As filed with the Securities and Exchange Commission on March 28, 2003

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UNITED STATESSECURITIES 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, 2002                                    

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

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|18881 Von Karman Avenue
Suite 500
Irvine, California          |  | 92612     
|------------------------------------------------------------- |  | ----------
|(Address and telephone number of
Principal Executive Offices) |  | (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:

$
6,127,945State 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,
2003

$
776,000Number of shares of Common Stock ($0.01 par value) outstanding as of the close of business on March 17, 2003:


20,131,212


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PRIMAL SOLUTIONS, INC. AND SUBSIDIARY        TABLE OF CONTENTS

|         |  |                                                                                                                 |  | Page
|-------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|PART I  
|Item 1.  |  | Business                                                                                                        |  | 2   
|Item 2.  |  | Property                                                                                                        |  | 17  
|Item 3.  |  | Legal Proceedings                                                                                               |  | 17  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                             |  | 17  
|PART II 
|Item 5.  |  | Market for Common Equity and Related Stockholder Matters                                                        |  | 18  
|Item 6.  |  | Management's Discussion and Analysis                                                                            |  | 19  
|Item 7.  |  | Financial Statements                                                                                            |  | 31  
|Item 8.  |  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                            |  | 31  
|PART III
|Item 9.  |  | Directors, Executive Officers, Promoters and Control Persons, Compliance With Section 16(a) of the Exchange Act |  | 32  
|Item 10. |  | Executive Compensation                                                                                          |  | 33  
|Item 11. |  | Security Ownership of Certain Beneficial Owners and Management                                                  |  | 37  
|Item 12. |  | Certain Relationships and Related Transactions                                                                  |  | 40  
|Item 13. |  | Exhibits and Reports on Form 8-K                                                                                |  | 40  
|Item 14. |  | Controls and Procedures                                                                                         |  | 42  

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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.

Primal
Solutions, Inc., and its subsidiary Wireless Billing Systems, ("Primal" or the "Company") deliver communications software solutions that allow Communications Service
Providers ("CSP") using internet protocol technology to generate revenue from their internet protocol networks ("IP networks"). IP networks provide a lower cost alternative from traditional
circuit-based network infrastructure and allow new enhanced services to be introduced more rapidly on existing data networks. Examples of these new enhanced services include broadband data services;
unified communications; and voice over IP networks ("VOIP"), including voice over cable and international long distance communication using IP networks. Primal's communications software products
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.

During
2001, the communications industry experienced a world-wide economic downturn, which has resulted in delayed capital spending by the large, established CSPs and
consolidation in the number of start-up, or emerging CSPs. During 2002, capital spending in the communications industry continued to decline. Large established CSPs delayed capital
spending for equipment and related software. The number of emerging or start up CSPs also continued to decline through market consolidation.
However, the demand for the "next-generation" technology that provides communications services using IP networks continues to grow.

In
order to respond to these market conditions, Primal has focused its marketing and product strategy on IP networks. Primal believes that the greatest opportunity for growth in sales of
both its products and services will be for CSPs who utilize IP networks for voice and data services. While there may be a few opportunities for providing Primal's products and services to CSPs who
have both circuit and IP networks, we believe that these opportunities will continue to decline as most CSPs with both types of networks currently rely on the circuit-based network to collect data to
generate revenue.

The
primary markets that show signs of growth opportunities for our products and services are broadband and cable multiple service operators ("MSO"), international long distance using
voice over internet protocol ("VOIP"), and enhanced services combining voice and data capabilities. In addition to licensing software products to these markets, there is also an opportunity to provide
our products in a managed service arrangement where Primal would manage, maintain and support the operating and business support software applications for the CSP. Primal believes there is a growing
interest by CSPs to look to software vendors, such as Primal, for such outsourcing services to accelerate the introduction of new services into their markets, decrease operating costs, and increase
overall operational efficiency.

Products

Primal's products are Access IM®network mediation; Connect RTRreal-time rating; Connect
EBP&Pelectronic bill presentment and payment; Connect Prepayprepaid billing; and Connect CCB®integrated customer care and
billing.

In
addition to providing individual software products, Primal has integrated selected products to create bundled solutions tailored to specific market needs.
Connect IXC is an example of a bundled

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solution that includes integrated mediation and rating to allow a CSP to quickly roll-out a new service and generate a usage-based billing record that can in turn be used by the CSP's
existing billing system. This bundled solution simplifies and quickens the rollout of new services by reducing the number of different systems potentially required to generate billing records for the
new services thereby allowing the CSP to begin generating revenue sooner from these new services.



Access IM Network Mediation 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. The critical functionality of Access IM includes:



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.



Connect RTR Rating is the real time application that assigns a 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 this critical functionality for CSPs. This functionality includes:



Connect
RTR can be installed as a stand-alone product so a CSP can acquire the Connect RTR software and use it with an existing mediation or billing system.



Connect Prepay Prepaid Billing services allow a subscriber to establish a debit account with a CSP. As the subscriber places calls, his/her account is charged for
services in real-time. Connect Prepay is a

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software solution that provides integration of three applications that are essential for pre-paid services: the Call Host, the Rating server and the Calling Card Manager.

The
Call Host application is the link between the CSP's network and its customer. The Prepay Host receives incoming requests for calls, triggers appropriate voice messages, authorizes
calls based on the monetary value of the call and then, sends the instructions to the network for initiation and termination of a call or service ("call set up and tear down").

The
Rating server communicates with the Call Host application. It evaluates the calls that are initiated to determine the allowable duration or services authorized for the customer.
After a call is terminated, it converts the events into monetary values that will be used to decrement the account/card value.

The
Card Manger is integrated with both the Rating server and the Host application. The Card Manager maintains account/card balances and all parameters associated with prepaid calling
cards.



Connect CCB Integrated Customer Care and Billing is Primal's integrated modular customer care and billing software solution. The modules include orders care,
payment processing, credit and collections, invoice processing, 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, Connect RTR rating and
Connect EBP&P products.

Connect
CCB provides a web-based, graphical user interface for all customer acquisition and customer service activities. Connect CCB's scalability has been proven in
individual commercial CSP installations supporting over 3.5 million customers and over 1,000 online users so it can be used for a small or start up CSP or for a very large CSP.



Connect EBP&P Electronic Bill Presentment & Payment allows CSPs to offer bill presentment and payment to subscribers over the Internet. Subscribers can
view, analyze and pay their bills via a web browser. Customer self service functions that can be performed using this module include: Bill Review, Bill History, View Current Unbilled Usage, Detail
Inquiry, Download Bill in spreadsheet or Adobe Portable Document Format (PDF®), Bill Payment, Account Management and Customer Service Contact. Connect EBP&P is an optional module that can
be implemented in conjunction with the Connect IXC solution or with the Connect CCB Customer Care and Billing application.

Services

Primal's services consist of providing maintenance and support for customers who purchase our software products, consulting services and application management.
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.

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.

Our
application management 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 services are generally
provided under a separate application management 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.

Sales and Marketing

Primal's sales and marketing efforts are concentrated on CSPs that provide services using IP networks. We 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. Primal also relies heavily on 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 region and Western Europe.

Primal
derives a majority of its revenues from products delivered or services performed in the United States. Products delivered or services performed outside the United States
represented approximately 22% and 18% of our total revenues in fiscal years 2002 and 2001, respectively. See Note 11 of the Notes to the Consolidated Financial Statements for a summary of
Primal's revenue by geographic area. Revenue for a given period typically reflects products delivered or services performed during the period with respect to relatively large financial commitments
from a small number of customers. During fiscal years 2002 and 2001, we had four or more customers generating $200,000 or more in revenue during the period representing $5.7 million and
$6.9 million, respectively, or approximately 93% of our total revenues.

Due
to the complex nature of our products and services and the depressed market conditions in the communications market, 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. Oftentimes, the sales evaluation process
necessitates demonstrations and field trials. When a product is conditionally accepted by a customer, we often have to install our product at a customer premises for a final acceptance trial before
the customer makes a decision to purchase our products or services.

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, Netcentrex, Net.com, IP Unity and Nuera Systems. We believe that these
partnerships provide us with a method to extend our

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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 Primal's 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 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, 2002 and 2001, our research and development costs were $1.5 million and
$2.0 million, respectively.

Intellectual Property

Primal relies upon a combination of U.S. patent, copyright, trade secret and trademark law to protect its intellectual property. Primal currently has two U.S.
patents related to its billing and mediation technology. In addition, Primal has 15 U.S. registered trademarks, two U.S. trademark applications pending and one U.S. copyright. While Primal relies on
patent, copyright, trade secret and trademark law to protect its technology, Primal believes 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 Primal's technology.

Primal
generally enters into confidentiality or license agreements with its employees, consultants and corporate partners, and generally controls access to and distribution of its
software, documentation and other proprietary information. Despite Primal's efforts to protect proprietary rights, unauthorized

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parties may attempt to copy or otherwise obtain and use its products or technology or to develop products with the same functionality as Primal's products. Policing unauthorized use of its products
is difficult, and Primal cannot be certain that the steps it has 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. In addition, certain of Primal's 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) Primal ceases to do
business without a successor or (3) Primal discontinues providing maintenance and support.

Substantial
litigation regarding intellectual property rights exists in the software industry. Primal expects that software products may be increasingly subject to third-party
infringement claims as the number of competitors in its industry segments grows and the functionality of products in different industry segments overlaps. Some of Primal's competitors may have filed
or may intend to file patent applications covering aspects of their technology that they may claim Primal's technology infringes. Primal cannot be certain that any of these competitors will not make a
claim of infringement against it with respect to its products and technology.

Primal's
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. Primal may have to rely on third-party software vendors and developers to a larger degree in future
products. Although Primal believes it could find other sources for these products, any significant interruption in the supply of these products could adversely impact Primal's sales unless and until
it can secure another source.

Employees

As of March 17, 2003, the Company had 32 full-time employees, none of which are 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

Our business has been adversely affected by recent developments in the telecommunications industry and these developments will continue to impact our revenues and operating
results.

From our inception through the end of 2000, the telecommunications market was experiencing rapid growth spurred by a number of factors including deregulation in
the industry, entry of a large number of new emerging service providers, growth in data traffic and the availability of significant capital from the financial markets. In 2001, the telecommunications
industry experienced a reversal of some of these trends, marked by a dramatic reduction in current and projected future capital expenditures by service providers, financial difficulties and in some
cases bankruptcies experienced by established and emerging service providers and a sharp contraction in the availability of capital. This trend has continued in 2002, and these conditions have caused
a substantial reduction in demand for telecommunications equipment and software, including our products.

As
a result, our ability to accurately forecast the timing and volume of new orders will be diminished, and our pricing policies may have to be relaxed from past practices in order to
secure these new orders. These developments may adversely effect our financial performance for the next several quarters.

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 $463,000, $8.4 million, and $4.5 million for the years ended December 31, 2002, 2001
and 2000, respectively. We had an accumulated deficit of $12.4 million as of December 31, 2002, and we could incur net losses for the foreseeable future.

We
have reduced our fixed operating expenses in 2001 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 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.

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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 and 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, 2002 and 2001, represented approximately 86% and 75%, respectively, of total
revenues. Two customers individually accounted for 10% or more of our total revenues in 2002 and 2001. As a result, if a large contract is cancelled or deferred or an anticipated contract does not
materialize, our business would be harmed. During 2002, the Company's largest customer entered and emerged from bankruptcy.

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.

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

Certain segments of the telecommunications industry is 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 telecommunications 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 telecommunications 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.

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 telecommunications 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 telecommunications operations. Our future revenues will also depend on our customers' licensing software for additional
subscribers or for additional call detail 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:



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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.

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, 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.

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If our software products do not continue to be enhanced and continue to integrate and operate successfully with the telecommunications 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 telecommunications equipment of the
leading manufacturers. We currently target a customer base that uses a wide variety of telecommunications
network infrastructure equipment and software platforms, which are constantly changing. As such, we must continually modify our software products as new telecommunications 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.

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.

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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 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.

13

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Barriers to international expansion could limit our future growth.

During 2003, we plan to expand our international operations, but 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 22% and 17% of our total revenue for the years ended December 31, 2002
and 2001, 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.

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 amortization costs for acquired goodwill and other

14

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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 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 telecommunications industry could reduce our potential market.

The
telecommunications 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
telecommunications 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 telecommunications 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.

15

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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 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 34.3% 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 31.6% 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

16

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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 become 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 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

Primal does not own any real estate properties, but leases approximately 13,500 square feet of general and administrative office space in Irvine, California.
Primal's monthly rent payment is approximately $31,000. Primal's lease expires in April 2007. Primal also leases an executive suite in Amsterdam, The Netherlands on a monthly basis. Primal's
monthly rent payment for the executive suite is approximately $700.

Item 3. Legal Proceedings

Primal is not currently a party to any material legal proceeding.

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

None.

17

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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, 2002:First Quarter

$
0.08

$
0.04Second Quarter


0.17


0.05Third Quarter


0.08


0.03Fourth Quarter


0.04


0.02Year ended December 31, 2001:First Quarter*

$
0.30

$
0.15Second Quarter


0.10


0.04Third Quarter


0.07


0.03Fourth Quarter


0.08


0.04


---

As
of March 17, 2003, there were approximately 441 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.

18

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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
(a) |           | Weighted-average
exercise price of
outstanding options,
warrants and rights
(b) |      | Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
|----------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------- | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plans approved by security holders:     |       |                                                                                                 |           |                                                                                 |      |                                                                                                                                                
|2001 Flexible Incentive Plan                                |       | 2,769,618                                                                                       |           | $                                                                               | 0.06 |                                                                                                                                                
|Equity compensation plans not approved by security holders: |       |                                                                                                 |           |                                                                                 |      |                                                                                                                                                
|William Salway (1)                                          |       | 409,312                                                                                         |           | $                                                                               | 0.03 |                                                                                                                                                
|investment banking firm (2)                                 |       | 100,000                                                                                         |           | $                                                                               | 0.03 |                                                                                                                                                
|                                                            |       |                                                                                                 |           |                                                                                 |      |                                                                                                                                                
|                                                            | Total |                                                                                                 | 3,278,930 |                                                                                 | $    | 0.06                                                                                                                                           

---

Recent Sales of Unregistered Securities

None.

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.

19

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Critical Accounting Policies

We prepare the consolidated financial statements of Primal Solutions, Inc. 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 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 and 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. During 2001, the Company recorded goodwill impairment of
$5.6 million, however, 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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

20

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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 and September 30, 2002. Management will complete an annual testing of goodwill for impairment on
September 30th of each year. During 2002 and 2001, the Company recorded goodwill impairment of none and $5.6 million, respectively. 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. Prior to 2002, the Company amortized goodwill over a seven year period, and tested for impairment based on future undiscounted estimated cash flows (See Recently
Adopted Accounting Principles).

General

Primal Solutions, Inc., and its subsidiary Wireless Billing Systems, ("Primal" or the "Company") deliver communications software solutions that allow
Communications Service Providers ("CSP") using internet protocol technology to generate revenue from their internet protocol networks ("IP networks"). IP networks provide a lower cost alternative from
traditional circuit-based network infrastructure and allows new enhanced services to be introduced more rapidly on existing data networks. Examples of these new enhanced services include broadband
data services; unified communications; and voice over internet protocol networks ("VOIP"), including voice over cable and international long distance using IP networks. Primal's communications
software products 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.

During
2001, the communications industry experienced a world-wide economic downturn, which has resulted in delayed capital spending by the large, established CSPs and
consolidation in the number of start-up, or emerging CSPs. During 2002, capital spending in the communications industry continued to decline. Large established CSPs delayed capital
spending for equipment and related software. The number of emerging or start up CSPs also continued to decline through market consolidation. However, the demand for the next-generation
technology in providing communications services using IP networks continues to grow.

In
order to respond to these market conditions, Primal has focused its marketing and product strategy on IP networks. Primal believes that the greatest opportunity for growth in sales of
both its products and services will be for communications service providers who utilize IP networks for voice and data services. While there will be a few opportunities for providing Primal's products
and services to CSPs who have both circuit and IP networks, we believe that these opportunities will continue to decline.

The
primary markets that show signs of growth opportunities for our products and services are broadband and cable multiple service operators ("MSO"), international long distance using
VOIP and enhanced services combining voice and data capabilities. In addition to licensing software products to these markets, there is an opportunity to provide our products as a managed service.
Primal believes there is a growing interest by CSPs to look to software vendors, such as Primal, for outsourcing the management of operating support and business support software applications to
accelerate the
introduction of new services into their markets, decrease operating costs, and increase overall operational efficiency.

21

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Current Conditions

In 2002, we focused on controlling costs as well as seeking out out new sales opportunities for Access IM, our network mediation software product and Connect RTR,
our rating software, through our direct sales force and our partnerships with communications infrastructure providers. These have been and continue to be very competitive markets with many
competitors. With fewer sales opportunities available due to the economic downturn, competition has increased for the sales opportunities that do exist. We expect this trend to continue until the
economic conditions in our industry improve. We believe we will be able to continue to compete for new sales based on our products' features, the low overall cost of ownership associated with our
products and by delivering a high level of customer service.

Despite
the market conditions in 2002, we were successful in adding new mediation and rating customers, including a tier 1 cable MSO. We also signed contract renewals with two customers,
totaling over $13.5 million, for continuing support and maintenance over a three-year period at approximately the same value as the expiring contracts. We expanded our indirect
sales channels by signing agreements with seven infrastructure partners and an international systems integrator. And, we improved our financial condition by signing a letter of intent in
December 2002 to restructure our debt with our largest note holder. The restructuring will reduce our debt service costs by deferring principal payments of $1.2 million to the end of
2004.

The
following discussion and analysis provides information which management believes is relevant for an assessment and understanding of the Company's 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, 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:



Selected Financial Information Line Item Explanations

Primal's revenues are primarily derived from the sale of software licenses and related services to telecommunications and Internet carriers.

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

22

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

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
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.

Primal
believes 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 will 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, and customization for Primal's 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.

23

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Results of Operations for the Years Ended December 31, 2002 and 2001

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

Statement of Operations Data

|                                |  | Year Ended
December 31 |      
|------------------------------- |  | ---------------------- | -----
|
|REVENUES:                       |  |                        |      
|System revenue                  |  | $                      | 2,141
|Service revenue                 |  |                        | 3,987
|                                |  |                        |      
|Total revenues                  |  |                        | 6,128
|COST OF REVENUES:               |  |                        |      
|System revenue                  |  |                        | 20   
|Service revenue                 |  |                        | 1,928
|                                |  |                        |      
|Total cost of revenues          |  |                        | 1,948
|                                |  |                        |      
|GROSS MARGIN                    |  |                        | 4,180
|OPERATING EXPENSES:             |  |                        |      
|Research and development        |  |                        | 1,487
|Sales and marketing             |  |                        | 1,126
|Loss on lease abandonment       |  |                        |     
|Impairment of goodwill          |  |                        |     
|General and administrative      |  |                        | 1,860
|                                |  |                        |      
|Total operating expenses        |  |                        | 4,473
|LOSS FROM OPERATIONS            |  |                        | (293 
|INTEREST AND OTHER EXPENSE, NET |  |                        | (168 
|                                |  |                        |      
|LOSS BEFORE INCOME TAXES        |  |                        | (461 
|INCOME TAX PROVISION            |  |                        | 2    
|                                |  |                        |      
|NET LOSS                        |  | $                      | (463 
|                                |  |                        |      

Total Revenue

Total revenue decreased to $6.1 million for the year ended December 31, 2002, from $7.5 million for the year ended December 31, 2001.

Revenue
growth depends, in part, on the overall demand for the Company's communications software products. Because the Company's sales are primarily to the CSPs, its ability to generate
revenue also depends on specific conditions affecting those CSPs and on general economic conditions. The decrease
in both system and services revenues in 2002 reflects the loss of a customer that ceased to do business in the communications market at the end of 2001.

System
revenue decreased to $2.1 million, or 35% of total revenues, for the year ended December 31, 2002, from $2.7 million, or 36% of total revenues, for the year
ended December 31, 2001, primarily due to a decrease in licensing revenue in 2002 as compared to prior year.

Service
revenue decreased to $4.0 million, or 65% of total revenues, for the year ended December 31, 2002, from $4.8 million, or 64% of revenues, for the year ended
December 31, 2001. The decrease in the dollar amount of service revenues primarily resulted from a decrease in maintenance revenues due to a turnover in our customer base and a decrease in
professional services revenue due to the loss of a customer that ceased to do business in the communications market at the end of 2001.

24

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Services revenue is primarily due to maintenance revenue, delivery of recurring professional services associated with our existing customer base and the delivery of professional services associated
with new customer contracts. In general, services revenue can fluctuate with the volume of new customer sales as well as the renewal or non-renewal of maintenance 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.

During
2002 and 2001, we had four or more customers generating $200,000 or more in revenue during the period representing $5.7 million and $6.9 million, respectively, or
approximately 93% of the total revenues.

Cost of Revenues

Total cost of revenues decreased to $1.9 million, or 32% of total revenues, for the year ended December 31, 2002, from $3.2 million, or 43%
of total revenues, for the year ended December 31, 2001.

Cost
of system revenue consists primarily of computer hardware resale and license fees paid to third parties under technology license arrangements and have not been significant to date.
The cost of system revenue decreased to $20,000, or 1% of system revenue for the year ended December 31, 2002 as compared to $64,000, or 2% for the year ended December 31, 2001. The
decrease is primarily due to a decrease in hardware and third-party software used during system installations for customers.

Cost
of service revenue consists primarily of the costs of consulting and customer service and support. Cost of service revenue decreased to $1.9 million, or 48% of service
revenue for the year ended December 31, 2002, as compared to $3.1 million, or 65% of service revenue for the year ended December 31, 2001. The decrease in dollars and as a
percentage of service revenue is primarily due to increased efficiencies in rendering professional services for installations, custom programming and maintenance services for customers caused
primarily by a decrease in employees performing such services. During the year ended December 31, 2002, the average number of employees performing such services decreased to 16 as compared to
24 in 2001.

Research and Development

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

Research
and development expenses consist primarily of personnel, and related costs associated with our product development efforts. Research and development expenses decreased to
$1.5 million, or 24% of total revenues, for the year ended December 31, 2002, from $2.0 million, or 27% of total revenues for the year ended December 31, 2001. The decrease
is primarily due to a decrease in personnel combined with a shift in product development project priorities. The average number of research and development employees for 2002 decreased to 11 as
compared to 15 in 2001. which resulted in a decrease in research and development personnel costs in 2002.

25

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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 decreased to $1.1 million, or 18% of total revenues, for the year ended December 31, 2002, from $1.4 million, or
18% of total revenues, for the year ended December 31, 2001. The decrease is primarily due to a reduction in sales personnel costs, travel costs and trade show expenses for 2002, offset by an
increase in literature and promotional material costs.

Loss on Lease Abandonment

The Company had a lease for approximately 28,000 square feet of space for the facilities in Irvine, California, and, during 2001, consolidated its operations to
13,500 square feet of space. During the quarter ended March 31, 2001, the Company was in default on its lease payments relating to excess space, and accrued $1.6 million which
represented the cost of the future lease payments. The Company amended its occupancy lease to reduce costs related to unneeded space and corresponding rental payments. As part of the amendment, the
Company agreed to reimburse the landlord for certain costs it incurred to lease the space of $86,000 and the Company signed a note for $200,000 due at the end of the lease in 2007. As a result, the
Company reversed $1.3 million of the lease loss liability at March 31, 2001, in the second quarter resulting in the recognition of net loss on lease abandonment charge of $286,000 for
the year ended December 31, 2001.

Impairment of Goodwill

In 2001, prior to the issuance of SFAS No. 142, long-lived assets and intangibles, including goodwill, were evaluated for impairment on an
annual basis or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A goodwill impairment loss was recognized to the extent that the
carrying value was not recoverable from future operating cash flows. The evaluation for other long-lived assets included comparing the estimated future net cash flows associated with the
asset to the asset's carrying amount to determine if impairment had occurred. If such assets were deemed impaired, an impairment loss equal to the amount by which the carrying amount exceeds the
estimated fair value of the assets was recognized. If quoted market prices for the assets were not available, the fair value was calculated using the present value of estimated expected future net
cash flows. The cash flow calculations were based on management's best estimates, using appropriate assumptions and projections at the time. Goodwill was also amortized using the
straight-line method over seven years.

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. Since October 1, 1999,
the goodwill has been amortized using a straight-line method over its estimated useful life of seven years. 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.

During
the quarter ended September 30, 2001, the Company assessed the recoverability of the amounts recorded for goodwill. Since the spin-off from Avery on
February 9, 2001, the economic condition of the telecommunications industry in particular and the economy in general had continued to deteriorate. The Company had significantly reduced
personnel and expenses during 2001 and the current cash flow forecasts had been reduced significantly as compared to the forecast used at the time of the Avery transactions. As a result, during the
quarter ended September 30, 2001, goodwill was

26

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deemed impaired, and the Company recorded a charge of $5.6 million to reflect the write down of goodwill to its estimated recoverable amount based on such revised forecast.

General and Administrative

General and administrative expenses consist primarily of employee salaries and related expenses for executive, finance, administrative, facilities and information
services personnel. General and administrative expenses decreased to $1.9 million, or 30% of total revenues for the year ended December 31, 2002, from $3.2 million, or 43% of
total revenues for the year ended December 31, 2001, primarily due to a decrease in goodwill amortization to none as compared to $982,000 in the year ended December 31, 2001, and a
decrease in legal expenses to $159,000 as compared to $296,000 due to a decrease in legal expenses associated with being a publicly owned company.

Depreciation
and amortization expense included in the results of operations decreased to $462,000 for the year ended December 31, 2002, as compared to $1.6 million for the
year ended December 31, 2001, primarily due to the decrease in goodwill amortization to none as compared to $982,000 in the year ended December 31, 2001, as the Company no longer
amortizes goodwill in accordance with the adoption of SFAS No. 142 in 2002. See Note 1 to Consolidated Financial Statements.

Interest and Other Expense, Net

Other expense decreased to $168,000 for the year ended December 31, 2002, from $205,000 for the year ended December 31, 2001. The decrease is
primarily due to decrease in interest expense on the Corsair note payable. In December 2001 the interest rate decreased to 8% from 16% in accordance with the terms of the letter amendment in
December 2001.

Income Tax Provision

The income tax provision for the years ended December 31, 2002 and 2001 consisted of the minimum state taxes due to the operating loss for the period.

Liquidity and Capital Resources

Our cash balance increased to $1.2 million at December 31, 2002, from $688,000 at December 31, 2001, primarily due to an accelerated
collection of an accounts receivable balance. Our working capital, defined as current assets less current liabilities, decreased to a deficit of $76,000 at December 31, 2002, as compared to a
surplus of $134,000 at December 31, 2001. The decrease in working capital was primarily due to an increase in the current portion of notes payable to $193,000 at December 31, 2002.

Net
cash provided by operating activities was $606,000 for the year ended December 31, 2002, as compared to $825,000 used for year ended December 31, 2001, primarily due to
a reduction in operating loss before depreciation and amortization, impairment of goodwill and noncash loss on lease abandonment to $2,000 in 2002 as compared to $975,000 in 2001 and an increase in
net change in accounts receivable balance of $469,000 to $866,000 as compared to $397,000.

Net
cash used in investing activities was $89,000 for the year ended December 31, 2002 as compared to $11,000 provided by investing activities for the year ended
December 31, 2001 primarily due to the increase in purchases of property and equipment. We purchased $92,000 of property and equipment during the year ended December 31, 2002 as compared
to $30,000 for the year ended December 31, 2001. We expect to purchase approximately $100,000 of property and equipment in 2003.

Net
cash used in financing activities decreased to $21,000 for the year ended December 31, 2002 as compared to $343,000 for the year ended December 31, 2001, primarily due
to a decrease in capital lease obligations and payments on officer notes payables offset by proceeds from note payable to Sunwest Bank.

27

---

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. During
January 2003, the Company began, and the noteholder accepted, payments under the new terms, and the amendment is expected to be completed and executed in early 2003. The terms of the letter of
intent have been reflected in the consolidated financial statements. The change in terms will reduce the monthly principal and interests payments by approximately $53,000 during 2003 and 2004 until
the maturity in December 2003. The decrease in payments reduces the total 2003 payments by approximately $635,000.

We
have a limited operating history as a software company. Prior to 2001, we invested heavily in sales and marketing, research and development and general operating expenses in order to
increase our market position, develop our products and build our infrastructure. However with the downturn in the
economy in 2001, company-wide, we reduced operating costs and decreased expenses in areas such as compensation and benefits, travel costs, capitalized expenditures, facilities and other
operating costs in 2001. In 2002, we continued to further reduce operating costs to a level supportable by the recurring revenue of our current customers.

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 a working capital line of credit, bridge and permanent financing and strategic financial partners. We cannot, however, be
certain that additional financing will be available to us on acceptable terms when required, or at all, or that cost reductions will be effective, or available.

The
following table includes all the contractual obligations, including principal and interest payments, as of December 31, 2002:

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

There
were no commercial commitments outstanding as of December 31, 2002.

Recently Adopted Accounting Principles

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 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 and September 30, 2002. Management will complete an annual testing of goodwill for impairment

28

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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.

In
2001, prior to the issuance of SFAS No. 142, long-lived assets and intangibles, including goodwill, were evaluated for impairment on an annual basis or whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A goodwill impairment loss was recognized to the extent that the carrying value was not
recoverable from future operating cash flows. The evaluation for other long-lived assets included comparing the estimated undiscounted future net cash flows associated with the asset to
the asset's carrying amount to determine if impairment had occurred. If such assets were deemed impaired, an impairment loss equal to the amount by which the carrying amount exceeds the estimated fair
value of the assets was recognized. If quoted market prices for the assets were not available, the fair value was calculated using the present value of estimated expected future net cash flows. The
cash flow calculations were based on management's best estimates, using appropriate assumptions and projections at the time. Goodwill was also amortized using the straight-line method over
seven years.

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. Since October 1, 1999, the goodwill has been amortized using a straight-line method over its estimated useful life of seven years. 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.

During
the quarter ended September 30, 2001, the Company assessed the recoverability of the amounts recorded for goodwill. Since the spin-off from Avery on
February 9, 2001, the economic condition of the telecommunications industry in particular and the economy in general continued to deteriorate. The Company had significantly reduced personnel
and expenses during 2001 and the current cash flow forecasts had been reduced significantly as compared to the forecast used at the time of the Avery transactions. As a result, during the quarter
ended September 30, 2001, goodwill was deemed impaired, and the Company recorded a charge of $5.6 million to reflect the write down of goodwill to its estimated recoverable amount based
on such revised forecast.

The
following table presents the effects on previously reported net loss if the Company had adopted nonamortization provision of SFAS No. 142 on January 1, 2001:

For the Year Ended December 31,2002

2001Reported net loss

$
(463,341
)
$
(8,425,061
)Add back: Goodwill amortization





982,118Adjusted net loss

$
(463,341
)
$
(7,442,943
)Basic and diluted earnings per share:Reported net loss per share

$
(0.02
)
$
(0.42
)Goodwill amortization per share





0.05Adjusted net loss per share

$
(0.02
)
$
(0.37
)


On
January 1, 2002, the Company adopted SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived
Assetswhich supersedes SFAS No. 121. SFAS No. 144 requires, among other things, the application of one accounting model for long-lived assets that
are impaired or are to be

29

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disposed of by sale. The adoption of SFAS No. 144 did not have a material impact on the Company's consolidated financial statements.

On
November 14-15, 2001, the Financial Accounting Standards Board ("FASB") Emerging Issues Task Force ("EITF") issued Topic D-103, requiring reimbursements
received for "out of pocket" expenses incurred to be recorded as revenue in the income statement. EITF Topic D-103 became effective for periods beginning after December 15, 2001 and
requires that comparative financial statements for prior periods should be restated. The adoption of EITF Topic D-103 did not have a material impact on the Company's consolidated financial
statements. The Company reclassed $60,241 for the year ended December 31, 2001.

In
December 2002, the 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 provisions of SFAS No. 148 are effective fiscal years ending after December 15, 2002, with early adoption permitted. 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.

Recently Issued Accounting Pronouncements

In August 2001, the FASB issued 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. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, with early adoption permitted. The adoption of SFAS
No. 143 is not expected to have a material impact on the Company's consolidated financial statements.

In
July 2002, the FASB issued 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 provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption
permitted. The Company expects to adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002.

In
November 2002, the FASB issued 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 Company adopted the
disclosure provisions of FIN No. 45 at December 31, 2002, with no impact on its financial position or results of operations. The Company expects to adopt the recognition provisions of
FIN No. 45 after

30

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December 31, 2002, and does not expect any material impact on its financial position or results of operations as a result of the adoption.

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 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. The Company is currently evaluating the provisions of FIN No. 46, but
believes its adoption will not have a material impact on its consolidated results of operations or its financial position.

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.

None.

31

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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 the executive officers and directors of Primal as of March 17, 2003:

|Name               |  | Age |  | Position                                                                                        
|------------------ |  | --- |  | ------------------------------------------------------------------------------------------------
|Joseph R. Simrell  |  | 45  |  | Chairman of the Board, Chief Executive Officer, President, Chief Financial Officer and Secretary
|David Haynes       |  | 38  |  | Director                                                                                        
|John Faltys        |  | 39  |  | Director                                                                                        
|Louis A. Delmonico |  | 62  |  | Director                                                                                        
|John E. Rehfeld    |  | 62  |  | Director                                                                                        

Joseph R. Simrell.Mr. Simrell joined Primal in January 1999 as Chief Financial Officer and Vice President of
Finance and Administration. Mr. Simrell became Chief Executive Officer and President as of January 31, 2003 and was elected as Chairman of the Board as of February 3, 2003.
Mr. Simrell has also served as Secretary since August 2000. 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. Prior to 1991, Mr. Simrell held various management positions
at BellSouth, InteGroup, and SCI.

David Haynes.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. Mr. Haynes has served as a Director since August 2000. From May 1997 to
September 1997, Mr. Haynes served as Senior Business Development Manager, at Deloitte & Touche Consulting Group/DRT Systems, 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.

John Faltys.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, 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 company.
Since September 1994, he has also served as the President and Director 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, an engineering software and services company. From May 1987 to August 1994, Dr. Delmonico
served as the Chairman and CEO of PDA Engineering Inc., an engineering software and services company. In addition, he is currently an advisor to and a director of SourcingLink, a NASDAQ listed
public company and several other private companies. Dr. Delmonico earned his bachelor's degree in economics from St. John's University in

32

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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 and Chairman of the Audit 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 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 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 2003 annual meeting of stockholders is scheduled to occur in
July, 2003.

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.

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, 2002, 2001 and 2000.

Summary Executive Compensation Table

|                                                                                 |  |                |  |   |                         |  |   | Long Term
Compensation Awards |  |  
|-------------------------------------------------------------------------------- |  | -------------- |  | - | ----------------------- |  | - | ----------------------------- |  | -
|
|
|
|William Salway(3)
Chief Executive Officer and President                          |  | 2002
2001
2000 |  | $ | 200,000
200,000
183,300 |  | $ | 47,500
113,400
87,500         |  | $
|David Haynes(4)
Vice President Sales and Marketing                               |  | 2002
2001
2000 |  |   | 58,333
129,867
124,800  |  |   | 
70,762
62,400               |  |  
|Joseph R. Simrell(5)
Chief Executive Officer, President, Chief Financial Officer |  | 2002
2001
2000 |  |   | 150,000
133,200
124,800 |  |   | 23,513
70,762
62,400          |  |  

---

33

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Option / SAR Grants in the Last Fiscal Year

Option / SAR Grants in the Last Fiscal Year

|                  |  | Individual Grants |  |   |   |  
|----------------- |  | ----------------- |  | - | - | -
|
|
|Louis A.Delmonico |  | 15,000            |  | 2 | % | $
|John E. Rehfled   |  | 50,000            |  | 7 | % |  

The
Company did not grant any options or SARs to executive officers during 2002, and no options were exercised during 2002.

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, President, Chief Financial Officer and Secretary of Primal. The employment agreement extends automatically for 30 days commencing on
January 1, 2004 at the discretion of the Board until Primal hires a replacement Chief Executive Officer and President. Mr. Simrell's base annual salary is $200,000. In addition,
Mr. Simrell is entitled to receive bonuses based on performance goals set by the Board. For 2003, Mr. Simrell is eligible to receive as his bonus up to 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 will be employed as a part-time employee of Primal for a transition period that terminates on July 31, 2003. During such transition
period, Mr. Salway will 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 is 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.

In
connection with the termination of Mr. Haynes's employment with Primal on June 1, 2002, the parties entered into a Separation Agreement and General Release. Under the
terms of the Separation Agreement and General Release, Mr. Haynes received a severance payment equal to three months of salary. Mr. Haynes agreed to release Primal from all claims that
he may have against Primal based on his employment with Primal or his termination from employment.

34

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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.

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.

35

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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:



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

Each non-employee member of our Board receives a one-time 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 will also receive an annual stipend of $14,000 and $1,750 for each Board meeting
attended. There are currently two Board committees, an audit committee and a compensation committee. Each non-employee member of the Board committees receives compensation of
1) $250 for each individual committee meeting attended in conjunction with a Board meeting up to $750 for attendance of multiple committee meetings and 2) $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
addition, the Board formed a transition committee charged with assisting with the transition of Mr. Salway's responsibilities upon his resignation as President and Chief
Executive Officer. The transition committee will terminate upon the completion of such transition. Each non-employee member of the transition committee receives a fee of $3,300 for such
service.

36

---

Item 11. Security Ownership of Certain Beneficial Owners and Management

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, 2003, the Company had 20,131,212 shares of common stock outstanding.

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 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 Class |  
|--------------------------------------------------------------- |  | ---------------- |  | ---------------- | -
|Mark J. Nielsen(1)(13)                                          |  | 3,529,026        |  | 17.5             | %
|Arun Anand(2)(13)                                               |  | 2,458,178        |  | 12.2             | %
|Murari Cholappadi(3)(13)                                        |  | 2,458,178        |  | 12.2             | %
|Sanjay Gupta(4)(13)                                             |  | 2,458,178        |  | 12.2             | %
|Patrick J. Haynes, III(5)(13)                                   |  | 2,255,059        |  | 11.2             | %
|William Salway(6)                                               |  | 1,118,624        |  | 5.4              | %
|John Faltys(7)(13)                                              |  | 4,157,339        |  | 20.7             | %
|Joseph R. Simrell(8)(13)                                        |  | 3,680,770        |  | 18.2             | %
|David Haynes(9)(13)                                             |  | 3,605,770        |  | 17.9             | %
|Louis A. Delmonico(10)                                          |  | 90,000           |  | *                |  
|John E. Rehfeld(11)                                             |  | 50,000           |  | *                |  
|All executive officers and directors as a group (5 persons)(12) |  | 7,073,761        |  | 31.6             | %

---

37

---

38

---

Voting Control

As discussed elsewhere in this filing, the Company was spun-off as a separate public company by Avery in February 2001. On February 13,
2001, Avery distributed approximately 13.2 million shares of common stock of the Company to Avery's security holders. As part of the Distribution:



As
part of the terms and conditions of the Distribution Agreement, Avery made certain non-recourse loans to each of the Old Primal Stockholders, the repayment of which was
secured by a pledge to Avery and a grant to Avery of a first priority security interest in all shares of Avery's Series G Preferred Stock beneficially owned by such Old Primal Stockholder. Also
as part of the Distribution Agreement, the Old Primal Stockholders granted proxies to Thurston Group, Inc. to vote 7,126,894 shares of Avery's series G voting preferred stock. In
March 2002, five members of the Old Primal Stockholders (Messrs. Anand, Cholappadi, Gupta, Haynes, and Simrell) each individually sold his shares of Avery's Series G Preferred
Stock to a third-party, which sale was consented to by Avery and Thurston Group Inc. The third-party acquired such shares subject to, and assumed the obligations of, the applicable
non-recourse loans, pledges, and first priority security interest made in favor of Avery, and the relevant proxies granted to Thurston Group Inc.

In
consideration for the grant of a proxy to vote the 7,126,894 shares of Avery's Series G Preferred Stock, 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. The proxy granted to the Old Primal Stockholders initially covered an aggregate of 1,830,260 shares, or approximately 9.1%,
of Primal's common stock outstanding. As of March 15, 2003, the proxy granted covered an aggregate of 2,255,059 shares, or approximately 11.2%, of Primal's common stock outstanding. The Old
Primal Stockholders have the right to vote or to direct the voting of an aggregate of 8,832,085 shares, or approximately 43.9%, of Primal's common stock outstanding.

Each
of the above-stated proxies covering shares of Primal common stock provides that any action required or permitted to be taken pursuant to the proxy by Messrs. Faltys,
Simrell, D. Haynes, Nielsen, Anand, Cholappadi and Gupta, including any voting of the shares covered thereby, may be so taken if the former holders of at least 66% of the issued and outstanding
shares of Primal immediately prior to its acquisition by Avery approve the taking of any such action. These percentages were as follows:



39

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Except
as set forth in the proxies, the Company knows of no other voting arrangement among the Old Primal Stockholders, so that each of the Old Primal Stockholders may vote his shares of
Primal common stock in such manner as each determines.

Item 12. Certain Relationships And Related Transactions

Notes Payable to Officers

From January 1998 through December 1999, Messrs. Faltys, Simrell, and Haynes advanced funds to Primal to provide working capital as needed.
The notes payable aggregated to $86,433, $170,575 and $165,146 at December 31, 2000, 1999 and 1998, respectively. The initial interest rates of notes were 6% (effective rate at 10%), but were
modified to an interest rate of 10% on June 30, 2001. Such notes were repaid in October 2001.

Income Tax Agreement with Officer

In accordance with his compensation agreement, Mr. Salway was granted 409,312 shares of common stock on February 9,2001. In addition,
Mr. Salway and the Company entered an agreement whereby the Company would pay the estimated related federal and state income taxes of approximately $41,000 triggered by such common stock grant.
The estimated fair value of the shares of common stock and the payment of the related federal and state income taxes totaling approximately $106,000 were recorded as stock compensation expense during
the year ended December 31,2001, and as of December 31,2001, the Company had paid the estimated related income taxes for Mr. Salway.

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)
|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)                                                                                                                                                                                                                                                                                                                  
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

40

---

|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)                                                                                                                                                                                                                                                               
|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)                                                                                                                                                                                                                            
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                        

41

---

|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)
|10.12  |  | 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                                                                                                                                                                          
|10.14* |  | Employment Agreement for Joseph R. Simrell dated January 28, 2003                                                                                                                                                                       
|10.15* |  | Consolidation Agreement between Wireless Billing Systems dba Primal Billing Solutions and Metrocall, Inc. dated December 30, 2002                                                                                                       
|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                      
|23.1*  |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                                        
|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)                                                                                                                         
|99.3*  |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002                                                                                                                  

---



Item 14. Controls and Procedures

Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the
Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the
CEO and CFO have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission
rules and forms. Subsequent to the date of their evaluation, there were no significant changes in the Company's internal controls or in other factors that could significantly affect the disclosure
controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

It
should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

42

---



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:                   
| |  | Date: March 28, 2003  

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, Chief Financial Officer and Director (Principal Executive and Financial and Accounting Officer) |  | March 28, 2003
|/s/DAVID HAYNESDavid Haynes             |  | Director                                                                                                                            |  | March 28, 2003
|/s/JOHN FALTYSJohn Faltys               |  | Director                                                                                                                            |  | March 28, 2003
|/s/LOUIS A. DELMONICOLouis A. Delmonico |  | Director                                                                                                                            |  | March 28, 2003
|/s/JOHN E. REHFELDJohn E. Rehfeld       |  | Director                                                                                                                            |  | March 28, 2003

43

---

CERTIFICATIONS

I,
Joseph R. Simrell, certify that:

1.    I
have reviewed this annual report on Form 10-KSB of Primal Solutions, Inc.;

2.    Based
on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based
on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The
registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and have:



5.    The
registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):



6.    The
registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material
weaknesses.

| |  | /s/JOSEPH R. SIMRELLJoseph R. Simrell
Chief Executive Officer President
and Chief Financial Officer
Primal Solutions, Inc.March 28, 2003
| |  | ----------------------------------------------------------------------------------------------------------------------------------------

44

---



PRIMAL SOLUTIONS, INC.        INDEX TO FINANCIAL STATEMENTS

|                             |                                                                                                          | Page
|---------------------------- | -------------------------------------------------------------------------------------------------------- | ----
|Independent Auditors' Report |                                                                                                          | F-2 
|Financial Statements:        |                                                                                                          |     
|                             | Consolidated Balance Sheets at December 31, 2002 and December 31, 2001                                   |     
|                             | Consolidated Statements of Operations for the years ended December 31, 2002 and 2001                     |     
|                             | Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2002 and 2001 |     
|                             | Consolidated Statements of Cash Flows for the years ended December 31, 2002 and 2001                     |     
|                             | 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 sheets 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 2001, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years 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 audits.

We
conducted our audits 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 audits provide 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 2001, and the results of their operations and their cash flows for the years 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-2

---



PRIMAL SOLUTIONS, INC.        CONSOLIDATED BALANCE SHEETS

|                                                                                                            |                                    | December 31,
2002 |             | December 31,
2001 |  
|----------------------------------------------------------------------------------------------------------- | ---------------------------------- | ----------------- | ----------- | ----------------- | -
|ASSETS                                                                                                      |                                   
|CURRENT ASSETS:                                                                                             |                                    |                   |             |                   |  
|Cash and cash equivalents                                                                                   |                                    | $                 | 1,183,322   |                   | $
|Accounts and notes receivable, net of allowance for doubtful accounts of $38,467 (2002) and $205,503 (2001) |                                    |                   | 394,328     |                   |  
|Prepaid expenses and other current assets                                                                   |                                    |                   | 164,349     |                   |  
|                                                                                                            |                                    |                   |             |                   |  
|                                                                                                            | Total current assets               |                   |             | 1,741,999         |  
|PROPERTY AND EQUIPMENT, net of accumulated depreciation of $1,203,475 (2002) and $1,194,057 (2001)          |                                    |                   | 822,013     |                   |  
|GOODWILL                                                                                                    |                                    |                   | 592,540     |                   |  
|OTHER ASSETS                                                                                                |                                    |                   | 79,633      |                   |  
|                                                                                                            |                                    |                   |             |                   |  
|                                                                                                            |                                    | $                 | 3,236,185   |                   | $
|                                                                                                            |                                    |                   |             |                   |  
|LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                                              |                                   
|CURRENT LIABILITIES:                                                                                        |                                    |                   |             |                   |  
|Accounts payable                                                                                            |                                    | $                 | 54,546      |                   | $
|Accrued liabilities                                                                                         |                                    |                   | 276,949     |                   |  
|Accrued salaries and benefits                                                                               |                                    |                   | 336,547     |                   |  
|Deferred revenue                                                                                            |                                    |                   | 953,763     |                   |  
|Current portion of note payable to Corsair                                                                  |                                    |                   | 168,288     |                   |  
|Current portion of notes payable                                                                            |                                    |                   | 25,128      |                   |  
|Current portion of capital lease obligations                                                                |                                    |                   | 2,502       |                   |  
|                                                                                                            |                                    |                   |             |                   |  
|                                                                                                            | Total current liabilities          |                   |             | 1,817,723         |  
|NOTE PAYABLE TO CORSAIR, less current portion                                                               |                                    |                   | 1,554,130   |                   |  
|NOTES PAYABLE, less current portion                                                                         |                                    |                   | 249,697     |                   |  
|                                                                                                            |                                    |                   |             |                   |  
|                                                                                                            | Total liabilities                  |                   |             | 3,621,550         |  
|COMMITMENTS AND CONTINGENCIES (Note 4)                                                                      |                                    |                   |             |                   |  
|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; 20,131,212 issued and outstanding              |                                    |                   | 201,312     |                   |  
|Additional paid-in capital                                                                                  |                                    |                   | 11,805,614  |                   |  
|Accumulated deficit                                                                                         |                                    |                   | (12,392,291 | )                 |  
|                                                                                                            |                                    |                   |             |                   |  
|                                                                                                            | Net stockholders' equity (deficit) |                   |             | (385,365          | )
|                                                                                                            |                                    |                   |             |                   |  
|                                                                                                            |                                    | $                 | 3,236,185   |                   | $
|                                                                                                            |                                    |                   |             |                   |  

See
accompanying notes to consolidated financial statements.

F-3

---

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                                             |                            |                                 | 1,948,335 
|                                                             |                            |                                 |           
|GROSS MARGIN                                                 |                            |                                 | 4,179,610 
|OPERATING EXPENSES:                                          |                            |                                 |           
|                                                             | Research and development   |                                 |           
|                                                             | Sales and marketing        |                                 |           
|                                                             | Loss on lease abandonment  |                                 |           
|                                                             | Impairment of goodwill     |                                 |           
|                                                             | General and administrative |                                 |           
|                                                             |                            |                                 |           
|                                                             |                            | Total operating expenses        |           
|                                                             |                            |                                 |           
|LOSS FROM OPERATIONS                                         |                            |                                 | (293,993  
|INTEREST AND OTHER EXPENSE, net                              |                            |                                 | (167,748  
|                                                             |                            |                                 |           
|LOSS BEFORE INCOME TAX PROVISION                             |                            |                                 | (461,741  
|INCOME TAX PROVISION                                         |                            |                                 | 1,600     
|                                                             |                            |                                 |           
|NET LOSS                                                     |                            | $                               | (463,341  
|                                                             |                            |                                 |           
|Basic and diluted net loss per share                         |                            | $                               | (0.02     
|Weighted-average basic and diluted common shares outstanding |                            |                                 | 20,131,212

See
accompanying notes to consolidated financial statements.

F-4

---



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

|                                                                    |  | Common
shares |  | Amount |         | Additional
paid-in
capital |   | Retained
Earnings
(accumulated
deficit) |  | Net
stockholder's
equity
(deficit) |            
|------------------------------------------------------------------- |  | ------------- |  | ------ | ------- | -------------------------- | - | --------------------------------------- |  | ---------------------------------- | -----------
|BALANCE, January 1, 2000                                            |  | 19,395,775    |  | $      | 193,958 |                            | $ | 3,415,979                               |  | $                                  | 958,759    
|Additional goodwill related to original purchase of Primal by Avery |  |               |  |        |         |                            |   | 3,575,000                               |  |                                    |            
|Capital contribution                                                |  |               |  |        |         |                            |   | 4,751,149                               |  |                                    |            
|Net loss                                                            |  |               |  |        |         |                            |   |                                         |  |                                    | (4,462,648 
|                                                                    |  |               |  |        |         |                            |   |                                         |  |                                    |            
|BALANCE, December 31, 2000                                          |  | 19,395,775    |  |        | 193,958 |                            |   | 11,742,128                              |  |                                    | (3,503,889 
|Issuance of common stock                                            |  | 735,437       |  |        | 7,354   |                            |   | 61,181                                  |  |                                    |            
|Noncash stock-based compensation                                    |  |               |  |        |         |                            |   | 2,305                                   |  |                                    |            
|Net loss                                                            |  |               |  |        |         |                            |   |                                         |  |                                    | (8,425,061 
|                                                                    |  |               |  |        |         |                            |   |                                         |  |                                    |            
|BALANCE, December 31, 2001                                          |  | 20,131,212    |  |        | 201,312 |                            |   | 11,805,614                              |  |                                    | (11,928,950
|Net loss                                                            |  |               |  |        |         |                            |   |                                         |  |                                    | (463,341   
|                                                                    |  |               |  |        |         |                            |   |                                         |  |                                    |            
|BALANCE, December 31, 2002                                          |  | 20,131,212    |  | $      | 201,312 |                            | $ | 11,805,614                              |  | $                                  | (12,392,291
|                                                                    |  |               |  |        |         |                            |   |                                         |  |                                    |            

See
accompanying notes to consolidated financial statements

F-5

---

PRIMAL SOLUTIONS, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                          |                                                                | For The Year Ended December 31,                                          |                                                    
|----------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------------------------------ | ---------------------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |                                                                |                                                                          |                                                    
|Net loss                                                                                  |                                                                | $                                                                        | (463,341                                           
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                                |                                                                          |                                                    
|                                                                                          | Depreciation and amortization                                  |                                                                          |                                                    
|                                                                                          | Provision for doubtful accounts                                |                                                                          |                                                    
|                                                                                          | Loss on disposal of equipment                                  |                                                                          |                                                    
|                                                                                          | Impairment of goodwill                                         |                                                                          |                                                    
|                                                                                          | Noncash loss on lease abandonment                              |                                                                          |                                                    
|                                                                                          | Reclass of accrued interest expense to note payable to Corsair |                                                                          |                                                    
|                                                                                          | Noncash stock-based compensation                               |                                                                          |                                                    
|                                                                                          | Amortization of loan payable discount                          |                                                                          |                                                    
|                                                                                          | Changes in operating assets and liabilities:                   |                                                                          |                                                    
|                                                                                          |                                                                | Accounts and notes receivable                                            |                                                    
|                                                                                          |                                                                | Prepaid expenses and other current assets                                |                                                    
|                                                                                          |                                                                | Other assets                                                             |                                                    
|                                                                                          |                                                                | Accounts payable, accrued liabilities, and accrued salaries and benefits |                                                    
|                                                                                          |                                                                | Increase in non-current accrued interest payable                         |                                                    
|                                                                                          |                                                                | Deferred revenue                                                         |                                                    
|                                                                                          |                                                                |                                                                          |                                                    
|                                                                                          |                                                                |                                                                          | Net cash provided by (used in) operating activities
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |                                                                |                                                                          |                                                    
|Purchases of property and equipment                                                       |                                                                |                                                                          | (92,473                                            
|Proceeds from sales of property and equipment                                             |                                                                |                                                                          | 3,061                                              
|Repayment from Avery Communications, Inc                                                  |                                                                |                                                                          |                                                   
|                                                                                          |                                                                |                                                                          |                                                    
|                                                                                          |                                                                |                                                                          | Net cash provided by (used in) investing activities
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |                                                                |                                                                          |                                                    
|Payments on capital lease obligations                                                     |                                                                |                                                                          | (66,656                                            
|Proceeds from notes payable                                                               |                                                                |                                                                          | 60,703                                             
|Payments on notes payable                                                                 |                                                                |                                                                          | (14,658                                            
|Payments on officer notes payables to officers                                            |                                                                |                                                                          |                                                   
|Payments on note payable to Corsair                                                       |                                                                |                                                                          |                                                   
|                                                                                          |                                                                |                                                                          |                                                    
|                                                                                          |                                                                |                                                                          | Net cash used in financing activities              
|                                                                                          |                                                                |                                                                          |                                                    
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                          |                                                                |                                                                          | 495,677                                            
|CASH AND CASH EQUIVALENTS, beginning of the year                                          |                                                                |                                                                          | 687,645                                            
|                                                                                          |                                                                |                                                                          |                                                    
|CASH AND CASH EQUIVALENTS, end of the year                                                |                                                                | $                                                                        | 1,183,322                                          
|                                                                                          |                                                                |                                                                          |                                                    
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                         |                                                                |                                                                          |                                                    
|Cash paid during the year for:                                                            |                                                                |                                                                          |                                                    
|                                                                                          | Interest                                                       |                                                                          | $                                                  
|                                                                                          |                                                                |                                                                          |                                                    
|                                                                                          | Income taxes                                                   |                                                                          | $                                                  
|                                                                                          |                                                                |                                                                          |                                                    
|NONCASH INVESTING AND FINANCING ACTIVITIES:                                               |                                                                |                                                                          |                                                    
|Reclassification of capital lease obligation to note payable to Corsair                   |                                                                | $                                                                        |                                                   
|                                                                                          |                                                                |                                                                          |                                                    

See accompanying notes to consolidated financial statements

F-6

---



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:



The
financial statements for the year ended December 31, 2002 reflect the operations of the Company as a separate company. The financial statements for the year ended
December 31, 2001 reflect the results of operations of the Company as a wholly-owned subsidiary of Avery until February 9, 2001, and as a separate company from February 9, 2001
through December 31, 2001.

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, 2002 and 2001.

F-7

---

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 yearsFurniture and fixtures

7 yearsLeasehold improvements

Shorter of the estimated useful life or life of the lease


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, 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 are
reviewed for impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. We evaluate the carrying value of long-lived assets and
certain 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 we have not experienced
impairment of intangible assets in prior periods, we cannot guarantee that there will not be impairment in the future.

Change in Accounting for Goodwill and Other Intangible Assets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 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 and September 30, 2002. Management will 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. During 2002 and 2001, the Company recorded goodwill impairment of none and $5.6 million (Note 8), respectively. Prior to
2002, the
Company amortized goodwill over a seven year period, and tested for impairment based on future undiscounted estimated cash flows (see Recently Adopted Accounting Principles).

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 shipment of the related product if the requirements of Statement of Position ("SOP") No. 97-2,

F-8

---

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 shipment and passage of title, 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.

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, 2002 and 2001.

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

Income TaxesFrom October 1, 1999, effective date of the merger with and into Avery, to February 9, 2001, date
of spin-off from Avery, the Company was included in the consolidated tax returns of Avery and, under the terms of a tax sharing arrangement, recorded any income taxes as if it were a
separate company. Subsequent to the spin-off on February 9, 2001, the Company was taxed as a separate entity. 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, 2002 and 2001.

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. See
Note 6 to the accompanying

F-9

---

consolidated financial statements for the pro forma effect of using the fair value method of accounting for stock options.

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 provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002,
with early adoption permitted. 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, 2002, the Company had one stock-based employee compensation plan, which is described above. 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 312002

2001Net loss, as reported

$
(463,341
)
$
(8,425,061
)Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects


(50,293
)

(67,643
)Pro Forma net loss

$
(513,634
)
$
(8,492,704
)Net loss per share:Basic and Dilutedas reported

$
(0.02
)
$
(0.42
)Basic and Dilutedpro forma

$
(0.03
)
$
(0.42
)


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
2002: expected volatility of 162%; risk-free interest rate of 4.00%; and a weighted-average contractual life of 10 years. 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 2001: expected volatility of 100%; risk-free interest rate of
5.10%; and a weighted-average contractual life of 9.77 years.

Stock SplitIn February 2001, the Company amended its articles of incorporation whereby, among other things, the
authorized capital was increased to 100,000,000 shares, comprising 95,000,000 shares of common stock and 5,000,000 shares of preferred stock and also effected a 19,396-for-1
stock split. The consolidated financial statements for all periods presented have been restated to reflect the effect of such stock split.

F-10

---

Concentration of Credit RiskThe Company sells its products to large communications companies, as well as emerging
telecommunications 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, 2002 and 2001 are primarily due from the major customer indicated below.

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. In the year ended December 31, 2001, 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 $957,000, respectively. During 2002, the Company's largest customer entered and emerged from bankruptcy.

Fair Value of Financial InstrumentsThe recorded amounts of financial assets and liabilities at December 31, 2002 and
2001 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 9 the required information about the Company's operating
segments and geographic areas.

Recently Adopted Accounting Principles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 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 and September 30, 2002.
Management will 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.

In
2001, prior to the issuance of SFAS No. 142, long-lived assets and intangibles, including goodwill, were evaluated for impairment on an annual basis or whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A goodwill

F-11

---

impairment loss was recognized to the extent that the carrying value was not recoverable from future operating cash flows. The evaluation for other long-lived assets included comparing
the estimated undiscounted future net cash flows associated with the asset to the asset's carrying amount to determine if impairment had occurred. If such assets were deemed impaired, an impairment
loss equal to the amount by which the carrying amount exceeds the estimated fair value of the assets was recognized. If quoted market prices for the assets were not available, the fair value was
calculated using the present value of estimated expected future net cash flows. The cash flow calculations were based on management's best estimates, using appropriate assumptions and projections at
the time. Goodwill was also amortized using the straight-line method over seven years.

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. Since October 1, 1999,
the goodwill has been amortized using a straight-line method over its estimated useful life of seven years. 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.

During
the quarter ended September 30, 2001, the Company assessed the recoverability of the amounts recorded for goodwill. Since the spin-off from Avery on
February 9, 2001, the economic condition of the telecommunications industry in particular and the economy in general had continued to deteriorate. The Company had significantly reduced
personnel and expenses during 2001 and the current cash flow forecasts had been reduced significantly as compared to the forecast used at the time of the Avery transactions. As a result, during the
quarter ended September 30, 2001, goodwill was deemed impaired, and the Company recorded a charge of $5.6 million to reflect the write down of goodwill to its estimated recoverable
amount based on such revised forecast.

The
following table presents the effects on previously reported net loss if the Company had adopted the nonamortization provisions of SFAS No. 142 on January 1, 2001:

For the Year Ended December 31,2002

2001Reported net loss

$
(463,341
)
$
(8,425,061
)Add back: Goodwill amortization





982,118Adjusted net loss

$
(463,341
)
$
(7,442,943
)Basic and diluted earnings per share:Reported net loss per share

$
(0.02
)
$
(0.42
)Goodwill amortization per share





0.05Adjusted net loss per share

$
(0.02
)
$
(0.37
)


On
January 1, 2002, the Company adopted SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived
Assetswhich supersedes SFAS No. 121. SFAS No. 144 requires, among other things, the application of one accounting model for long-lived assets that
are impaired or to be disposed of by sale. The adoption of SFAS No. 144 did not have a material impact on the Company's consolidated financial statements.

On
November 14-15, 2001, the FASB Emerging Issues Task Force ("EITF") issued Topic D-103, requiring reimbursements received for "out of pocket"
expenses incurred to be recorded as revenue in

F-12

---

the income statement. EITF Topic D-103 became effective for periods beginning after December 15, 2001 and requires that comparative financial statements for prior periods
should be restated. The adoption of EITF Topic D-103 did not have a material impact on the Company's consolidated financial statements. The Company reclassed $60,241 for the year
ended December 31, 2001.

In
December 2002, the 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 provisions of SFAS No. 148 are effective fiscal years ending after December 15, 2002, with early adoption
permitted. 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.

Recently Issued Accounting PronouncementsIn August 2001, the FASB issued 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. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002, with early adoption permitted. The adoption of SFAS No. 143 is not expected to have a material impact on the Company's consolidated
financial statements.

In
July 2002, the FASB issued 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 provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption permitted. The Company expects
to adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002.

In
November 2002, the FASB issued 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 Company adopted the
disclosure provisions of FIN No. 45 at December 31, 2002, with no impact on its financial position or results of operations. The Company expects to adopt the recognition provisions of
FIN No. 45 after December 31, 2002, and does not expect any material impact on its financial position or results of operations as a result of the adoption.

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

F-13

---

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 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. The Company is currently evaluating the provisions of FIN No. 46, but believes its adoption will not have a material impact on its consolidated results of operations or its financial
position.

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.

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

Year Ended12/31/02

12/31/01Numerator:Numerator for basic loss per shareNet loss applicable to common stockholders

$
(463,341
)
$
(8,425,061
)Denominator:Denominator for basic and diluted loss per share





Weighted-average shares outstanding during the period


20,131,212


20,021,835Net loss per share:Basic and Diluted

$
(0.02
)
$
(0.42
)


Not
included in the above table are the dilutive effect of options to purchase 239,070 shares of common stock for the year ended December 31, 2002 and 224,328 shares of common
stock for the year ended December 31, 2001 because they are anti-dilutive.

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

F-14

---



2.    PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31:

2002

2001Computer and office equipment

$
1,897,156

$
2,272,749Furniture and fixtures


91,383


91,383Leasehold improvements


36,949


33,6172,025,488


2,397,749Less accumulated depreciation and amortization


(1,203,475
)

(1,194,057
)Property and equipment, net

$
822,013

$
1,203,692


Amortization
of equipment purchased under capitalized lease obligations is included in depreciation expense. Maintenance and repairs are charged to expense as incurred. Renewals and
improvements of
a major nature are capitalized. Included in property and equipment is equipment under capital leases of $5,796 and $647,672 at December 31, 2002 and 2001, respectively. Accumulated depreciation
related to equipment under capital leases amounted to $5,152 and $464,522 at December 31, 2002 and 2001, respectively.

3.    NOTES PAYABLE

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

Current

Non current

TotalDecember 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

$
1,997,243December 31, 2001:Corsair Communications, Inc.

$


$
1,722,418

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





209,170


209,170Total

$


$
1,931,588

$
1,931,588


Note Payable to Corsair Communication, Inc.

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.

F-15

---

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 is 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 extend the maturity of the note from May 2004 to December 2004, require 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. During
January 2003, the Company began, and the noteholder accepted, payments under the new terms. The terms of the letter of intent have been reflected in the consolidated financial statements.

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 (see
Note 7). 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, 2002) due in October 2004, and any borrowings under the operating line of credit are to be repaid at maturity,
April 2004, with accrued interest paid monthly at a rate of prime plus 2.0% (6.25%, at December 31, 2002). 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. The loan is structured as a $100,000 facility to purchase
equipment, with amortized payments due in October 2004 with an adjustable interest rate of 2.25% plus prime (6.50% at December 31, 2002). At December 31, 2002, the balance of the
loan was $46,045.

F-16

---

The
following table represents the contractual payments associated with the notes payable as of December 31, 2002:

Interest
Payments

Principal
Payments

Total
PaymentsYear ending December 31:2003

$
133,984

$
193,416

$
327,4002004


118,375


1,574,957


1,693,3322005








2006








2007


108,560


228,870


337,430Total

$
360,919

$
1,997,243

$
2,358,162


4.    COMMITMENTS AND CONTINGENCIES

The Company leases office space and certain equipment under various noncancelable operating and capital leases. Future minimum lease payments required under
operating and capital leases as of December 31, 2002 are as follows:

Operating
Leases

Capital
LeasesYear ending December 31:2003

$
381,322

$
2,5122004


396,2432005


412,2692006


428,8492007


344,792Thereafter


Total minimum lease payments

$
1,963,475


2,512Less amount representing interest





(10
)Present value of minimum lease payments




$
2,502


Rent
expense under such operating leases was $437,362 and $498,805 for the years ended December 31, 2002 and 2001, 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

F-17

---

for these guarantees and indemnities in the accompanying consolidated balance sheets. The maximum amount of potential future payments under such indemnification is not determinable.

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 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 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. Options to purchase an aggregate of 2,322,322 shares at a price of $0.07 per share were granted at the fair value
on the date of grant from November 9, 2001 to December 5, 2001. At December 31, 2002 and 2001, options to purchase 1,527,524 and 611,772 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
2001, in accordance with the Company's Stock Option Plan, the Company issued 2,322,322 options to purchase common stock at an exercise price of $0.07, fair market value at the
time of the grant, including 400,000 options granted to William Salway, the Company's then current Chief Executive Officer and 100,000 options granted to Joseph Simrell, the Company's Chief Executive
Officer. Of the options granted, 611,772 options vested on the date of the grant, and the remaining
1,710,550 options will vest 33% on February 15, 2002 and then vest approximately 8% every three months thereafter over the next two years to be fully vested at February 15, 2004.

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



F-18

---



Information
regarding all stock options issued is as follows:

Number of
Options

Weighted-
Average
Exercise
PriceBalances, January 1, 2001



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

2,831,634


0.06Exercised




Canceled

(58,500
)

0.07Balances, 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

$
0.06


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

Weighted-
Average
Number
Exercisable

Weighted-
Average
Exercise
Price$0.03

509,312

8.28

$
0.03

509,312

$
0.03$0.03

575,150

9.87

$
0.03



$
0.03$0.05

115,000

9.50

$
0.05

73,333

$
0.05$0.07

2,079,468

8.78

$
0.07

1,453,921

$
0.07$0.03 to $0.07

3,278,930

8.92

$
0.06

2,036,566

$
0.06


Stock Compensation

In accordance with his compensation agreement, William Salway was granted 409,312 shares of common stock on February 9, 2001. In addition, the Company also
paid the estimated related federal and state income taxes triggered by such common stock grant. The estimated fair value of the shares of common stock and the payment of the related federal and state
income taxes totaling approximately $106,000 were recorded as stock compensation expense during the year ended December 31, 2001.

During
2001, the Company also granted 76,125 shares of common stock to employees. The estimated fair value of the shares of common stock totaling $3,000 was recorded as stock
compensation expense during 2001.

7.    LOSS ON LEASE ABANDONMENT

The Company had a lease for approximately 28,000 square feet of space for the facilities in Irvine, California, and recently consolidated its operations to 13,500
square feet of space. During the quarter ended March 31, 2001, the Company was in default on its lease payments relating to excess space, and accrued $1.6 million which represented the
cost of the future lease payments. The Company and the landlord amended the lease to reduce costs related to unneeded space and corresponding rental

F-19

---

payments. As part of the amendment, the Company agreed to reimburse the landlord for certain costs it incurred to initially lease the space of $86,000 and the Company signed a note for $200,000 due
at the end of the lease. As a result, the Company reversed $1.3 million of the lease loss liability recorded at March 31, 2001 resulting in the recognition of net loss on lease
abandonment charge of $286,000 for the year ended December 31, 2001.

8.    GOODWILL

Prior to the adoption of SFAS No. 142, effective January 1, 2002, long-lived assets and intangibles, including goodwill, were evaluated
for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A goodwill impairment loss was recognized to the
extent that the carrying value is not recoverable from future operating cash flows. The evaluation for other long-lived assets includes comparing the estimated future net cash flows
associated with the asset to the asset's carrying amount to determine if impairment has occurred. If such assets are deemed impaired, an impairment loss equal to the amount by which the carrying
amount exceeds the estimated fair value of the assets is recognized. If quoted market prices for the assets are not available, the fair value is calculated using the present value of estimated
expected future net cash flows. The cash flow calculations are based on management's best estimates, using appropriate assumptions and projections at the time.

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. Since October 1, 1999,
the goodwill has been amortized using the straight-line method over its estimated useful life of seven years. 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 telecommunications 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 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 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 and September 30, 2002. Management will complete an annual testing of goodwill for impairment on

F-20

---

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.

9.    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 $30,319 and $30,077 for the years ended December 31, 2002 and 2001.

10.  INCOME TAXES

For the years ended December 31, 2002 and 2001, the expense for income taxes was $1,600 and $2,451, respectively. 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 (benefit) for the income taxes to the amount of income tax expense that would result from applying the federal statutory rate of 35% to income before
provision for income taxes is as follows:

2002

2001Benefit at statutory rate

$
(161,610
)
$
(2,947,107
)State taxes, net of federal benefit


(13,157
)

(102,880
)Goodwill





2,253,021Adjustment of federal net operating loss carryforwards resulting from spin-off


277,967


675,000Change in valuation allowance


(110,552
)

(33,064
)Nondeductible expenses and other


8,952


157,481$
1,600

$
2,451


F-21

---

The
tax effects of temporary differences used in determining the Company's deferred tax assets and liabilities are presented below at December 31, 2002 and 2001:

2002

2001Deferred tax assets:Net operating loss carryforwards

$
605,688

$
714,304Bad debt allowances


16,479


88,037Accruals


123,228


196,627Credits


302,948


209,416Other


24,135


Total deferred tax assets


1,072,478


1,208,384Less valuation allowance


(955,341
)

(1,065,893
)Net deferred tax assets


117,137


142,491Deferred tax liabilities:Basis difference in fixed assets


(70,916
)

(82,039
)State taxes


(46,221
)

(60,452
)Total deferred tax liabilities


(117,137
)

(142,491
)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, 2002 and December 31, 2001, as it is more likely than not that the Company's deferred tax asset will not be realized.

At
December 31, 2002, the Company's federal and state loss carryforwards are $1,595,325 and $715,807 and will begin to expire in 2019 and 2006, respectively. The Company's
research and development credit carryforward is $232,763 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, as 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.

11.  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 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.

F-22

---

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, and consulting 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, 2002 and 2001 were as follows:.

Systems

Services

TotalYear 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

$
4,179,610Year ended December 31, 2001Revenues

$
2,662,918

$
4,802,064

$
7,464,982Cost of Revenues


64,567


3,131,116


3,195,683Gross Profit

$
2,598,351

$
1,670,948

$
4,269,299


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, 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








822,013Year ended December 31, 2001Revenues

$
6,246,375

$
678,780

$
539,827

$
7,464,982Gross Profit


3,566,696


391,359


311,244


4,269,299Net Loss


(7,038,538
)

(772,311
)

(614,212
)

(8,425,061
)Property and Equipment, net


1,203,692








1,203,692


Revenues
from significant countries were as follows:

Australia

United
Kingdom

United StatesYear ended December 31, 2002

$
712,830

$
427,619

$
4,782,882Year ended December 31, 2001

$
622,707

$
438,024

$
6,168,274


F-23

---

EXHIBIT INDEX

|Exhibit
Number |  | Description of Document                                                                                                                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.13          |  | Transition Agreement for William Salway dated January 27, 2003                                                                                                                                                    
|10.14          |  | Employment Agreement for Joseph R. Simrell dated January 28, 2003                                                                                                                                                 
|10.15          |  | Consolidation Agreement between Wireless Billing Systems dba Primal Billing Solutions and Metrocall, Inc. dated December 30, 2002                                                                                 
|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
|23.1           |  | Consent of Deloitte & Touche LLP                                                                                                                                                                                  
|99.3           |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002                                                                                            

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