any of the Haynes Parties received in the Distribution and certain shares of the Company's common stock, if any, acquired
thereafter ("Proxies"). The Proxies provided that any action required or permitted to be taken pursuant to the them by the Old Primal Stockholders, including any voting of the shares covered thereby,
may be so taken if the former holders

42

---

of
at least 66% of the issued and outstanding shares of Primal immediately prior to its acquisition by Avery approved the taking of any such action. These percentages were as follows:



During
August 2003, a dispute arose between Avery and Primal with respect to the Proxies. Avery asserted, among other things, that, as a matter of law, the Proxies expired
effective July 31, 2003. Following discussions between Primal and Avery, Primal elected to treat the Proxies as expired effective September 24, 2003, in order to avoid litigation between
Avery and Primal and to reduce expenses associated with a prolonged dispute between Avery and Primal with respect to the Proxies. Notwithstanding Primal's decision to treat the Proxies as expired, the
Old Primal Stockholders have asserted to Primal that the Proxies did not expire as a matter of law or otherwise. Currently, Primal is in discussions with the Old Primal Stockholders in hopes of
finding an amicable resolution to the treatment of the Proxies as between Primal and the Old Primal Stockholders. There can be no assurance that we will be able to reach an amicable resolution with
respect to the treatment of the Proxies.

The
Proxies initially covered an aggregate of 1,830,260 shares, or approximately 9.1%, of Primal's common stock outstanding. As of September 24, 2003, the Proxies covered an
aggregate of up to 2,772,325 shares, or approximately 13%, of Primal's outstanding common stock; providing the Old Primal Stockholders the right to vote or to direct the voting of an aggregate of up
to 9,476,017 shares, or approximately 42%, of Primal's outstanding common stock. Treating the Proxies as expired on September 24, 2003, the Old Primal Stockholders have the right to vote or to
direct the voting of an aggregate of up to 6,703,692 shares, or approximately 32%.

Item 12. Certain Relationships And Related Transactions

Issuance of Common Stock

In September 2003, the Board of Directors approved and completed the sale of 688,253 shares of our common stock to members of the Board of Directors at a
price equal to fair market value.

Item 13. Exhibits and Reports on Form 8-K

INDEX TO EXHIBITS

|Exhibit
Number |  | Description of Document                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | 
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|2.1            |  | Primal Solutions, Inc. Preliminary Distribution Agreement (the "Distribution Agreement"), dated July 31, 2000, by and among Avery Communications, Inc., a Delaware corporation, Primal Solutions, Inc., a
Delaware corporation, John Faltys, Joseph R. Simrell, David Haynes, Mark J. Nielsen, Arun Anand, Murari Cholappadi, Sanjay Gupta, Thurston Group, Inc., a Delaware corporation, Patrick J. Haynes, III and Scot M. McCormick
(filed as Exhibit 2.1 to Avery's Form 8-K dated August 31, 2000 (the "Primal Form 8-K") and incorporated by reference herein) |  | 
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  | 

43

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|2.2   |  | Form of Non-Recourse Promissory Note, which is attached as Exhibit 5-A to the Distribution Agreement (filed as Exhibit 2.2 to the Primal Form 8-K and incorporated by reference herein)                                                                                                                                                                                                                                 |  | 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|2.3   |  | Form of Pledge Agreement, which is attached as Exhibit 5-B to the Distribution Agreement (filed as Exhibit 2.3 to the Primal Form 8-K and incorporated by reference herein)                                                                                                                                                                                                                                             |  | 
|2.4   |  | Form of Irrevocable Proxy for Thurston Group, Inc., Patrick J. Haynes III and their affiliates relating to the common stock of Primal, which is attached as Exhibit 9-A to the Distribution Agreement (filed as Exhibit 2.4 to
the Primal Form 8-K and incorporated by reference herein)                                                                                                                                |  | 
|2.5   |  | Form of Irrevocable Proxy for the Old Primal Stockholders relating to the common stock of Avery, which is attached as Exhibit 9-B to the Distribution Agreement (filed as Exhibit 2.5 to the Primal Form 8-K and incorporated by reference
herein)                                                                                                                                                                      |  | 
|2.6   |  | Indemnification Agreement, dated July 31, 2000, by and between Avery Communications, Inc., a Delaware corporation, John Faltys, Joseph R. Simrell, and David Haynes (filed as Exhibit 2.6 to the Primal Form 8-K and incorporated
by reference herein)                                                                                                                                                                  |  | 
|3.1   |  | Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company's Registration Statement on Form SB-2 (Registration No. 333-46494) ("Primal Form SB-2") and incorporated by reference herein)                                                                                                                                                                                                    |  | 
|3.2   |  | Amended and Restated Bylaws (filed as Exhibit 3.2 to the Primal Form SB-2 and incorporated by reference herein)                                                                                                                                                                                                                                                                                                         |  | 
|3.3   |  | Second Amended and Restated Bylaws adopted by the Board of Directors on May 15, 2002 (filed as Exhibit 3.3 to the Primal Form 10-QSB filed on August 14, 2002 and incorporated by reference herein)                                                                                                                                                                                                                     |  | 
|10.1  |  | Agreement and Plan of Merger, dated as of March 19, 1999, by and among Avery Communications, Inc., ACI Telecommunications Financial Services Corporation, Primal Systems Inc., Mark J. Nielsen, John Faltys, Joseph R. Simrell and
David Haynes (the "Primal Merger Agreement") (filed as Exhibit 2.5 to Avery's Registration Statement on Form SB-2 (Registration No. 333-65133) and incorporated by reference herein) |  | 
|10.2  |  | Form of Director and Officer Indemnification Agreement (filed as Exhibit 10.2 to the Primal Form SB-2 and incorporated by reference herein)                                                                                                                                                                                                                                                                             |  | 
|10.2a |  | Amended and Restated Indemnification Agreement (filed as Exhibit 10.2a to the Primal Form 10-KSB filed March 27, 2002 (the "Primal Form 10-KSB") and incorporated by reference herein)                                                                                                                                                                                                                                  |  | 
|10.3  |  | Employment Agreement for William Salway dated December 5, 2001 (filed as Exhibit 10.3 to the Primal Form 10-KSB and incorporated by reference herein)                                                                                                                                                                                                                                                                   |  | 
|10.4  |  | Reserved                                                                                                                                                                                                                                                                                                                                                                                                                |  | 
|10.5  |  | Employment Agreement for Joseph R. Simrell dated December 5, 2001 (filed as Exhibit 10.5 to the Primal Form 10-KSB and incorporated by reference herein)                                                                                                                                                                                                                                                                |  | 
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                         |  | 

44

---

|10.6   |  | Employment Agreement for David Haynes dated December 31, 2001 (filed as Exhibit 10.6 to the Primal Form 10-KSB and incorporated by reference herein)                                                                                                                                                   |  | 
|------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | 
|10.7   |  | Form of Master Software License Agreement (filed as Exhibit 10.7 to the Primal Form SB-2 and incorporated by reference herein)                                                                                                                                                                         |  | 
|10.8   |  | Form of Change of Control Agreement, as modified on May 3, 2002 (filed as Exhibit 10.8 to the Primal Form 10-QSB filed on May 14, 2002 and incorporated by reference herein)                                                                                                                           |  | 
|10.9   |  | Form of Lease between Spieker Properties, L.P. and Primal Solutions, Inc. dated October 26, 2000 (filed as Exhibit 10.9 to the Primal Form 10-KSB and incorporated by reference herein)                                                                                                                |  | 
|10.9a  |  | First Amendment to Lease between Spieker Properties, L.P. and Primal Solutions, Inc. dated June 13, 2001 (filed as Exhibit 10.9a to the Primal Form 10-KSB and incorporated by reference herein)                                                                                                       |  | 
|10.10  |  | Promissory Note of Primal Solutions, Inc. in favor of Spieker Properties, L.P., dated June 15, 2001 (filed as Exhibit 10.10 to the Primal Form 10-KSB and incorporated by reference herein)                                                                                                            |  | 
|10.11  |  | Amended Note Payable of Primal Solutions, Inc. in favor of Corsair Communications, Inc., dated January 1, 2001 (filed as Exhibit 10.11 to the Primal Form 10-KSB and incorporated by reference herein)                                                                                                 |  | 
|10.11a |  | Letter agreement, dated December 20, 2001, amending the Amended Note Payable of Primal Solutions, Inc. in favor of Corsair Communications, Inc. (filed as Exhibit 10.11a to the Primal Form 10-KSB and incorporated by reference
herein)                                                               |  | 
|10.11b |  | 2002 Amended and Restated Promissory Note, dated December 27, 2002, amending the Amended Note Payable of Primal Solutions, Inc. in favor of Corsair Communications, Inc. (filed as Exhibit 10.11b to the Primal June 30, 2003
Form 10-QSB and incorporated by reference herein)                        |  | 
|10.11c |  | Guaranty of the 2002 Amended and Restated Secured Promissory Note dated December 27, 2002, amending the Amended Note Payable of Primal Solutions, Inc. in favor of Corsair Communications, Inc. (filed as Exhibit 10.11c to the Primal
June 30, 2003 Form 10-QSB and incorporated by reference herein) |  | 
|10.12  |  | Indemnification Agreement between Primal Solutions, Inc. and Louis A. Delmonico, dated April 25, 2001 (filed as Exhibit 10.12 to the Primal Form 10-KSB and incorporated by reference herein)                                                                                                          |  | 
|10.13  |  | Transition Agreement for William Salway dated January 27, 2003 (filed as Exhibit 10.13 to the Primal Form 10-KSB and incorporated by reference herein)                                                                                                                                                 |  | 
|10.14  |  | Employment Agreement for Joseph R. Simrell dated January 28, 2003 (filed as Exhibit 10.14 to the Primal Form 10-KSB and incorporated by reference herein)                                                                                                                                              |  | 
|10.15  |  | Consolidation Agreement between Wireless Billing Systems dba Primal Billing Solutions and Metrocall, Inc. dated December 30, 2002 (filed as Exhibit 10.15 to the Primal Form 10-KSB and incorporated by reference herein)                                                                              |  | 
|       |  |                                                                                                                                                                                                                                                                                                        |  | 

45

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|10.16   |  | Letter of Intent between Wireless Billing Systems dba Primal Billing Solutions and Lightbridge, Inc. regarding amendment of Amended Note Payable in favor of Corsair Communications, Inc., dated December 18, 2002 (filed as
Exhibit 10.16 to the Primal Form 10-KSB and incorporated by reference herein) |  | 
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|10.17*  |  | 2004 Amended and Restated Promissory Note, dated March 27, 2004, amending the 2002 Amended and Restated Promissory Note Payable of Primal Solutions, Inc. in favor of Corsair Communications, Inc.                                                                                                         |  | 
|10.17a* |  | Confirmation of Guaranty by Primal Solutions, Inc. of 2004 Amended Note amending 2002 Amended Note                                                                                                                                                                                                         |  | 
|16.1    |  | Letter on Change in Certifying Accountant (filed as Exhibit 16.1 to the Primal Form 8-K filed on April 24, 2003 and incorporated by reference herein)                                                                                                                                                      |  | 
|23.1*   |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                                                                                                           |  | 
|23.2*   |  | Consent of Haskell & White LLP                                                                                                                                                                                                                                                                             |  | 
|31.1*   |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                            |  | 
|31.2*   |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                            |  | 
|32.1*   |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                            |  | 
|99.1    |  | Primal Solutions, Inc. 2001 Flexible Incentive Plan, as amended (filed as Exhibit 99.1 to the Company's Registration Statement on Form S-8 (Registration No. 333-60298) ("Primal Form S-8") and incorporated by reference
herein)                                                                          |  | 
|99.2    |  | Governance Document, as amended (filed as Exhibit 99.2 to Primal Form S-8 and incorporated by reference herein)                                                                                                                                                                                            |  | 

---

None.

Item 14. Principal Accountant Fees and Services

For the year ended December 31, 2003, Haskell & White LLP audited the Company's consolidated financial statements and for the year ended
December 31, 2002, the Company retained Haskell & White LLP to provide tax return and tax related services.

For
the year ended December 31, 2002, Deloitte & Touche LLP audited the Company's consolidated financial statements. In addition, the Company retained Deloitte &
Touche LLP, as well as another accounting and consulting firm, to provide tax related services in 2002.

46

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The
aggregate fees billed for professional services by Haskell & White LLP and Deloitte & Touche LLP in 2003 and 2002 were as follows:

|                   |  | 2003 |        | 2002
|------------------ |  | ---- | ------ | ----
|
|Audit Fees         |  | $    | 62,135 | (1) 
|Audit Related Fees |  |      |       |     
|Tax Fees(3)        |  |      | 7,500  | (2) 
|                   |  |      |        |     
|Total              |  | $    | 69,635 |     
|                   |  |      |        |     

---

It
is our Audit Committee's policy and procedure to approve in advance all audit engagement fees and terms and all permitted non-audit services provided by our independent auditors. We
believe that all
audit engagement fees and terms and permitted non-audit services provided by our independent auditors as described in the above table were approved in advance by our Audit Committee, except for the
tax fees and other fees paid to Deloitte & Touche LLP in 2002 for non-audit services which were approved by our Board of Directors in advance of existence of our Audit Committee.

We
do not believe that any of the tax services and "other" services described in the above table were approved by our Audit Committee pursuant to paragraph (c)(7)(i)(C) of
Rule 2-01 of Regulation S-X, because it is our belief that all such services were approved in advance by our Audit Committee or by our Board of Directors prior to the existence of our
Audit Committee.

47

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

| |  | PRIMAL SOLUTIONS, INC.
| |  | ----------------------
| |  | By:                   
| |  | PRIMAL SOLUTIONS, INC.
| |  | By:                   
| |  | Date: March 30, 2004  

In
accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

|Signature                               |  | Title                                                                                                              |  | Date          
|--------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------ |  | --------------
|                                        |  |                                                                                                                    |  |               
|/s/JOSEPH R. SIMRELLJoseph R. Simrell   |  | Chief Executive Officer, President and Director (Principal Executive Officer)                                      |  | March 30, 2004
|/s/TODD R. TAYLORTodd R. Taylor         |  | Chief Financial Officer and Vice President Finance and Administration (Principal Financial and Accounting Officer) |  | March 30, 2004
|/s/DAVID HAYNESDavid Haynes             |  | Director                                                                                                           |  | March 30, 2004
|/s/JOHN FALTYSJohn Faltys               |  | Director                                                                                                           |  | March 30, 2004
|/s/LOUIS A. DELMONICOLouis A. Delmonico |  | Director                                                                                                           |  | March 30, 2004
|/s/JOHN E. REHFELDJohn E. Rehfeld       |  | Director                                                                                                           |  | March 30, 2004

48

---



PRIMAL SOLUTIONS, INC.        INDEX TO FINANCIAL STATEMENTS

|                              |                                                                                                          | Page
|----------------------------- | -------------------------------------------------------------------------------------------------------- | ----
|Independent Auditors' Reports |                                                                                                          | F-2 
|Financial Statements:         |                                                                                                          |     
|                              | Consolidated Balance Sheets at December 31, 2003 and December 31, 2002                                   |     
|                              | Consolidated Statements of Operations for the years ended December 31, 2003 and 2002                     |     
|                              | Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2003 and 2002 |     
|                              | Consolidated Statements of Cash Flows for the years ended December 31, 2003 and 2002                     |     
|                              | Notes to Consolidated Financial Statements                                                               |     

F-1

---

INDEPENDENT AUDITORS' REPORT

The
Board of Directors and Stockholders
Primal Solutions, Inc.

We
have audited the accompanying consolidated balance sheet of Primal Solutions, Inc. (the "Company") as of December 31, 2003 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.

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

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Primal Solutions, Inc. as of December 31, 2003
and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

HASKELL &
WHITE LLP

Irvine,
California
March 2, 2004, except for Notes 3 and 12, as to which date is March 27, 2004

F-2

---

INDEPENDENT AUDITORS' REPORT

The
Board of Directors and Stockholders
Primal Solutions, Inc.

We
have audited the accompanying consolidated balance sheet of Primal Solutions, Inc. and subsidiary (formerly a wholly owned subsidiary of Avery Communications, Inc.
("Avery")) ("Primal" or the "Company") as of December 31, 2002, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

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

In
our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Primal Solutions, Inc. and subsidiary at
December 31, 2002 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

As
discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets as a result of adopting
Statement of Financial Accounting Standards No. 142,Goodwill and Other Intangible Assets, effective January 1, 2002.

DELOITTE &
TOUCHE LLP

Costa
Mesa, California
February 14, 2003

F-3

---



PRIMAL SOLUTIONS, INC.  CONSOLIDATED BALANCE SHEETS

|                                                                                                                            |                                    | December 31,
2003 |             | December 31,
2002 |  
|--------------------------------------------------------------------------------------------------------------------------- | ---------------------------------- | ----------------- | ----------- | ----------------- | -
|ASSETS                                                                                                                      |                                    |                   |             |                   |  
|CURRENT ASSETS:                                                                                                             |                                    |                   |             |                   |  
|Cash and cash equivalents                                                                                                   |                                    | $                 | 1,249,237   |                   | $
|Accounts receivable, net of allowance for doubtful accounts of $-0- (2003) and $38,467 (2002)                               |                                    |                   | 639,761     |                   |  
|Prepaid expenses and other current assets                                                                                   |                                    |                   | 189,475     |                   |  
|                                                                                                                            |                                    |                   |             |                   |  
|                                                                                                                            | Total current assets               |                   |             | 2,078,473         |  
|PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,125,914 (2003) and $1,203,475 (2002)                          |                                    |                   | 493,407     |                   |  
|GOODWILL                                                                                                                    |                                    |                   | 592,540     |                   |  
|OTHER ASSETS                                                                                                                |                                    |                   | 79,633      |                   |  
|                                                                                                                            |                                    |                   |             |                   |  
|                                                                                                                            |                                    | $                 | 3,244,053   |                   | $
|                                                                                                                            |                                    |                   |             |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                                                              |                                    |                   |             |                   |  
|CURRENT LIABILITIES:                                                                                                        |                                    |                   |             |                   |  
|Accounts payable                                                                                                            |                                    | $                 | 179,503     |                   | $
|Accrued liabilities                                                                                                         |                                    |                   | 262,906     |                   |  
|Accrued salaries and benefits                                                                                               |                                    |                   | 469,151     |                   |  
|Deferred revenue                                                                                                            |                                    |                   | 1,001,773   |                   |  
|Current portion of note payable to Corsair                                                                                  |                                    |                   | 182,256     |                   |  
|Current portion of notes payable                                                                                            |                                    |                   | 120,917     |                   |  
|Current portion of capital lease obligations                                                                                |                                    |                   |            |                   |  
|                                                                                                                            |                                    |                   |             |                   |  
|                                                                                                                            | Total current liabilities          |                   |             | 2,216,506         |  
|NOTE PAYABLE TO CORSAIR, less current portion                                                                               |                                    |                   | 1,371,874   |                   |  
|NOTES PAYABLE, less current portion                                                                                         |                                    |                   | 253,452     |                   |  
|                                                                                                                            |                                    |                   |             |                   |  
|                                                                                                                            | Total liabilities                  |                   |             | 3,841,832         |  
|COMMITMENTS AND CONTINGENCIES (Note 4, 5 and 6)                                                                             |                                    |                   |             |                   |  
|STOCKHOLDERS' EQUITY (DEFICIT):                                                                                             |                                    |                   |             |                   |  
|Preferred stock, $0.01 par value; 5,000,000 authorized; none issued and outstanding                                         |                                    |                   |            |                   |  
|Common stock, $0.01 par value; 95,000,000 shares authorized; 20,968,083 (2003) and 20,131,212 (2002) issued and outstanding |                                    |                   | 209,681     |                   |  
|Additional paid-in capital                                                                                                  |                                    |                   | 11,863,413  |                   |  
|Accumulated deficit                                                                                                         |                                    |                   | (12,670,873 | )                 |  
|                                                                                                                            |                                    |                   |             |                   |  
|                                                                                                                            | Net stockholders' equity (deficit) |                   |             | (597,779          | )
|                                                                                                                            |                                    |                   |             |                   |  
|                                                                                                                            |                                    | $                 | 3,244,053   |                   | $
|                                                                                                                            |                                    |                   |             |                   |  

See
accompanying notes to consolidated financial statements.

F-4

---

PRIMAL SOLUTIONS, INC.  CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                             |                            | For The Year Ended December 31, |           
|------------------------------------------------------------ | -------------------------- | ------------------------------- | ----------
|
|REVENUES:                                                    |                            |                                 |           
|                                                             | System revenue             |                                 | $         
|                                                             | Service revenue            |                                 |           
|                                                             |                            |                                 |           
|                                                             |                            | Total revenues                  |           
|                                                             | Cost of systems            |                                 |           
|                                                             | Cost of services           |                                 |           
|                                                             |                            |                                 |           
|COST OF REVENUES                                             |                            |                                 | 2,936,148 
|                                                             |                            |                                 |           
|GROSS MARGIN                                                 |                            |                                 | 3,580,517 
|OPERATING EXPENSES:                                          |                            |                                 |           
|                                                             | Research and development   |                                 |           
|                                                             | Sales and marketing        |                                 |           
|                                                             | General and administrative |                                 |           
|                                                             |                            |                                 |           
|                                                             |                            | Total operating expenses        |           
|                                                             |                            |                                 |           
|LOSS FROM OPERATIONS                                         |                            |                                 | (71,738   
|INTEREST AND OTHER EXPENSE, net                              |                            |                                 | (205,244  
|                                                             |                            |                                 |           
|LOSS BEFORE INCOME TAX PROVISION                             |                            |                                 | (276,982  
|INCOME TAX PROVISION                                         |                            |                                 | 1,600     
|                                                             |                            |                                 |           
|NET LOSS                                                     |                            | $                               | (278,582  
|                                                             |                            |                                 |           
|Basic and diluted net loss per share                         |                            | $                               | (.01      
|Weighted-average basic and diluted common shares outstanding |                            |                                 | 20,369,380

See
accompanying notes to consolidated financial statements.

F-5

---



PRIMAL SOLUTIONS, INC.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

|                                                                             |                   | Common
shares |            | Amount |       | Additional
paid-in
capital |  | Accumulated
deficit |            | Net
stockholders'
equity
(deficit) |         
|---------------------------------------------------------------------------- | ----------------- | ------------- | ---------- | ------ | ----- | -------------------------- |  | ------------------- | ---------- | ---------------------------------- | --------
|BALANCE,                                                                     |                   |               |            |        |       |                            |  |                     |            |                                    |         
|                                                                             | December 31, 2001 |               | 20,131,212 |        |       | 201,312                    |  |                     | 11,805,614 |                                    |         
|Net loss                                                                     |                   |              |            |        |      |                            |  |                    |            |                                    | (463,341
|                                                                             |                   |               |            |        |       |                            |  |                     |            |                                    |         
|BALANCE,                                                                     |                   |               |            |        |       |                            |  |                     |            |                                    |         
|                                                                             | December 31, 2002 |               | 20,131,212 |        |       | 201,312                    |  |                     | 11,805,614 |                                    |         
|Issuance of common stock to members of the Board of Directors                |                   | 688,235       |            |        | 6,883 |                            |  | 51,617              |            |                                    |        
|Exercise of stock options issued to employees                                |                   | 4,545         |            |        | 45    |                            |  | 273                 |            |                                    |        
|Exercise of stock options issued to employees through cashless exercise, net |                   | 109,091       |            |        | 1,091 |                            |  | (1,091              | )          |                                    |        
|Stock grant to employee                                                      |                   | 35,000        |            |        | 350   |                            |  | 7,000               |            |                                    |        
|Net loss                                                                     |                   |              |            |        |      |                            |  |                    |            |                                    | (278,582
|                                                                             |                   |               |            |        |       |                            |  |                     |            |                                    |         
|BALANCE,                                                                     |                   |               |            |        |       |                            |  |                     |            |                                    |         
|                                                                             | December 31, 2003 |               | 20,968,083 |        | $     | 209,681                    |  | $                   | 11,863,413 |                                    | $       
|                                                                             |                   |               |            |        |       |                            |  |                     |            |                                    |         

See
accompanying notes to consolidated financial statements

F-6

---

PRIMAL SOLUTIONS, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                |                                                                      | For The Year Ended December 31,                  |                                          
|------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ------------------------------------------------ | -----------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                           |                                                                      |                                                  |                                          
|Net loss                                                                        |                                                                      | $                                                | (278,582                                 
|Adjustments to reconcile net loss to net cash provided by operating activities: |                                                                      |                                                  |                                          
|                                                                                | Depreciation and amortization                                        |                                                  |                                          
|                                                                                | Provision for doubtful accounts                                      |                                                  |                                          
|                                                                                | Loss on disposal of equipment                                        |                                                  |                                          
|                                                                                | Non-cash stock based compensation                                    |                                                  |                                          
|                                                                                | Charitable contribution of equipment                                 |                                                  |                                          
|                                                                                | Changes in operating assets and liabilities:                         |                                                  |                                          
|                                                                                |                                                                      | Accounts receivable                              |                                          
|                                                                                |                                                                      | Prepaid expenses and other current assets        |                                          
|                                                                                |                                                                      | Accounts payable                                 |                                          
|                                                                                |                                                                      | Accrued liabilities                              |                                          
|                                                                                |                                                                      | Accrued salaries and benefits                    |                                          
|                                                                                |                                                                      | Increase in non-current accrued interest payable |                                          
|                                                                                |                                                                      | Deferred revenue                                 |                                          
|                                                                                |                                                                      |                                                  |                                          
|                                                                                |                                                                      |                                                  | Net cash provided by operating activities
|CASH FLOWS FROM INVESTING ACTIVITIES:                                           |                                                                      |                                                  |                                          
|Purchases of property and equipment                                             |                                                                      |                                                  | (98,856                                  
|Proceeds from sales of property and equipment                                   |                                                                      |                                                  | 1,244                                    
|                                                                                |                                                                      |                                                  |                                          
|                                                                                |                                                                      | Net cash used in investing activities            |                                          
|CASH FLOWS FROM FINANCING ACTIVITIES:                                           |                                                                      |                                                  |                                          
|Payments on capital lease obligations                                           |                                                                      |                                                  | (2,502                                   
|Proceeds from notes payable                                                     |                                                                      |                                                  | 100,000                                  
|Payments on notes payable                                                       |                                                                      |                                                  | (25,128                                  
|Payments on note payable to Corsair                                             |                                                                      |                                                  | (165,078                                 
|Proceeds from issuance of common stock                                          |                                                                      |                                                  | 50,318                                   
|                                                                                |                                                                      |                                                  |                                          
|                                                                                |                                                                      | Net cash used in financing activities            |                                          
|                                                                                |                                                                      |                                                  |                                          
|INCREASE IN CASH AND CASH EQUIVALENTS                                           |                                                                      |                                                  | 65,915                                   
|CASH AND CASH EQUIVALENTS, beginning of the year                                |                                                                      |                                                  | 1,183,322                                
|                                                                                |                                                                      |                                                  |                                          
|CASH AND CASH EQUIVALENTS, end of the year                                      |                                                                      | $                                                | 1,249,237                                
|                                                                                |                                                                      |                                                  |                                          
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                               |                                                                      |                                                  |                                          
|Cash paid during the year for:                                                  |                                                                      |                                                  |                                          
|                                                                                | Interest                                                             |                                                  | $                                        
|                                                                                |                                                                      |                                                  |                                          
|                                                                                | Income taxes                                                         |                                                  | $                                        
|                                                                                |                                                                      |                                                  |                                          
|NONCASH INVESTING AND FINANCING ACTIVITIES:                                     |                                                                      |                                                  |                                          
|                                                                                | Issuance of common stock in satisfaction of liability (see Note 11). |                                                  | $                                        
|                                                                                |                                                                      |                                                  |                                          

See
accompanying notes to consolidated financial statements

F-7

---



PRIMAL SOLUTIONS, INC. AND SUBSIDIARY        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     BASIS OF PRESENTATION, ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Organization and Nature of OperationsPrimal Systems, Inc. was incorporated on June 28,
1996 to provide computer software programming, customization, program maintenance, and product marketing for a variety of software languages and platforms. During 1999, Primal Systems, Inc.
acquired certain assets from Corsair Communications, Inc. through its wholly owned subsidiary, Wireless Billing Systems, which provides software and services to the telecommunications industry.
Effective October 1, 1999, Primal Systems, Inc. was merged with and into a wholly-owned subsidiary of Avery Communications, Inc. ("Avery"), ACI Telecommunications Financial
Services, and the surviving company changed its name to Primal Solutions, Inc. Primal Solutions, Inc., and its subsidiary, Wireless Billing Systems, (the "Company"), develop, market and
support convergent network mediation and convergent integrated billing software for providers of voice and data transmission services using the Internet and wireless networks.

The
Company was spun-off as a separate public company by Avery in February 2001. On February 13, 2001 and in connection with the Distribution Agreement, Avery
distributed approximately 13.2 million shares of common stock of the Company to Avery's securityholders (the "Distribution"). As part of the Distribution:



Basis of PresentationThe accompanying consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America.

Principles of ConsolidationThe accompanying consolidated financial statements include the accounts of Primal
Solutions, Inc. and its wholly owned subsidiary, Wireless Billing Systems. Intercompany accounts and transactions have been eliminated.

Cash EquivalentsThe Company considers all highly liquid debt instruments purchased with an original maturity of three months
or less to be cash equivalents. Substantially all of the Company's cash and cash equivalents are held at one bank at December 31, 2003 and 2002. As of December 31, 2003 and 2002, the
Company has $1.0 million on deposit with this bank that exceeds the federally insured limit.

F-8

---

Property and EquipmentProperty and equipment are stated at cost. Depreciation and amortization are provided on the
straight-line method over the following estimated useful lives:

|Computer and office equipment |  | 2 to 5 years                                             
|----------------------------- |  | ---------------------------------------------------------
|Furniture and fixtures        |  | 7 years                                                  
|Leasehold improvements        |  | Shorter of the estimated useful life or life of the lease

Maintenance
and repairs are charged to expense as incurred. Renewal and improvements of a major nature are capitalized.

Long-Lived AssetsIn the first quarter of fiscal 2002, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 establishes a single
accounting model, based on the framework established in SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, for long-lived assets to be disposed of by sale, and resolves implementation issues related to SFAS No. 121. The adoption of SFAS
No. 144 did not have a material impact on the Company's operating results or financial position.

Property
and equipment, definite life intangible assets, and capitalized software costs are recorded at cost less accumulated depreciation or amortization. They are amortized using the
straight-line method over estimated useful lives of three years to seven years. The determination of useful lives and whether or not these assets are impaired involves judgment and such
assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. The Company evaluates the carrying value of
long-lived assets and definite life identifiable intangible assets for impairment of value based on undiscounted future cash flows resulting from the use of the asset and its eventual
disposition. While the Company did not experience impairment of intangible assets in prior periods, it cannot guarantee that there will not be impairment in the future.

Accounting for Goodwill and Other Intangible AssetsOn January 1, 2002 the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. SFAS
No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be
amortized. It also establishes a new method of testing goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of
a reporting unit below its carrying value, and, required the transitional testing of goodwill for impairment under the new standard by June 30, 2002. Management has completed a review of each
of the Company's reporting units, Systems and Services, and has concluded that the fair value of each reporting unit exceeds its carrying value, indicating no goodwill impairment is present as of
January 1, 2002, September 30, 2002 and 2003. Management will
continue to complete an annual testing of goodwill for impairment on September 30th of each year. Such fair value measurements involve significant estimates and assumptions,
including the future cash flows, comparable market multiples and discount rates. Changes in such estimates and assumptions could significantly affect the fair value and potential impairment.

Software Licenses, Services, and Post-Contract Customer SupportRevenues from sales of software licenses (systems
revenue), which generally do not contain multiple elements, are recognized upon delivery of the related product if the requirements of Statement of Position ("SOP") No. 97-2, Software Revenue Recognition, as amended, are met. If the requirements of SOP No. 97-2, including evidence of an arrangement, client
acceptance, a fixed or determinable fee, collectibility or vendor-specific objective evidence about the value of an element are not met at the date of delivery and passage of title,

F-9

---

revenue
recognition is deferred until such items are known or resolved. Revenue from service and post-contract customer support is deferred and recognized ratably over the term of the
contract.

The
AICPA and its Software Revenue Recognition Task Force continue to issue interpretations and guidance for applying the relevant standards to a wide range of sales contract terms and
business arrangements that are prevalent in the software industry. Also, the Securities and Exchange Commission ("SEC") has issued Staff Accounting Bulletin No. 101
"Revenue Recognition in Financial Statements,"which provides guidance related to revenue recognition based on interpretations and practices followed by
the SEC. Future interpretations of existing accounting standards or changes in the Company's business practice could result in future changes in the Company's revenue accounting policies that could
have a material adverse effect on the Company's business, financial condition and results of operations.

Software Programming and Customization ServicesRevenues are recognized as services are performed under the agreements and are
included in systems revenue in the accompanying consolidated financial statements.

Software Development CostsCosts incurred in the research and development of new software products and enhancements to
existing software products are expensed as incurred until technological feasibility has been established. After technological feasibility is established, any additional costs would be capitalized in
accordance with SFAS No. 86,Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed. Because the Company believes
that its current process for developing software is essentially completed concurrently with the establishment of technological feasibility, no software development costs have been capitalized as of
December 31, 2003 and 2002.

Advertising CostsAdvertising costs are expensed as incurred. The Company did not incur any significant advertising costs for
any periods presented.

Income TaxesIncome taxes are accounted for in accordance with SFAS No. 109,Accounting for
Income Taxes. This statement requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and
tax bases of the Company's assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated
by such assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or all of the deferred tax asset will not be realized. A full
valuation allowance for deferred tax assets has been provided at December 31, 2003 and 2002.

Accounting for Stock-Based CompensationSFAS No. 123,Accounting for Stock-Based
Compensation,requires disclosure of the fair value method of accounting for stock options and other equity instruments. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is recognized over the service period which is usually the vesting period. The Company has chosen, under the provisions of SFAS
No. 123, to account for employee stock-based transactions under Accounting Principles Board ("APB") Opinion No. 25,Accounting for Stock Issued to
Employees.Under APB No. 25, no compensation expense is generally recognized as long as the exercise price of each stock option is at least equal to the market price of
the underlying stock at the time of the grant. If an entity chooses to use the accounting method described in APB No. 25, SFAS No. 123 requires that the pro forma effect of using the
fair value method of accounting on its net income be disclosed in a note to the financial statements. The Company has chosen to use the accounting method described in APB No. 25.

F-10

---

In
December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148,Accounting for Stock-Based Compensation Transition and
Disclosure, an amendment of SFAS No. 123. This statement amends SFAS No. 123,Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported results. The Company has adopted the disclosure provisions of SFAS No. 148, and does not expect any impact on its
financial position or results of operations as a result of the adoption since it has not elected to adopt the fair value method.

At
December 31, 2003, the Company had one stock-based employee compensation plan, which is described in Note 6. The Company accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25,Accounting for Stock Issued to Employees,and related Interpretations.
No stock-based employee compensation cost is reflected in net loss, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date
of grant. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,to stock-based employee compensation.

Year Ended December 312003

2002Net loss, as reported

$
(278,582
)
$
(463,341
)Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


(69,020
)

(50,293
)Pro Forma net loss

$
(347,602
)
$
(513,634
)Net loss per share:Basic and Diluted-as reported

$
(0.01
)
$
(0.02
)Basic and Diluted-pro forma

$
(0.02
)
$
(0.03
)


The
fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in
2003: expected volatility of 162%; risk-free interest rate of 2.00%; and a weighted-average contractual life of 10 years. The following weighted-average assumptions used for grants
in 2002: expected volatility of 162%; risk-free interest rate of 4.00%; and a weighted-average contractual life of 10 years.

Concentration of Credit RiskThe Company sells its products to large communications companies, as well as emerging
communications carriers. Credit is extended based on an evaluation of the customer's financial condition, and collateral is generally not required. The Company also evaluates
its credit customers for potential credit losses. The accounts receivable balances at December 31, 2003 and 2002 are primarily due from the major customers indicated below.

In
the year ended December 31, 2003, the Company had one customer that accounted for greater than 10% of the Company's total revenues in the amount of $4.5 million. In the
year ended December 31, 2002, the Company had two customers that accounted for greater than 10% of the Company's total revenues in the amount of $4.6 million and $713,000, respectively.
At December 31, 2003, the Company had three customers that accounted for greater than 10% of the accounts

F-11

---

receivable
balance in the amount of $628,000. At December 31, 2002, the Company had two customers that accounted for greater than 10% of the accounts receivable balance in the amount of
$370,000.

Fair Value of Financial InstrumentsThe recorded amounts of financial assets and liabilities at December 31, 2003 and
2002 approximate fair value, based on the Company's incremental borrowing rate or due to the relatively short period of time between origination of the instruments and their expected realization.

Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Comprehensive LossThere was no difference between net loss and comprehensive loss for any period presented.

Segment InformationThe Company has adopted SFAS No. 131,Disclosures About Segments of an
Enterprise and Related Information. In accordance with SFAS No. 131, the Company has disclosed in Note 10 the required information about the Company's operating
segments and geographic areas.

Recently Adopted Accounting Principles

On January 1, 2003, the Company adopted SFAS No. 143,Accounting for Asset Retirement Obligations,which addresses financial and reporting for obligations associated with the retirement of
long-lived assets and related asset retirement costs. SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its
associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. The adoption of SFAS
No. 143 did not have a material impact on the Company's consolidated financial statements.

On
January 1, 2003, the Company adopted SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities,
which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes EITF Issue 94-3,Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability
for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost, as defined in EITF Issue
94-3, was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value.
The adoption of SFAS No. 146 did not have a material impact on the Company's consolidated financial statements.

On
January 1, 2003, the Company adopted FASB Interpretation ("FIN") No. 45,Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 requires increased financial statement disclosures by a guarantor about its obligations under certain
guarantees it has issued. FIN No. 45 also requires that a guarantor recognize a liability for the fair value of a certain guarantees made after December 31, 2002. The adoption of FIN
No. 45 did not have any material impact on the Company's consolidated financial statements.

In
January 2003, the FASB issued FIN No. 46,Consolidation of Variable Interest Entities. In general, a variable interest
entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity

F-12

---

investors
that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires a variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of
FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest
entity was established. The Company did not have any variable interest entities as of December 31, 2002 and 2003. The adoption of FIN No. 46 did not have a material impact on the
Company's consolidated financial statements.

In
December 2003, the Financial Accounting Standards Board ("FASB") issued a revision to Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51 ("FIN 46R"). FIN 46R clarifies the application of ARB 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 provided by any parties, including the equity holders. FIN 46R requires the consolidation of these entities, known as variable interest entities ("VIEs"), by
the primary beneficiary of the entity. The primary beneficiary is the entity, if any, that will absorb a majority of the entity's expected losses, receive a majority of the entity's expected residual
returns, or both.

Among
other changes, the revisions of FIN 46R (a) clarified some requirements of the original FIN 46, which had been issued in January 2003, (b) eased some
implementation problems, and (c) added new scope exceptions. FIN 46R deferred the effective date of the Interpretation for public companies to the end of the first reporting period ending after
March 15, 2004, except that all public companies must, at a minimum, apply the unmodified provisions of the Interpretation to entities that were previously considered "special-purpose entities"
in practice and under the FASB literature prior to the issuance of FIN 46R by the end of the first reporting period ending after December 15, 2003. As of December 31, 2003 and 2002,
management believes that the Company is not the primary beneficiary of any VIE's.

In
May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity("SFAS 150"). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity. SFAS 150 applies specifically to a number of financial instruments that companies have historically presented within their financial statements either as equity or
between the liabilities section and the equity section, rather than as liabilities. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. However, in November 2003, the FASB issued Staff Position No. 150-3, which defers the
effective date for certain provisions of the statement. Once required in its entirety, SFAS 150 is not expected to have a material impact on the Company's consolidated financial statements.

Net Loss Per ShareThe Company has computed net loss per share in accordance with SFAS No. 128, Earnings Per Share. Basic and diluted net loss per share was
computed by dividing net loss by the weighted-average number of common shares outstanding
for the period.

F-13

---

The
following table represents the computation of basic and diluted loss per common share for the periods presented:

Year Ended12/31/03

12/31/02Numerator:Numerator for basic loss per shareNet loss applicable to common stockholders

$
(278,582
)
$
(463,341
)Denominator:Denominator for basic and diluted loss per share





Weighted-average shares outstanding during the period


20,369,380


20,131,212Net loss per share:Basic and Diluted

$
(0.01
)
$
(0.02
)


Not
included in the above table are the dilutive effect of options to purchase 1,150,982 shares of common stock for the year ended December 31, 2003 and 239,070 shares of common
stock for the year ended December 31, 2002 because they are anti-dilutive.

ReclassificationCertain prior year amounts were reclassified to conform with the current year presentation.

2.     PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31:

2003

2002Computer and office equipment

$
1,489,861

$
1,897,156Furniture and fixtures


92,511


91,383Leasehold improvements


36,949


36,9491,619,321


2,025,488Less accumulated depreciation and amortization


(1,125,914
)

(1,203,475
)Property and equipment, net

$
493,407

$
822,013


Amortization
of equipment purchased under capitalized lease obligations is included in depreciation expense. There are no property and equipment under capital leases at
December 31, 2003. Included in property and equipment is equipment under capital leases of $5,796 at December 31, 2002. Accumulated depreciation related to equipment under capital leases
amounted to $5,152 at December 31, 2002.

F-14

---



3.     NOTES PAYABLE

The following table represents principal balances due under the notes payable:

Current

Non current

TotalDecember 31, 2003:Corsair Communications, Inc.

$
182,256

$
1,371,874

$
1,554,130Spieker Properties, L.P.





250,242


250,242Sunwest Bank


120,917





120,917Total

$
303,173

$
1,622,116

$
1,925,289December 31, 2002:Corsair Communications, Inc.

$
168,288

$
1,554,130

$
1,722,418Spieker Properties, L.P.





228,780


228,780Sunwest Bank


25,128


20,917


46,045Total

$
193,416

$
1,803,827

$
1,997,243


Note Payable to Corsair Communication, Inc. (see Note 12)

On February 4, 1999, Corsair Communications, Inc. ("Corsair") and its wholly-owned subsidiary, Subscriber Computing, Inc., sold substantially
all of the assets relating to Subscriber's Communication Resource Manager billing system and Intelligent Message Router to Wireless Billing Systems, a recently formed and wholly owned subsidiary of
Primal Systems, Inc. As consideration for the agreement, the Company paid Corsair $2,238,242 by issuing a note payable to Corsair. The note payable bears interest at 10% and is secured by
substantially all the property and equipment that was acquired from Corsair. Principal and interest are payable monthly with all unpaid principal and interest originally due May 2001. The
Company recorded the assets at fair value of $4,581,889 and assumed liabilities of $2,343,647, in addition to the note payable to Corsair.

In
January 2001, the Company amended the terms of and refinanced the Corsair note payable originally due in May 2001. Also, certain other liabilities due to Corsair
totaling $50,528 were added to the principal balance of the amended note. The interest rate of the amended note increased to 16% starting in May 2001, and the note was payable in approximately
36 monthly installments, beginning June 2001, and is due May 2004.

In
December 2001, the Company again amended the terms of the Corsair note payable. At the time of the amendment, the accrued interest was $185,903. As per the terms of the
amendment, the Company paid $125,000 of the accrued interest, and the remaining $60,903 was reclassified to the principal balance of the note making the principal balance $1,722,418 at
December 31, 2001. The amended terms of the note also extended the maturity of the note from May 2004 to December 2004, required no principal payments to be made in 2002 and
adjusted the interest rate of the note to 8%.

In
December 2002, the Company signed a letter of intent to amend the terms of the Corsair note payable. Per the terms of the letter of intent, the principal and interest payments
scheduled to begin in January 2003 have been reduced to $25,000 for 2003 and 2004 with a balloon payment of $1.4 million due at maturity of the note in December 2004. In
July 2003, the Company formally completed the 2002 Amended and Restated Secured Promissory Note.

F-15

---

Note Payable to Spieker Properties, L.P.

In June 2001, the Company and its landlord amended its occupancy lease to reduce costs related to unneeded space and corresponding rental payments. As part
of the amendment, the Company agreed to sign a note for $200,000 which carries an interest rate of 9%, and there are no principal or interest payments due until April 2007.

Note Payable to Sunwest Bank.

In May 2002, the Company entered into two loan agreements with Sunwest Bank. One loan agreement is structured as an equipment line of credit facility for
$100,000. The second loan agreement is structured as a $100,000 operating line of credit. Any borrowings under the equipment line of credit are to be repaid with amortizing payments at an adjustable
interest rate of prime plus 2.25% (6.50%, at December 31, 2003) due in October 2004, and any borrowings under the operating line of credit are to be repaid at maturity,
August 2004, with accrued interest paid monthly at a rate of prime plus 2.0% (6.50%, at December 31, 2003). The loan agreement does not include any specific financial covenants that the
Company is required to meet, however the Company is required to inform Sunwest Bank of 1) all material adverse changes to the Company's financial condition and 2) all existing and
threatened litigation or claims that could materially affect the financial condition of the Company.

In
May 2002, the Company drew down on the equipment line of credit to finance a $60,704 purchase of computer equipment.    At December 31, 2003, the balance of
the loan was $20,916.

In
February 2003, the Company drew down $100,000 on the operating line of credit to finance a portion of the annual premium for an insurance policy. At December 31, 2003,
the balance of the loan was $100,000.

The
following table represents the contractual payments associated with the notes payable as of December 31, 2003:

Interest
Payments

Principal
Payments

Total
PaymentsYear ending December 31:2004

$
118,375

$
303,173

$
421,5482005


85,949


658,605


744,5542006


31,285


713,269


744,5542007


87,188


250,242


337,4302008








Total

$
322,797

$
1,925,289

$
2,248,086


F-16

---

4.     COMMITMENTS AND CONTINGENCIES

The Company leases office space and certain equipment under various noncancelable operating and capital leases (Note 12). Future minimum lease payments
required under operating leases, net of sublease income, as of December 31, 2003 are as follows:

Sublease
(Income)

Operating
Leases

NetYear ending December 31:2004

$
(40,574
)
$
396,243

$
355,6692005


(43,656
)

412,269


368,6132006


(15,515
)

428,849


413,3342007





144,792


144,792Total minimum lease payments

$
(99,745
)
$
1,382,153

$
1,282,408


Rent
expense under such operating leases was $382,627and $437,362 for the years ended December 31, 2003 and 2002, respectively.

The
Company is subject to various legal proceedings from time to time as part of its business. The Company does not believe that it is currently party to any legal proceedings or
threatened legal
proceedings, the adverse outcome of which, individually or in the aggregate, would have a material adverse effect on its business, financial condition and results of operations.

5.     GUARANTEES AND INDEMNIFICATIONS

The Company has made guarantees and indemnities, under which it may be required to make payments to a third-party, in relation to certain transactions. In
connection with the sales of its products, the Company provides intellectual property indemnities to its customers. Guarantees and indemnities to customers in connection with product sales generally
are subject to limits based on the amount of the related product sales. The Company also indemnifies its directors and officers to the maximum extent permitted under applicable law in effect. The
Company has not recorded any liability for these guarantees and indemnities in the accompanying consolidated balance sheets. The Company considers such factors as the degree of probability of an
unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. To date, the Company has not encountered material costs as a result of such obligations and have not accrued
any liabilities related to such indemnification in its financial statements.

The
Company generally warrants its products for a period of three months from the date of acceptance of the product by its customers. Warranty costs have historically been minimal.

6.     STOCK-BASED COMPENSATION

Stock Options



In February 2001, the Board of Directors approved the Company's 2001 Flexible Incentive Plan (the "Stock Option Plan") and authorized approximately
3,900,000 shares to be reserved for issuance pursuant to the Stock Option Plan. In October 2001, upon the approval of the Stock Option Plan by the Department of Corporations of the State of
California, the Board of Directors approved the

F-17

---

Company's
Stock Option Plan, as amended. Under the terms of the Stock Option Plan, as amended, employees and directors are eligible to receive a grant of incentive stock options to purchase shares of
the Company's common stock at their fair market value on the date of grant. Options granted under the Stock Option Plan vest at the minimum rate of 20% per year from the grant date, but could vest at
an accelerated rate. Options to purchase an aggregate of 2,180,964 shares at prices ranging from $0.06 to $0.07 per share were granted with exercise price at fair value on the date of the grant during
the year ended December 31, 2003. Options to purchase an aggregate of 740,150 shares at prices ranging from $0.03 to $0.07 per share were granted with exercise price at fair value on the date
of the grant during the year ended December 31, 2002. At December 31, 2003 and 2002, options to purchase 1,714,897 and 1,527,524 shares, respectively, of common stock were exercisable
under the Stock Option Plan.

During
2002, the Company issued 740,150 options to purchase commons stock at a weighted-average price of $0.04 per share, fair market value at the time of the grant. Options to purchase
65,000 shares vested immediately upon grant, and the remaining 675,150 options vest proportionately every three months over a three-year period from the date of the grant.

During
2003, the Company issued 2,180,964 options to purchase commons stock at a weighted-average price of $0.06 per share, fair market value at the time of the grant. Options to
purchase 1,000,000 shares vest proportionately every three months over a two-year period from the date of the grant and the remaining 1,180,964 options vest proportionately every three
months over a three-year period from the date of the grant.



Outside of the Stock Option Plan, certain options to purchase common stock were granted as follows:



At
December 31, 2003 and December 31, 2002, options / warrants to purchase 759,312 and 509,312 shares, respectively, of common stock were exercisable from grants outside
the Stock Option Plan.

F-18

---

Information
regarding all stock options issued is as follows:

Number of
Options

Weighted-
Average
Exercise
PriceBalances, December 31, 2001

2,773,134

$
0.06Granted (weighted-average fair value of $0.04)

740,150


0.04Exercised




Canceled

(234,354
)

0.07Balances, December 31, 2002

3,278,930

$
0.06Granted (weighted-average fair value of $0.06)

2,180,964


0.06Exercised

(113,636
)

0.07Canceled

(566,103
)

0.07Balances, December 31, 2003

4,780,155

$
0.06


The
following table summarizes information concerning currently outstanding and exercisable options:

Options Outstanding

Options ExercisableRange of
Exercise Price

Number
Outstanding

Weighted-
Average
Remaining
Contractual
Life

Weighted-
Average
Exercise
Price

Number
Exercisable

Weighted-
Average
Exercise
Price$0.03

509,312

1.72

$
0.03

509,312

$
0.03$0.03

547,850

8.87

$
0.03

182,615

$
0.03$0.05

1,115,000

9.24

$
0.05

340,000

$
0.05$0.06

820,964

9.55

$
0.06

68,411

$
0.06$0.07

1,427,029

7.86

$
0.07

1,343,872

$
0.07$0.08

360,000

9.63

$
0.08

30,000

$
0.08$0.03 to $0.08

4,780,155

8.07

$
0.06

2,474,210

$
0.07


7.     GOODWILL

The Company merged with Avery on October 1, 1999. In connection with the merger and subsequent spin-off on February 9, 2001, the Company
recorded a total of $8.3 million in goodwill representing the difference between the purchase price Avery paid over the estimated fair market value of the net assets of the Company. On
February 9, 2001, the Company was spun-off as a separate company by Avery. However, the goodwill, which was pushed-down to the Company's balance sheet by the parent,
Avery, at the time of the merger, remained on the Company's balance sheet at the time it was spun-off.

Since
the spin-off from Avery on February 9, 2001, the economic condition of the communications industry in particular, and the economy in general, has continued to
deteriorate. The Company has significantly reduced personnel and expenses during 2001, and the current cash flow forecasts have been reduced significantly as compared to the forecast used at the time
of the Avery transactions. Also, the Company's market capitalization has decreased significantly from the spin-off date. As a result, during the quarter ended September 30, 2001,
goodwill was deemed impaired, and the Company

F-19

---

recorded
a charge of $5.6 million to reflect the write down of goodwill to its estimated recoverable value.

In
2001, the Company adopted SFAS No. 141,Business Combinations, and on January 1, 2002 the Company adopted SFAS
No. 142,Goodwill and Other Intangible Assets. SFAS No. 141 requires use of the purchase method of accounting for business combinations
initiated after June 30, 2001. The adoption of SFAS No. 141 did not have a material impact on the Company's consolidated financial statements. SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized. It also establishes a new method of testing goodwill for impairment on an annual basis or on an
interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value, and required the testing of goodwill for impairment under the
new standard by June 30, 2002. Management completed reviews of each of the Company's reporting units, Systems and Services, and has concluded that the fair value of each reporting unit exceeds
its carrying value, indicating no goodwill impairment is present as of January 1, 2002, September 30, 2002 and 2003. Management will continue to complete an annual testing of goodwill
for impairment on September 30th of each year. Such fair value measurements involve significant estimates and assumptions, including the future cash flows, comparable market
multiples and discount rates. Changes in such estimates and assumptions could significantly affect the fair value and potential impairment.

8.     EMPLOYEE BENEFITS

The Company has a qualified 401(k) retirement plan (the "Plan") for its full-time employees and makes contributions at the discretion of the Board of
Directors. Total contributions to the Plan were none and $30,319 for the years ended December 31, 2003 and 2002.

9.     INCOME TAXES

For each of the years ended December 31, 2003 and 2002, the expense for income taxes was $1,600. The expense for income taxes for the years ended
December 31, 2002 and 2001 reflects the minimum tax due in California.

A
reconciliation of the provision for the income taxes to the amount of income tax expense that would result from applying the federal statutory rate of 34% to income before provision
for income taxes is as follows:

2003

2002Benefit at statutory rate

$
(94,270
)
$
(161,610
)State taxes, net of federal benefit


5,298


(13,157
)Adjustment of net operating loss and credit carryforwards


30,041


277,967Change in valuation allowance


65,579


(110,552
)Other


(5,048
)

8,952$
1,600

$
1,600


F-20

---

The
tax effects of temporary differences used in determining the Company's deferred tax assets and liabilities are presented below at December 31, 2003 and 2002:

2003

2002Deferred tax assets:Net operating loss carryforwards

$
576,474

$
605,688Bad debt allowances





16,479Accruals


209,524


123,228Credits


316,829


302,948State taxes


2,730


Other


27,091


24,135Total deferred tax assets


1,132,648


1,072,478Less valuation allowance


(1,020,920
)

(955,341
)Net deferred tax assets


111,728


117,137Deferred tax liabilities:Basis difference in fixed assets


(111,728
)

(70,916
)State taxes





(46,221
)Total deferred tax liabilities


(111,728
)

(117,137
)Net deferred tax assets

$


$



Based
upon uncertainties related to the Company's ability to generate sufficient taxable income in the future to realize its deferred tax assets, a full valuation allowance has been
provided for the years ended December 31, 2003 and December 31, 2002, as it is more likely than not that the Company's deferred tax asset will not be realized.

At
December 31, 2003, the Company's federal and state loss carryforwards are $1,477,916 and $839,679 and will begin to expire in 2019 and 2006, respectively. The Company's
research and development credit carryforward is $314,754 and will begin to expire in 2019. However, the net operating loss and research and development credit may change due to utilization within the
Avery consolidated group.

As
a result of the merger of Primal Systems, Inc. with and into Avery (see Note 1), the Company's annual use of Primal Systems, Inc.'s net operating losses were
limited under Section 382 of the Internal Revenue Code to approximately $160,000 annually.

In
2001, an adjustment was made to eliminate approximately $2 million of federal net operating loss carryforwards, previously accounted for by the Company on a separate return
basis and used by Avery, that are not available to the Company after the spin-off. In 2002, an additional adjustment was made to eliminate approximately $640,000 of federal net operating
loss carryforwards. An offsetting adjustment was made to the valuation allowance with no effect on the income tax provision or net income.

10.   SEGMENT AND GEOGRAPHIC INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company's
chief operating decision maker, or

F-21

---

decision-making
group, in deciding how to allocate resources and in assessing performance. The operating segments of the Company are managed separately because each segment represents a strategic
business unit that offers different products or services.

The
Company's reportable operating segments include Systems and Services. The Systems operating segment develops and markets the Company's integrated suite of client/server and
browser-based software solutions. The Services segment provides after-sale support for software products, programming, maintenance, customization, consulting and application management and
hosting services related to the Company's products and a variety of software languages and platforms.

The
Company does not separately allocate operating expenses to these segments, nor does it allocate specific assets to these segments. Therefore, segment information reported includes
only revenues, cost of revenues, and gross margin, as this information is the only segment-related information provided to the chief operating decision maker.

Operating
segment data for years ended December 31, 2003 and 2002 were as follows:.

Systems

Services

TotalYear ended December 31, 2003Revenues

$
2,548,980

$
3,967,685

$
6,516,665Cost of Revenues


244,107


2,692,041


2,936,148Gross Profit

$
2,304,873

$
1,275,644

$
3,580,517Year ended December 31, 2002Revenues

$
2,140,677

$
3,987,268

$
6,127,945Cost of Revenues


19,987


1,928,348


1,948,335Gross Profit

$
2,120,690

$
2,058,920

$
4,179,610


Revenues
are attributed to geographic areas based on the location of the entity to which the products or services were sold. Revenues, gross profit, loss from operations, and
long-lived assets concerning principal geographic areas in which the Company operates are as follows:

North America

Asia / Pacific

Europe

TotalYear ended December 31, 2003Revenues

$
5,492,439

$
609,055

$
415,171

$
6,516,665Gross Profit


3,017,776


334,639


228,112


3,580,517Net Loss


(234,797
)

(26,037
)

(17,748
)

(278,582
)Property and Equipment, net


493,407








493,407Year ended December 31, 2002Revenues

$
4,845,081

$
829,884

$
452,980

$
6,127,945Gross Profit


3,304,624


566,028


308,958


4,179,610Net Loss


(366,343
)

(62,748
)

(34,250
)

(463,341
)Property and Equipment, net


822,013








822,013


F-22

---

Revenues
from significant countries were as follows:

Australia

United Kingdom

United StatesYear ended December 31, 2003

$
609,055

$
415,171

$
5,456,940Year ended December 31, 2002

$
712,830

$
427,619

$
4,782,882


11.   RELATED PARTY TRANSACTION

In September 2003, the Board of Directors approved and completed the sale of 688,235 shares of our common stock to members of the Board of Directors at a
price equal to fair market value.

12.   SUBSEQUENT EVENTS

In February 2004, the Company entered into a lease agreement for an additional 7,000 square feet which includes a datacenter and general and administrative
office space in Irvine, California with a monthly rent payment of approximately $9,000. This new lease expires May 2006.

In
March 2004, the Company amended the terms of the note with Corsair which extends the maturity date to December 2006 and converts the note to fully-amortizing payments of
approximately $60,000 beginning January 2005. At December 31, 2003, the balance of the note was $1.6 million.

F-23

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