UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549










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, 2007


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. 333-46494











PRIMAL
SOLUTIONS, INC.


(Exact
Name of Small Business Issuer in its Charter)





Delaware
            
            36-4170318(State
      or Other Jurisdiction
              of
      Incorporation or
              Organization)
            
            (I.R.S.
      Employer
              Identification
      No.)





19732
MacArthur Boulevard


Suite 100


Irvine,
California 92612


(Address
and telephone number of Principal Executive Offices)





(949)
260-1500


(Issuer’s
Telephone Number, Including Area Code)








Check
whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. o




Check
whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange 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. Yesý    Noo




Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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




Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange
Act).       Yeso     Noý







State
      issuer’s revenues for its most recent fiscal year:
            
            $
            6,372,000State
      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, 2008:
            
            $
            1,151,000Number
      of shares of common stock ($0.01 par value) outstanding as of the close of
      business on March 17, 2008:
            
            
            38,373,634







Transitional
Small Business Disclosure Format (Check one):
       Yeso      No ý











PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY


INDEX




PAGEPART IItem
      1.
            
            Description
      of Business
            3Item
      2.
            
            Description
      of Property
            15Item
      3.
            
            Legal
      Proceedings
            15Item
      4.
            
            Submission
      of Matters to a Vote of Security Holders
            15PART IIItem
      5.
            
            Market
      for Common Equity, Related Stockholder Matters, and Small Business Issuer
      Purchases of Equity Securities
            16Item
      6.
            
            Management’s
      Discussion and Analysis
            16Item
      7.
            
            Financial
      Statements
            24Item
      8.
            
            Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
            24Item
      8A.
            
            Controls
      and Procedures
            24Item
      8B.
            
            Other
      Information
            25PART IIIItem
      9.
            
            Directors,
      Executive Officers, Promoters and Control Persons and Corporate
      Governance; Compliance With Section 16(a) of the Exchange
      Act
            26Item
      10.
            
            Executive
      Compensation
            27Item
      11.
            
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            32Item
      12.
            
            Certain
      Relationships and Related Transactions, and Director
      Independence
            33Item
      13.
            
            Exhibits
            34Item
      14.
            
            Principal
      Accountant Fees and Services
            37








- 2
-


PART I






Item 1.
            Description of
  Business




COMPANY
BACKGROUND


The
Company was incorporated on June 28, 1996 and has one wholly-owned
subsidiary, Wireless Billing Systems, (collectively, “Primal” or the
“Company”). For over
a decade, Primal’s technology has been deployed at both large and small
communications service providers ("CSPs") around the world.  Our core
billing, mediation, and rating solutions have been used in 70 paging, cellular,
wireline, fiber, and hybrid fibre-coaxial ("HFC") networks to support tens of
millions of subscribers and billions of transactions.  With the
emergence of Internet Protocol-based communications networks, our capabilities
have expanded beyond these traditional back-office solutions to incorporate
market-demanded real-time transaction management and analytics
capabilities.






OUR
BUSINESS FOCUS




We are a
leading provider of managed software solutions that enable CSPs to automatically
capture, correlate, track, manage, monetize, and analyze their communications
transaction data.  Our outsourced solutions and services can be
deployed as an overlay solution alongside,and integrated with, existing back-office systems,or as a standalone
replacement solution to enable usage-based billing, transaction management,
revenue assurance, and analytics.  Our managed solutions contribute
to our customers' ability to increase revenue, improve
profitability, and control costs.




Our
solutions are communication
service agnostic and can support voice, data, or video
services.  Examples of our broad
deployment flexibilityinclude residential and commercial Voice over
Internet Protocol  (“VoIP”) telephony, high-speed broadband analytics
and billing, marketing analytics, third-party invoice reconciliation and
analytics, Internet Protocol (“IP”) peering settlement, wholesale wireless
broadband billing, triple-play service billing, short message service ("SMS")
and wireless messaging billing, and mobile voice billing.




Our
market focus has been the North American cable companies, and other providers of
residential and commercial VoIP service.  We maintain strong and
collaborative relationships with our customers, which we believe is one of our
core competencies and critical to our success.  Our industry leading
customers include Time Warner Cable, Bright House Networks, Bresnan
Communications, and EarthLink.  During the late 2007, we re-branded our
solutions under the "IPC"
name to better reflect our solution focus.




Our goal is to establish our IPCplatformas
the leading platform to drive value from communications services for North
American cable companies, internet service providers ("ISPs"), and
enterprises.  We believe key competitive differentiators for service
providers of IP-based communications services will be the possession of
real-timecapability for managing transactional data and extracting
valuable business intelligence from that data to (i) improve the
customer experience, (ii) generate
increased revenues, (iii) improve
profitability, and (iv) control
costs.  Key elements of our growth strategy to achieve our goalinclude(i)
broadening our customer base and expanding offerings to existing
customers, (ii) continuing to
exploit VoIP industry opportunities, (iii) expanding
into the enterprise market, (iv) maintaining
our technology leadership, and (v) expandingthrough select strategic partnerships.


OUR SOLUTIONS
  Our IPC
platform and outsourced billing, analytics, and audit and compliance
capabilities provide a comprehensive solution for managing communications
transactions through their entire business lifecycle.  We have
designed our solutions to be flexible, scalable, reliable, and high-performing to
provide service providers a solution for managing
transactions and gaining business insight into a wide variety of communications
services.




Our IPC
platform, launched in the fall of 2005, moves beyond the capabilities of our
field proven mediation, rating, and billing technologies by adding real-time
transaction management and analytics capabilitiesdeliveredvia
customizable web portals running on cost effective small footprint Unix
computers.




In the communications
industry, it is common to see multiple and redundant
systems for back-office operations.  These systems often use a
variety of technologies
that aredifficultto integrate with each other.  The
result is "silos" of services and
operations technology appearing throughout the service provider
as new services are introduced, or as new systems are acquired
for those services rather than doing costly upgrades to existing
systems.  The problem is this not only creates service silos, it
also createsinformation silos
that are very difficult to access for business purposes, or to gain a 360-degree view
of customer activity.  The common response to this data access
problem has
been the creation of data warehouses and data marts, which are large
repositories of data that are accessed via business intelligence
tools.




These multi-million
dollar, multiple-year projects run by the information technology ("IT")
department often fail to deliver the
business value that end-users, such as finance and marketing, desire because
these systems are not flexible
and require a
lot of time and resources to
design, build and maintain.  Rapidly changing business
conditions and requirements further limittheir value
as a business tool because the data can be out of
sync with current needs.




Our IPC platform and
associated solutions, delivered as a managed service, are designed to
address this problem by building transaction management and analytics
capabilities into the operational systems and thus provide real-time
value and a substantiallylower overall cost of
ownership.






- 3
-


The IPC
Platform


The IPC
platform goes beyond traditional mediation systems and data warehouses by
providing a robust and flexible real-time capability for managing transactional
data.  The IPC platform enables automation of business processes, and
provides business intelligence to marketing and finance users.The
carrier-grade IPC platform offers the following functionality to the
customer, including
the ability to:




·
                capture
      transactional data from voice, data and video
    networks;
 ·
                format,
      correlate, enhance, and store this data in a “business-usable” form;
      and
 ·
                retrieve
      the data for monetization, audit and compliance, or analytic
      purposes.
  In
addition, the transactional data can be combined with externally provided
demographic data to provide enhanced insight into customer behavior and
profiles.





The
flexible architecture allows the IPC platform to be quickly tailored to meet the
specific business requirements of each customer – whether that customer provides
retail or wholesale services to the residential or commercial
markets.





The IPC
transaction definition capability and correlation engine enable the assembling
of transaction data for specific business purposes,the assignment of
business rules, and the tracking
ofthe
flow of transactions through their entire business lifecycle. Robust monitoring
and alerting capabilities are included to enable reacting to conditions in
real-time that are defined as outside acceptable parameters.





The
advanced web portal capabilities enable delivery of essential business
information to both internal user communities and external end customers.
Flexible branding, language support, reporting and analytics, and transaction
access control allow customers to create custom tailored portals that exactly
meet their internal and externally facing business requirements.





Analytics
Capabilities




Leveraging
actionable intelligence to improve operational efficiency while scaling up new
services is increasingly viewed as a competitive edge.  It iscomplicated, costly, and often dependent on IT
priorities when done in-house.  IPC’s analytics capabilities provide a
low-cost, quick and easy-to-implement outsourced approach.  We focus
on three areas – product profitability, cost control, and tailored solutions for
external end customers.




Built on years of
operating experience on behalf of our customers and deep insight provided by
product marketing experts from the industry, our analytics solutions are
designed to answer the questions most important to our customers and
provide a positive impact on operational efficiency.  Our analytics
solutions are carrier-grade and provide the
scalability and performance expected by our largest customers.  We
are accustomed to operating transaction repositories where over 15
terabytes of data is actively accessed on a daily basis.





Via our
web portal technology, we provide customizable dashboards, graphs, and reports
that provide real-time insight into transactional data.  Tailored
analytics solutions can be quickly assembled and provided to different internal
user communities and to external end customers.  A large library of
widgets and reports are available to gain insight into revenue generation and
cost control.  All widgets and reports provide drill down capabilities
back to the lowest level of detail around a transaction.





As an
optional service, transactional data can be combined with demographic
information to provide greater insight into customers and their usage patterns
or as a value-added service that can be offered to external business
customers.




Billing
Capabilities




Our
standalone pricing and rating engine provides a real-time capability to support
monetizing any type of retail or wholesale IP-based voice, data, or video
service.  Our rating engine leverages the power of the IPC platform to
provide the capability to create pricing
plans whether based on usage, transactional, bundles, promotion and incentive,
or any other pricing scheme.  N-level hierarchies with customizable
billing schemes provides flexibility to support the unique business
relationships with resellers, service partners, and corporate clients that
change as services mature and evolve, more complex multi-party services are
offered, and business models adapt to market conditions.




Product
marketing users can simulate, test, and evaluate pricing schemes to ensure
maximum market reach and profitability.   The monitoring and
alerting capabilities provide real-time notification when conditions, such as
wholesale rates or customer usage patterns, have changed and action is needed to
protect revenue and profit margin before the problem becomes more
serious.




As an overlay
solution, our rating engine can provide rated usage to our customers'
other business systems, including all the leading cable billing
systems.  The solution can also be configured to work with existing
installed mediation products rather than using the mediation functionality
provided through the IPC platform.





Audit
and Compliance Capabilities




All our
solutions have audit and compliance capabilities that can be enabled to track
and trace transactions through their entire business lifecycle with associated
reporting to support internal and external audit and compliance staff.Our
solutions incorporate automation and auditing capabilities that reduce the cost
to process and settle multi-party transactions, and ensure accuracy with our
customer’s trading partners.





Integration
Capabilities




Over the
past decade, Primal’s technology has been deployed at both large and small CSPs
around the world.  Our solutions have been used in 70 paging,
cellular, wireline, fiber, and HFC networks to support tens of millions of
subscribers and billions of transactions.  Along the way, our
technology became an integrated part of customer networks comprised of hardware
and software from all the leading suppliers to the communications industry,
including Cisco Systems, Lucent Technologies, Alcatel, Motorola, Ericsson,
Qualcomm, Broadsoft, Sylantro Systems, and Nortel Networks.





Today,
leveraging our heritage of experience, scalability and reliability, Primal is
focused on the challenges associated with IP-based networks.  Our
solutions are designed to work well in both hybrid networks with both IP and
non-IP network elements, or in pure IP-based networks.  They can be
used as overlay solutions in conjunction with existing business support systems
("BSS") and operational support systems ("OSS", or collectively "BSS/OSS"), or
as replacement solutions.





Our
solutions integrate with a wide range of networks elements including VoIP
switches, session border controllers, policy managers, gateways, routers, RKS,
call managers, time-division multiplexing ("TDM") switches, code division
multiple access ("CDMA") switches, global system for mobile communications
("GSM") switches, cable modem termination system ("CMTS"), and video and
pay-per-view systems.  We support a wide range of integration options
with downstream business systems such as provisioning, billing, finance,
customer relationship management ("CRM"), data warehouses, and fraud management
from the major suppliers including Amdocs, CSG Systems, Convergys, Oracle
Corporation, Sigma Systems, and JacobsRimmell.


- 4
-


EXAMPLES
OF HOW OUR SOLUTIONS ARE USED





Residential
VoIP Telephony




We
support several of the largest residential VoIP deployments in the market. We
work with all the major VoIP technology suppliers, such as Cisco Systems,
Siemens, Nortel Networks, Broadsoft, and Sylantro Systems, and all the major
BSS/OSS suppliers, such as Convergys, CSG Systems, and Amdocs.





We offer
a range of solutions that address all stages in the residential VoIP lifecycle.
Our billing solutions can be tailored to work with different business models and
network architectures. Our revenue assurance capabilities help maximize revenue
capture and control third-party costs. Our analytics solutions are used to
better understand end customer’s transactional experiences and pinpoint
opportunities to improve profitability.





Commercial
VoIP Telephony




Business-class
voice services are not a “one size fits all” proposition. The Company’s billing
solutions provide the features and flexibility required to handle any type of
service package or customer contract arrangement.





Sales
channels are critical to success in the commercial voice service market. Our
solutions ensure proper pricing and accounting between our customers and their
channel partners.  Additionally, we can provide channel partners with
capabilities that they can offer to their business customers that improve the
customer experience and deliver added convenience.  Our solutions all
share a sophisticated account hierarchy structure that enable flexible billing,
analytical, and audit capabilities.





Broadband
Data Analytics




We offer
cable companies with cable access networks based on Cisco CMTS routers a
real-time capability to capture, track, monetize, and manage broadband usage.
Our solution employs the detailed per-subscriber account and billing information
present in the SAMIS-formatted Management Information Bases (“MIBS”), which are
embedded in Cisco uBR7246VXR and Cisco uBR10012 universal broadband routers. The
SAMIS format is specified within the Data-over-Cable Service Interface
Specifications (“DOCSIS”) Operations Support System Interface (“OSSI”)
specification and is supported for cable modems compliant with DOCSIS 1.0, 1.1,
and 2.0.





Marketing
Analytics




Our
solutions combine subscriber, usage, financial, and demographic data to create
actionable views of product and marketing performance.





We
provide dashboards that provide dozens of customizable “widgets”, reports and
views that make data easy to understand and act on, and our unique “Widget of
the Month Club” monthly subscription service for regular new widget updates. All
our solutions offer a real-time monitoring capability that provides alerts
whenever rules-driven business thresholds are crossed.





Invoice
Reconciliation and Profitability Analytics




Market
research indicates that service providers today may be losing a significant
percentage of billed revenues and profits from their VoIP and other new IP-based
services. A sampling of this leakage for voice services includes such items as
overcharges and duplicate invoicing from third party network providers, call
detail errors, minutes-of-use discrepancies, unrecoverable third-party charges,
and pricing plans that do not account for all the real costs of services
used.





Our
solution provides high-level as well as microscopic views of all voice traffic,
so our customers can thoroughly review third-party settlements and conduct
in-depth revenue assurance analysis. Highlights of our solution capabilities
include a business rules driven transaction management engine to process and
assure the integrity of each end-to-end transaction, “digital microscopes” –
data reporting and forensic analysis tools – to create and access the
information needed to uncover and address revenue assurance challenges,
customizable web portal, reports and dashboard views that make the data easy to
understand and act on, and a real-time monitoring capability that can alert
users whenever rules-driven business thresholds are crossed.







DEMAND
DRIVERS FOR OUR SOLUTIONS




Our
solutions are capable of managing a wide variety of transactions across multiple
service provider delivery models, allowing us to benefit from increased growth,
complexity, and technological change in the communications
industry.





For
service providers, the cost of not executing well is significant. The evolving
competitive environment demands quickly adapting to changes in the market,
efficiently managing costs to survive massive price compression, and finding
creative and effective ways to maintain fleeting customer loyalty. These new
business economics require service providers to form new ecosystems for
delivering services, while effectively managing complexity and risk. Service
providers must also leverage existing infrastructure investments not by adding
or replacing infrastructure, but increasingly by looking to the flexibility
offered from outsourced managed solutions.




We believe thatgrowth in VoIP and the increasing importance of commercial services are
strongly driving demand for our solutions and services.  Additionally,
we see an opportunity to provide our solutions to future high-growth markets
such as bundled services (including voice, data, video, and wireless) and
digital content.  We support real-time and post-event management of
transactional data through the entire transaction lifecycle.  The need
for service providers to gain insight into their transactional data efficiently
increases demand for our solutions and managed services delivery
model.  The critical driver of adoption of our solutions is shifting
from a need for cost effective billing infrastructure to a need for real-time
business intelligence about customers and their service usage
behavior.  In this environment, we believe our managed services
capabilities will be a major value-added difference to our service providers and
their largest customers.


- 5
-


Adoption
of VoIP




IP-based
network technologies are transforming the communications marketplace and VoIP
applications are just starting to be deployed.  We believe ourstrong market penetration across new entrants and cable companies
positions us well to leverage our existing base and maximize the opportunity for
other IP-based services.





Growth
in Managed Services delivery model




Our
managed services delivery model enables delivery of proprietary solutions over
the Internet as a service.  Customers do not have to make large and
risky upfront investments in software, extensive implementation services, and
additional IT and operational staff.  We implement all upgrades to our
software as part of our managed service capability so they are available to
benefit our customers immediately and without any additional software upgrade
cost.







GROWTH
STRATEGY




Our goal is to
establish our IPC platform as the
leadingplatform to drive value
from communications services for North American cable multiple service operators
("MSOs"), ISPs, and enterprises.  We believe key competitive
differentiators for service providers of IP-based communications services will
be the possession ofreal-time capability for managing transactional data and extracting
valuable business intelligence from that data to (i) improve the
customer experience, (ii) generate
increased revenues, (iii) improve
profitability, and (iv) control
costs.  Key elements of ourgrowth
strategy to achieve our goalinclude:




Broaden
Customer Base and Expand Offering to Existing Customers




Our IPC platformand related solutions are designed to be
communication
service agnostic and address service providers and business models across a
range of communications services including voice, high-speed data, and
video.  This is a
capability we have demonstrated through a broad range of complex
implementations, such as residential and commercial VoIP billing, wholesale
Wi-Fi/Wi-Max billing, high-speed broadband usage analytics and billing,
marketing analytics, invoice reconciliation service and voice profitability
analytics, and IP peering settlement services.  We also derive
significant growth from our existing customers as they expand the scope and
complexity of their service offerings, expand into new distribution channels,
and increase transaction and subscriber volumes.  As our customers
expand the scope and complexity of their service offerings, they require
additional capabilities, which drive enhanced functionality and increasing
amounts of transactions and subscribers over our platform.  Many of
our customers contract for multiple solutions from us, and we believe we are
well positioned to cross-sell additional solutions to customers who do not
currently use
our full solutions portfolio.  In addition, our
customers' increased importance of and expansion into the commercial
services market has led to their increased focus onservice
differentiation, thus providing another opportunity for us to further penetrate
into existing customers and attract new customers.  Our
customer-facing web portal solutions and analytics solutions for commercial
services are examples of service differentiation enablers available to our
existing customers and new customers alike.





Continue to Exploit VoIP Industry
Opportunities




We
believe continued rapid VoIP industry growth and increased service complexity
will increase demand for our solutions.  We have seen strong growth in
residential VoIP customers and we believe we will see similar growth for
commercial VoIP customers.  Being the trusted partner to VoIP industry
leaders, including Time Warner Cable, Bright House Networks, and Bresnan
Communications, positions us well to benefit from the evolving needs,
requirements, and opportunities of the VoIP industry.





Expand into the Enterprise
Market




VoIP and
other IP-based communications services are being more widely adopted by large
and small businesses because of its
flexibility,morerobust capabilities, and  lower
cost.  Many large enterprises possess internal networks capable of
providing voice, video and data services to their employees and trading
partners.  These companies often have the same need for back office
solutions as service providers and would be potential customers for our
solutions.  Small and medium sized businesses are increasingly
adopting hosted solutions for VoIP and other IP-based services, often
contracting with our service provider customers for these
solutions.  As our customers and other service providers seek to
differentiate their offering, work through new distribution channels, and
increase the average revenue per user ("ARPU") on their services, our
customer-facing web portal solutions and analytics solutions provide needed
capabilities to achieve these objectives.





Maintain Technology
Leadership




Our
proprietary, patent-pending technology, delivered as a managed service allows
service providers to capture, correlate, track, manage, monetize, and analyze
communications transactional data, enabling them to increase the effectiveness of acquiring newcustomers, improve profitability through the service lifecycle, and
control third-party costs.  We intend to build upon our technology
leadership by continuing to invest in research and development to increase the
automation of processes and workflows andtodevelop
enhanced capabilities and complementary solutions that leverage our platform and
competitive strengths.  We believe this
will driveincreased interest in our solutions by making it
more economical for service providers to use us as an outsourced third-party
solutions provider.  Additionally, we believe our close relationships
with our tier-one customers and partners will continue to provide us with
valuable insights into the challenges that are creating demand for
next-generation solutions.





Expand through
Partnerships




As we
explore new opportunities, we continue to look for companies that are
complementary to us for strategic partnership that will enable us to either
enter new markets or enhance our offerings.


- 6
-
  CUSTOMERS




Our
typical customers are providers of communications services with a concentration
around North American cable companies, such as Time Warner Cable and Bresnan
Communications, and ISPs such as EarthLink and American Online.  We
maintain strong and collaborative relationships with our customers, which we
believe to be one of our core competencies and critical to our
success.  We are generally the only provider of the services we offer
to our customers.  Our contracts typically extend up to 60 months in
length from execution with volume-sensitive pricing based on subscriber counts
or transactions processed.  All of our significant customers may
terminate their contracts for convenience upon written notice.  We
have long-standing relationships with Time Warner Cable dating back to December
2002, and Bright House Networks dating back to March 2004.  We are the
primary provider of outsourced usage-based billing services to Time Warner Cable
and Bright House Networks for both their residential and commercial VoIP
telephony service under a shared master agreement that ran through December
2007, and which has been automatically renewed for another twelve month
period.  Under the terms of this agreement, Time Warner Cable and/or
Bright House Networks may terminate its relationship with us for convenience,
although we believe they would encounter substantial costs in replacing our
outsourced usage-based billing services.  For 2007, we received 65.7%
and 14.6% of our revenues from Time Warner Cable and Bright House Networks,
respectively, compared to 52.8% and 10.1%, respectively, of our revenues in
2006.  No other customer accounted for more than 10% of our revenues
in 2007.







SALES
AND MARKETING




Sales




We market
and sell our solutions primarily through a small direct sales team and a small
number of channel partners who either private label our solutions or who refer
sales leads to us for direct contact.  To date, we have concentrated
our sales efforts on North American cable companies and other domestic providers
of residential and commercial VoIP services.  Following each sale, a
team is assigned to provide the contracted managed services and is also used to
identify additional sales opportunities within the account.  We
generate leads from contacts made through our telesales program, trade shows,
seminars, conferences, market research, our web site, customers, partners, and
our ongoing public relations program.





Marketing




We focus
our marketing efforts on product initiatives, creating awareness of our
solutions and generating new sales opportunities.  We base our product
management strategy on an analysis of market requirements, customer input,
competitive offerings, and projected return on investment made possible through
our solutions.  Our product management groupis
active in numerous industry and technology forums such as CTAM, VON, and TM
Forum.  In addition, through our product marketing and marketing
communications functions, we manage and maintain our web site, publish solution
related communications and educational whitepapers and conduct or participate in
webinars.  We also have an active public relations program focused on
building awareness of the Company and our solutions.







OPERATIONS
AND TECHNOLOGY





We
leverage our proprietary IPC platform to deliver carrier-grade services to our
customers.  Constructed using a combination of internally developed,
licensed, and open source technologies, our platform integrates our billing,
analytics, and audit and compliance solutions into a unified
system.  The platform is a secure foundation on which to build and
offer additional solutions and services and maximize performance, security,
scalability, and reliability.





Applications
Management Services




We
differentiate our services from both internal and competitive offerings by
managing the applications environment for our solutions on behalf of our
customers at a cost and quality level that provides significant financial and
strategic value to our customers, by enabling their staff to concentrate on
their higher value core business systems and applications.  We offer
management of our solutions locally at our data center, or remotely through a
secure high speed connection, either to our customer’s data center or at a
third-party facility. Our specialized application management systems, customercare
experts, and proprietary automation ensures our solutions are monitored and
running optimally 24 hours a day, 7 days a week. This keeps costs down and
performance in line with our customer’s business needs.





Business
Process Outsourcing (“BPO”) Services




We offer
outsourced operations staff to perform the daily business functions normally
associated with operating our solutions so our customer’s do not need to hire
staff for these tasks and can avoid the labor cost and it’s associated overhead
on their books. Our outsourced services provide our customers flexibility and
expertise trained in the business processes and knowledge of how to gain maximum
value from our solutions. Our BPO service arrangements are custom tailored to
meet each customer’s unique business requirements.





Local
and Remote Data Center Services




We
provide our customers the flexibility to choose to host our solutions at their
own data center with Primal providing application management services, to host
our solution at a third party co-location facility, or for Primal to host our
solutions at our own co-location facility based in Irvine,
California.  When we provide local data center hosting services we use
our data center partner, Irvine-based Intelenet Communications, who is a SAS-70
Type II certified facility.




- 7
-
 Professional
Services
  We provide professionalservices to assist the customer in the deployment, tailoring, and
customization of our solutions.  Deployment services include planning,
business process consulting, training, and implementation support
services.  Our solutions can be tailored through configuration options to
meet differing business requirements.  When additional functionality that
is unique to a customer is requested, we offer customization services to add the
needed functionality to our solution.
 Customer
Support




We offer
two types of customer support.  For those customers on annual
maintenance agreements because they have traditional software license contracts,
we provide customer support staff that act as the initial point of contact for
all customer related issues and requests. For those customers on our managed
services agreements because they have subscription-based Software as a Service
("SaaS") contracts, we include customer support services as part of the managed
services offering.  Ourcustomer’s managed services team provides first level customer support
for all customer related issues and requests.





Under
both programs, customer support is available 24 hours a day, 7 days per week via
phone, email or pager to facilitate the diagnosis and resolution of application
and service related issues.  Issues that require further investigation
are immediately escalated to our product and infrastructure staff on behalf of
the customer to provide the greatest speed of problem resolution and highest
level of customer service.







RESEARCH
AND DEVELOPMENT




Our
research and development team 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. Additionally, our research and development team
supports pre-sale and customer support activities, in which case related costs
are allocated to costs of revenue. Our product management, professional services
and sales staff helps our research and development team identify potential new
product features.  We spent approximately $1.4 million and $1.5
million on research and development efforts during the fiscal years ended
December 31, 2007 and 2006, respectively.






COMPETITION




Competition
in our markets is intense and includes rapidly-changing technologies and
customer requirements, as well as evolving industry standards and frequent
product introductions.  We compete primarily on the basis of depth of
our domain expertise and our proprietary transaction management capabilities, as
well as on the basis of price, time-to-market, functionality, quality,
scalability and reliability, and customizable business solutions.  We
believe the most important factors making us a strong competitor
include:





·
            the proven
      carrier-grade quality, scalability, reliability and performance of our
      solutions;


·
            our
      ability to quickly deploy and integrate our
  solutions;


·
            our
      high-quality and high-touch customer service and outsourced business
      services;


·
            the
      overall value of our solutions; and


·
            the
      references of our customers.







GOVERNMENT
REGULATION




We are
not currently subject to direct federal, state or local government regulation,
other than regulations that apply to businesses generally.  Many of
our customers are subject to regulation by the Federal Communications Commission
("FCC").  Changes in FCC regulations that affect our existing or
potential customers could lead them to increase spending on our solutions, such
as adding support for customer proprietary network information ("CPNI")
requirements, or lead them to spend less on our solutions.  In the
event that this leads them to spend less on our solutions this would reduce our
revenues and could have a material adverse effect on our business, financial
condition or results of operations.





- 8
-


INTELLECTUAL
PROPERTY




We rely
upon a combination of U.S. patent, trade secret and trademark law to protect our
intellectual property. We currently have one U.S. patent related to billing and
mediation technology and six U.S. registered trademarks. In addition, the
Company has submitted the relevant paperwork in order to register two new
trademarks and issue one new patent. The table below summarizes our material
intellectual property either currently registered or pending
registration.




Type of
              Intellectual
              Property
            
            Intellectual Property Name
            
            StatusPatent
            
            Cellular
      Telephone Real Time Account Administration System
            
            IssuedPatent
            
            Systems
      and Methods for Tracking IP Transactions
            
            PendingTrademark
            
            CONNECT
      CCB
            
            RegisteredTrademark
            
            OUT
      FRONT
            
            RegisteredTrademark
            
            PRIMAL
            
            RegisteredTrademark
            
            PRIMAL
      ACCESS IM
            
            RegisteredTrademark
            
            PRIMAL
      CONNECT CCB
            
            RegisteredTrademark
            
            PRIMAL
      SOLUTIONS LOGO, NO IP TRANSACTION LEFT BEHIND
            
            RegisteredTrademark
            
            IP
      CORRELYTICS
            
            PendingTrademark
            
            KPIPAK
            
            Pending




While we
rely on patent, copyright, trade secret and trademark law to protect our
technology, we believe that factors such as new product developments, frequent
product enhancements, the technological and creative skills of our personnel,
and reliable product maintenance are more essential to establishing and
maintaining a technology leadership position. There can be no assurance that
others will not develop technologies that are similar or superior to our
technology.




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




Certain
of our products use open source software. Open source software is software that
is covered by a license agreement which permits the user to liberally use, copy,
modify and distribute the software without cost. Some open source software
licenses may require us to make part or all of the source code for our
derivative products available to the public free of charge and/or license such
derivative product under a similar open source software license.




Our
success and ability to compete are substantially dependent upon our 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 as well as open-source
software.






EMPLOYEES




As of
March 17, 2008, the Company had 21 full-time and 2 part-time employees, none of
whom is represented by a union. The Company believes that its relationship with
its employees is good.




- 9
-


RISK
FACTORS





Investing
in our common stock involves a high degree of risk.  You should carefully
consider the material risk factors listed below and all other information
contained in this prospectus before investing in our common stock.  You
should also keep these risk factors in mind when you read the forward-looking
statements.  The risks and uncertainties described below are not the only
ones facing us.  Additional risks and uncertainties that we are unaware of,
or that we currently deem immaterial, also may become important factors that
affect us.




If
any of the following risks occur, our business, our quarterly and annual
operating results or our financial condition could be materially and adversely
affected.  In that case, the market price of our common stock could decline
or become substantially volatile, and you could lose some or all of your
investment.





Risks
Related to Our Business and Our Marketplace




Our
revenues are generated from a limited number of customers, the loss of any
of which could substantially harm our business.




A
substantial portion of our revenue has been, and is expected to continue to be,
generated from a limited number of customers with large financial commitments.
During the twelve months ended December 31, 2007, the Company had two customers
that individually accounted for more than 10% of our total
revenues.  These customers represented approximately 65.7% and 14.6%, respectively, of total
revenues for the year ended December 31, 2007.





The loss
of any customer or failure of an anticipated contract to materialize could cause
our business to be harmed.  If a large contract is deferred, expires,
or is cancelled pursuant to early termination clauses that enable customers to
terminate its contract without cause, and we are unable to replace the resulting
loss of revenue associated with a large customer, our operations and financial
condition would be materially adversely affected.  In
December 2007, the original five-year master software license agreement
with our largest customer expired and was automatically renewed for a
one-year period, ending in December 2008, and remains subject to a right of
termination upon thirty days'written notice for any or no reason.





If
we are exposed to costs beyond our expectations, or if cash flow generated from
existing contracts does not meet our expectations, our business and financial
condition could be seriously harmed.




We
believe that existing cash balances combined with cash generated from existing
and currently anticipated contracts will be sufficient to support our working
capital requirements through at least the next twelve months. However, if these
sources of cash are insufficient, or if we are exposed to unexpected costs, we
may have to raise additional funds to pay outstanding indebtedness and fund our
other liquidity needs.  Pursuant to the senior
convertible notes payable to Special
Situations Private Equity Fund, L.P., Special Situations Technology Fund, L.P.,
Special Situations Technology Fund II, L.P., Special Situations Fund III, L.P.,
and Special Situations Fund III QP, L.P. (collectively, "SSF"), we are required
to make quarterly principal and interest payments beginning in June 2008.If we are unable to pay our indebtedness when due, our
lenders (including
SSF) may be permitted to accelerate maturity and exercise
other remedies. There can be no assurance that we will have access to additional
financing on acceptable terms, or at all, should the need arise. If we are
unable to obtain additional financing as needed, our business and financial
condition would be materially adversely affected.





If
our customers with multiple-year recurring revenue contracts experience a
decline or lack of volume, our revenue could be harmed.




An
increasing number of our contracts with new customers are multi-year agreements
and include recurring license and service fees. Our subscription-based pricing
model for recurring software licensing and product support and upgrades fees for
our solutions allows our customers to pay a monthly fee based on the
then-current number of subscribers and/or transaction volumes associated with
our solutions, as compared to an up-front one-time license fee. Under this
subscription-based recurring revenue model, our revenue from customers is
expected to increase as their subscriber base and/or transaction volumes grow
and, thus, related revenue from these customers is expected to be low in the
early part of the customer contracts and higher in later years. If our
customers do not or are not able to increase the number of subscribers as they
expect, our future revenues could be harmed.





- 10
-


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:




·customer
unwillingness to implement our outsourced software
solutions;


·any
delays or difficulties that we may incur in completing the development and
introduction of our planned solutions or solution
enhancements;


·our
customers’ inability to raise capital to finance their business plans and
capital expenditures;


·new
product introductions by our competitors;


·any
failure of our solutions to perform as expected;


·any
difficulty we may incur in meeting customers’ delivery requirements;
or


·the
market perception of our financial condition and/or current stock
price.





Our
quarterly operating results may fluctuate in future periods and we may fail to
meet expectations, which could cause the price of our common stock to
fall.




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 investors and the price of our common stock may fall.
Factors that could cause quarterly fluctuations include:




·
              the
      timing and volume of orders for our outsourced billing solutions.
      Customers typically order our billing solutions only after other vendors
      have provided the infrastructure for their communications network. There
      can be delays in that process. It is therefore difficult for us to predict
      the timing of orders for our outsourced billing solutions and related
      services by customers;


·the
ability of our customers to expand their communications operations and increase
their subscriber base, including their ability to obtain
financing;


·changes
in our pricing policies or competitive pricing by our
competitors;


·the
timing of releases of new products by manufacturers of communications equipment
with which our solutions operate; and


·the
timing of product introductions by competitors.




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
outsourced analytics solutions 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.




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




Our
future growth depends on the commercial success of our outsourced solutions.
Substantially all of our revenues are derived from licensing and support for
these outsourced solutions and related services. We sell our outsourced
solutions and related services primarily through our direct sales force.
Our business will be harmed if our target customers do not adopt and subscribe
to our outsourced solutions. Our future financial performance will also depend
on the successful development, introduction and customer acceptance of our
outsourced software solutions for IP networks. We are not certain that our
target customers will widely adopt and deploy our outsourced software solutions
in their communications operations. Our financial success and our ability to
increase revenues in the future may depend considerably on the productivity of
our direct sales force. Our future revenues will also depend on our customers’
subscription fees increasing for additional billable units, such as increased
subscribers or additional event records. Their failure to do so could harm our
business.




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 our outsourced solutions can be lengthy, and the time
between the initial proposal to a prospective customer and the signing of an
agreement can be as long as one year. Our outsourced solutions involve a
commitment of time and internal resources that may be significant to the
customer. In addition, market conditions have lengthened the sales cycles
associated with our solutions. 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.


- 11
-




If
the VoIP and managed services markets do not expand as we anticipate, our future
growth and success could be limited.




The offerings provided by
communications service providers (“CSPs”) using IP networks are rapidly
changing. We believe this market shows signs of growth opportunities for our
products and services. However, the revenue opportunities in the market are
dependent on certain factors, including the following:




·the
adoption of VoIP services by the consumer and commercial
businesses;
 ·the
adoption of managed services rather than traditional software
licensing;


·the
timing of the providers offering VoIP services;


·our
contracts having volume-based characteristics;


·our
ability to enable our solutions to conform and comply with industry
standards;


·new
competitors we might encounter; and


·changes
to technical specifications before our solutions are
accepted.




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





Our
future success depends on our ability to retain and attract qualified
personnel.




We
may not be able to retain, or attract and assimilate highly qualified
personnel in the future. In particular, our financial success and our ability to
increase revenues in the future depend considerably upon the productivity of our
operations and development teams. This productivity will depend to a large
degree on our success to retain, recruit, and train qualified operations and
technical resources. Our business will be harmed if we fail to retain or hire
qualified personnel, or if newly hired employees fail to develop the necessary
skills or develop these skills more slowly than we anticipate.





Loss
of our senior management could harm our business if we are unable to hire
suitable replacements.




Our Chief
Executive Officer and Chief Operating Officer are responsible for all executive
management decisision in our Company. Our future success depends to a
significant extent on the continued services of this senior management. If we
lose the services of either of our senior management and are unable to hire
suitable replacements, our business could be harmed. Our success also depends in
large part on our ability to motivate and retain senior management.
Significant turnover of our senior management could hinder our ability to serve
our existing customers effectively and compete for new business, either of which
could adversely affect our business and results of operations.





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




Certain
segments of the communications industry continue to experience significant
consolidation, which may result in fewer potential clients for our
solutions and result in increasing the level of competition for new customers.
We cannot be certain that we will not lose clients as a result of consolidation
of certain areas of the communications industry. In addition, larger CSPs have
strengthened their purchasing power, which could create pressure on the prices
and the margins we could realize. These companies are also striving to
streamline their operations by combining different communications systems and
the related OSSinto one system, reducing the number of vendors needed. We have sought to
address this situation by continuing to market our solutions and services to new
clients and by working with major CSPs to provide outsourced software solutions
and services that they need to remain competitive.





If
large CSPs consolidate their software vendors, our business may be
harmed.




We
believe large CSPs are seeking ways to reduce operating costs. Many CSPs have a
large number of operating support systems from a variety of suppliers. In an
effort to reduce operating costs, the CSPs could choose to reduce the number of
software vendors they use to gain efficiencies. We could lose customers if we
are not selected as a surviving incumbent software vendor. In addition, our
ability to sell our outsourced solutions and related services to the large CSPs
could be limited if we had to compete directly with an incumbent software vendor
with greater resources.





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




If we do
not continue to improve our outsourced software solutions and develop new
software solutions 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 outsourced software solutions depends upon the continued
successful integration and operation of our software solutions with the
communications equipment of the leading manufacturers. We currently target a
customer base that uses a wide variety of communications network infrastructure
equipment and software platforms, which are constantly changing. As such, we
must continually modify our software solutions as new communications equipment
is introduced. If our solutions fail to satisfy these demanding and rapidly
changing technical challenges, our business may be harmed.


- 12
-


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




The
market for our products is very competitive. We compete in the VoIP, broadband,
cable, commercial telecommunications, and wireless broadband markets with other
companies that provide solutions for IP transaction management, transaction
archiving, triple-play, mediation, pricing and rating, partner settlement,
revenue assurance, pricing plan analysis, business intelligence, dashboards, and
analytics. Also, the internal information technology departments of larger
communications companies may elect to develop products in-house similar to those
provided by our outsourced solutions.




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


·larger
customer bases;


·substantially
greater financial, technical, sales and marketing resources;
and


·greater
name recognition.




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




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




Unauthorized
use or misappropriation of our intellectual property could seriously harm our
business. Copyrights and patents are important to the protection of our
software, and our trademarks are important to the protection of our company and
product name. 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. Despite
this protection, 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
or license 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 the day-to-day
operations or our business.





Some
of our software solutions contain open source software, which may be subject to
restrictive open source licenses and harm our business.




Certain
of our outsourced software solutions use open source software. Open source
software is software that is covered by a license agreement that permits the
user to liberally use, copy, modify and distribute the software without cost.
Some open source software licenses may require us to make all or part of the
source code of our derivative products available to the public free of charge
and/or to license such derivative product under a similar open source software
license. If we are required to publicly disclose the source code for such
derivative products or to license our derivative products that use an open
source license, our previously proprietary software solutions may be available
to others without charge. If this happens, our customers and our competitors may
have access to our software solutions without cost to them, which could harm our
business.





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




Third
parties may claim that our current or future software solutions 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 outsourced software solutions. 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
outsourced software solutions and could seriously harm our
business.




Because
we use open source software in some of our outsourced software solutions, we may
incur expenses in defending claims that we did not abide by the open source
software license. If we are not successful in defending against such claims, we
may be subject to monetary damages or be required to remove the open source
software from our solutions. Such events could disrupt our operations and the
sales of our solutions, which would negatively impact our revenues and cash
flow.





If
our outsourced software solutions contain 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 outsourced
software solutions and the potential for undetected errors. Due to the
importance of our outsourced solutions to our customers’ operations, undetected
errors are of particular concern. Computer software such as ours may contain
undetected errors. In addition, the open source software that we incorporate
into our solutions may contain undetected errors. Because this software was
used pursuant to an open source license, such software is not covered by a
warranty. If there are any errors in our product or the open source software
that we use, we will be required to expend resources to correct any errors,
defects or design flaws. The implementation of our solutions, 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 outsourced software solutions contain
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.




In
general, we attempt to enter into agreements with our customers that
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, we attempt to
enter into agreements that 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. Notall of our agreements may contain such
provision. 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
-


Fixed-price
services engagements can impact our profitability if we fail to complete them
within the estimated budget.




We
perform some of our professional services engagements on a fixed-price basis. If
the project requires more labor or products than was estimated by us in
determining the fixed price agreed to with the customer, our margins and
profitability will be adversely affected. In addition, failure to complete
services as required or to obtain written acceptance of completed milestones may
result in deferral of revenue until such completion or acceptance occurs and may
cause revenues to be recognized in periods other than as initially expected or
forecast.





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




The
communications carriers that constitute our clients are regulated at the
federal, state and local levels. Federal and state regulations may inhibit the
growth of the Internet or communications industry, affect the development of
internet enhanced services, limit the number of potential clients for our
services, impede our ability to offer competitive services to the Internet and
communications markets, or otherwise have an 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 outsourced
software solutions 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.





A
related group of institutional investors beneficially owns approximately 57.3%
of our voting stock and possesses the right to designate one person for election
to our Board of Directors.




As of
March 17, 2008, SSF beneficially owns approximately 57.3% of our outstanding
common stock. As a result of such ownership, SSF 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.
Additionally, SSF has the right to designate one person for election to our
Board of Directors. SSF’s ownership interest may delay or prevent an acquisition
or cause the market price of our stock to decline.




As
a result of the agreements related to the
private placement in March 2006 (the "March 2006 Private Placement") and
the private placement in April 2006 (the "April 2006 Private Placement" and
collectively, the "2006 Private Placements"), our ability to
engage in or enter into a variety of transactions is restricted.




Pursuant
tothe 2006 Private
Placements, we entered into certain agreements that contain
various restrictive covenants that limit our discretion in operating our
business. In particular, these agreements limit our ability to, among other
things:




·make
restricted payments (including paying dividends on, limitations on redeeming or
repurchasing our capital stock);


·engage in
sales of our assets outside of the ordinary course of our
business;


·make
certain investments or acquisitions;


·create
liens on our assets to secure debt;


·engage in
transactions with affiliates; and


·engage in
a business other than our current operations.




These
restrictions may impair our ability to obtain additional financing and impact
our liquidity.





Conversion
of outstanding convertible notes and exercise of outstanding warrants by SSF
could cause substantial dilution.
  As
of March 17, 2008, SSF held outstanding convertible notes convertible into
approximately 15.2 million shares of common stock (assuming all accrued and
unpaid interest as of March 17, 2008 is paid in shares of common stock) and
warrants to purchase approximately 15.6 million shares of common stock.  To
the extent SSF converts the notes and/or warrants, stockholders will incur
additional dilution.


Since
first trading on March 14, 2001, our common stock has experienced significant
price and volume volatility and we expect that it will continue to do so in the
future, which substantially increases the risk of loss to persons owning our
common stock.




There was
no market for our common stock prior to our initial distribution in 2001.
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 our operating performance or the performance of
these companies.


- 14
-


We
are not required to meet or maintain any listing standards for our common stock
to be quoted on the OTC Bulletin Board or in the Pink Sheets, which could affect
our stockholders’ ability to access trading information about our common
stock.




The OTC
Bulletin Board and the Pink Sheets are each separate and distinct from the
Nasdaq Stock Market and other national stock exchanges, such as the New York
Stock Exchange or the American Stock Exchange. Although the OTC Bulletin Board
is a regulated quotation service operated by the National Association of
Securities Dealers (“NASD”), that displays real-time quotes, last sale prices,
and volume information in over-the-counter (“OTC”) equity securities like our
common stock, and although Pink Sheets’ Electronic Quotation Service is an
Internet-based, real-time quotation service for OTC equities for market makers
and brokers that provides pricing and financial information for the OTC
securities markets, we are not required to meet or maintain any qualitative or
quantitative standards for our common stock to be quoted on either the OTC
Bulletin Board or in the Pink Sheets. Our common stock does not presently meet
the minimum listing standards for listing on the Nasdaq Stock Market or any
other national securities exchange, which could affect our stockholders’ ability
to access trading information about our common stock. Additionally, we are
required to satisfy the reporting requirements under the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). If we fail to do so, our shares may no
longer be quoted on the OTC.





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.




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




Broker-dealer
practices in connection with transactions in “penny stocks” are regulated by
certain penny stock rules adopted by the Securities and Exchange Commission
(“SEC”). 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.
Description of Property




We do not
own any real estate properties.  In May 2007, we entered into a new
lease agreement for approximately 10,000 square feet of office space in Irvine,
California. Our monthly rent obligation is $20,000 from May 2007 through
April 2008 and increases to $21,000 from May 2008 through April 2009. Beginning
in May 2009, the monthly rent is $22,000 with an increase to $23,000 from May
2011 through the end of the lease in April 2012.  For the first three
quarters of 2007, we
leased an executive suite in Amsterdam, The Netherlands under a month-to-month
arrangement for approximately $1,000 per
month.






Item 3. Legal
Proceedings




We are
not currently a party to any legal proceeding, other than routine litigation
related to collections.






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




None.




- 15
-




PART II


Item 5.
              Market
      for Common Equity, Related Stockholder Matters, and Small Business Issuer
      Purchases of Equity Securities


Our
common stock has been quoted on the OTC Bulletin Board since February 2001,
and currently is quoted on the OTC Bulletin Board and the Pink Sheets under the
trading symbol “PSOL.” 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.




High
            
            
            LowFiscal
      year ended December 31, 2007First
      quarter
            
            $
            0.19
            
            
            $
            0.06Second
      quarter
            
            $
            0.10
            
            
            $
            0.06Third
      quarter
            
            $
            0.12
            
            
            $
            0.08Fourth
      quarter
            
            $
            0.08
            
            
            $
            0.03Fiscal
      year ended December 31, 2006First
      quarter
            
            $
            0.18
            
            
            $
            0.12Second
      quarter
            
            $
            0.13
            
            
            $
            0.07Third
      quarter
            
            $
            0.20
            
            
            $
            0.07Fourth
      quarter
            
            $
            0.23
            
            
            $
            0.07






As of March 17,
2008, there were approximately 287 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.







Item
      6.
              Management’s
      Discussion and Analysis


This
section should be read in conjunction with our Consolidated Financial Statements
and the Notes thereto, which are included elsewhere in this
report.  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 Annual
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.






OVERVIEW




For the
fiscal year ended December 31, 2007, we increased operating income by $3.2 million, as
well as reduced our net loss by $2.9 million, when compared to the same period
in 2006.  Net revenue
increased $724,000 during the fiscal year ended December 31, 2007 to $6.4
million, as compared to $5.6 million in 2006.  Additionally, we were
able to manage and reduce our operating expenses by $2.4 million during
2007.  The net loss of $290,000 for the fiscal year ended December 31,
2007 includes $686,000 ofnon-cash expenses incurred
as part of the accounting for the private placements in
2006.




The
year-to-date subscriber counts for our customers under the subscription-based
revenue model increased 63% over the same period in 2006. Additionally, we
expanded our revenues within existing accounts while continuing to focus on
managing operating costs to keep them in line with expected
revenues.




As of
December 31, 2007, our working capital deficit balance decreased by $91,000 to
$2.3 million, as compared to a working capital deficit of $2.4 million as of
December 31, 2006. The overall decrease was primarily due to the
reduction in current liabilities as a result of our efforts to manage operating
expenses as well as payments of $556,000 made
against accrued wages and full paydown of$350,000 against current debt obligations.  The decrease
in working capital deficit was also attributable to the normal fluctuations in
other current assets and current liabilities due to changes in timing from
period to period.


- 16
-


The
$250,000 promissory note due to Special Situations Private Equity Fund, L.P.
(the "December 2007 Note") was amended during the second quarter of 2007 to
extend the maturity date from June 27, 2007 to October 2, 2007.  On
the new maturity date, we paid this obligation in full, including the
principal balance and the accrued interest.




In February 2008, we
settled our debt obligation originally with Spieker Properties, L.P. (the
"Spieker Obligation") for $200,000. The outstanding balance at
the time of settlement totaled $337,000.Additionally,
the outstanding note in the amount of $982,000 due to CyberSource
Corporation ("CyberSource"), the successor by way of merger to Authorize.Net
Holdings, Inc. (formerly known as Lightbridge, Inc., the successor by way
of merger to Corsair Communications, Inc.) was also fully settled for
$100,000 on April 15, 2008.  The agreement provides that
CyberSource will release the Company from further liability upon the later of
(i) the expiration of one hundred days from the date the $100,000 is received by
CyberSource without the occurence of an insolvency event, or (ii) in the event that aninsolvency eventoccurs within such 100 days, the date that any or all limitations periods
for an action for the avoidance of payment has
passed.
  Effective
March 31, 2008, we amended the senior convertible notes payable to Special
Situations Private Equity Fund, L.P., Special Situations Technology Fund, L.P.,
Special Situations Technology Fund II, L.P., Special Situations Fund III, L.P.,
and Special Situations Fund III QP, L.P. (collectively, "SSF"), amending the
payment terms and extending the maturity date to December 31, 2009 from March
31, 2008.  Pursuant to the amended terms of the notes, the interest
rate changed to 10% from 5% per annum, and we are required to make
quarterly principal and interest payments, beginning in June 2008.  The
first payment is in the amount of $60,000 due in June 2008, followed with a
payment $125,000 in September 2008 and a payment of $174,000 in December
2008.  In 2009, principal and interest payments of $212,000 are due each
quarter-end through September 2009 with a final payment of $712,000 in December
2009.  The senior convertible debt, net of discount, was reflected as a
current liability at December 31, 2007.
  Additionally,
pursuant to a related Amendment Letter Agreement dated March 31, 2008
between the Company and SSF, on April 1, 2008, we paid the accrued interest
of $19,000 on the original senior convertible notes for the quarter ended March
31, 2008 as well as the outstanding principal and accrued interest balance of
the five unsecure adjustable promissory notes collectively payable to SSF to
cover the liquidated damages related to the March 2006 private placement (the
"Liquidated Damages Notes").  The aggregate outstanding principal and
interest balance for the Liquidated Damages Notes totaled $126,000 as of March
31, 2008.
  In
2008, we are focused on converting new sales opportunities to augment cash
receipts from existing contracts.  We believe that existing cash balances
combined with cash generated from existing and currently anticipated contracts
will be sufficient to support our working capital requirements through at least
the next twelve months. We expect continued growth in our customers’ subscriber
counts and continue to maintain our operating costs in light of expected
revenues.




We
cannot, however, be certain that existing contracts will continue or that
currently anticipated contracts will materialize, that cash generated from
future operations will be adequate to support our working capital requirements
or that our cost-maintenance activities will be adequate or
possible.




Historically, our
sources of liquidity primarily have been cash from operations and financing
activity. In 2008, we expect our sources of liquidity will continue to include
cash fromoperations. 
We
generated net cash of $485,000 from operations during the year ended December
31, 2007.




Pursuant
to the private placement in March 2006 (the "March 2006
Private Placement") and the private placement in April 2006 (the "April 2006
Private Placement" and collectively, the "2006 Private
Placements"),we entered into certain
agreements that contain various restrictive covenants that limit our discretion
in operating our business. In particular, these agreements limit our ability to,
among other things:




·make
restricted payments (including paying dividends on, limitations on redeeming or
repurchasing our capital stock);


·engage in
sales of our assets outside of the ordinary course of our
business;


·make
certain investments or acquisitions;


·create
liens on our assets to secure debt;


·engage in
transactions with affiliates; and


·engage in
a business other than our current operations.




Thus our
ability to obtain third party financing on acceptable terms will be limited. If
we require additional financing, we cannot be certain that such financing will
be available to us on acceptable terms, or at all.




- 17
-




RESULTS
OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006




Year Ended
      December 31,
            
            
            Increase/(Decrease)2007
            
            
            2006
            
            
            $
            
            
            
            %Net
      revenues
            
            $
            6,372,000
            
            
            $
            5,648,000
            
            
            $
            724,000
            
            
            
            12.8
            %Cost
      of revenues
            
            
            1,747,000
            
            
            
            2,533,000
            
            
            
            (786,000
            )
            
            
            (31.0
            )%Research
      and development
            
            
            1,436,000
            
            
            
            1,499,000
            
            
            
            (63,000
            )
            
            
            (4.2
            )%Selling,
      general and administrative
            
            
            2,604,000
            
            
            
            4,186,000
            
            
            
            (1,582,000
            )
            
            
            (37.8
            )%Total
      costs
            
            
            5,787,000
            
            
            
            8,218,000
            
            
            
            (2,431,000
            )
            
            
            (29.6
            )%Gain
      (loss) from operations
            
            
            585,000
            
            
            
            (2,570,000
            )
            
            
            3,155,000
            
            
            
            122.8
            %Interest
      and other expense, net
            
            
            (872,000
            )
            
            
            (590,000
            )
            
            
            282,000
            
            
            
            47.8
            %Loss
      before income taxes
            
            
            (287,000
            )
            
            
            (3,160,000
            )
            
            
            2,873,000
            
            
            
            (90.9
            )%Income
      tax provision
            
            
            3,000
            
            
            
            2,000
            
            
            
            1,000
            
            
            
            50.0
            %Net
      loss
            
            $
            (290,000
            )
            
            $
            (3,162,000
            )
            
            $
            2,872,000
            
            
            
            (90.9
            )%Supplemental
      data:Depreciation
      and amortization
            
            $
            104,000
            
            
            $
            126,000
            
            
            $
            (22,000
            )
            
            
            (17.5
            )%







REVENUE




We derive
our revenues from three sources:  (1) subscription revenue, (2)
upfront software license fees and related support revenue, and (3) professional
services and other revenue. A majority of revenue comes from multi-year,
subscription-based agreements, with a smaller percentage of our revenue coming
from upfront license and related maintenance agreements.  Under the
subscriber-based recurring revenue model, related recurring subscription revenue
will increase over time if the customers' subscriber bases
increase.




Total
revenues for the fiscal year ended December 31, 2007 were $6.4 million, an
increase of $724,000, or 12.8%, from $5.6 million for the same period in
2006.  There was an increase of $1.4 million in the recurring
subscription fees as the subscriber base of our customers increased during
2007.  This was offset with the decrease in the two other sources of
revenue.  Total revenues from our current largest customer represented
approximately 66% and
53%, respectively, of total revenues for the fiscal years ended December
31, 2007 and 2006.




Subscription Revenue




Subscription
revenue consists of monthly fees for access to our software and related support,
monthly fees for application management services, monthly fees for business
process outsourcing (“BPO”) services, and monthly fees for hosting our software
on the customer’s hardware.  Under our subscriber-based recurring
revenue model, monthly fees for access to our software and related support are
volume sensitive and generally are based on the number of subscriber
count.  This recurring revenue is expected to be low in the early
period of the contracts and higher in the later period.  Under the
monthly subscription, a customer gains rights to unspecified product upgrades,
maintenance releases, and patches released during the related month. 
Product support includes internet and telephone access to technical support as
well as on-site visits.  The monthly fees for application management
services, BPO services, and hosting services are typically fixed-fee
arrangements.




For the
fiscal year ended December 31, 2007, subscription revenue was $4.7 million, 74%
of total revenues, an increase of $1.4 million from $3.3 million, 58% of total
revenues, for the same period in 2006.  The increase was primarily the
result of an increase in subscriber count base of approximately 63% from our
existing customers as well as a full-year contribution from new 2006
customers.




Upfront Software License and Related Maintenance
Revenue




The
upfront software license revenue consists of one-time license fees charged to
our customers for their use of our software as well as license upgrade
charges.  The related maintenance revenue is from providing software
support and maintenance and is recognized ratably
over the maintenance period.  It begins after the
ninety-day warranty period has expired and the customer has purchased software
and maintenance.  Under our maintenance agreement, a customer gains rights
to unspecified product upgrades, maintenance releases, and patches released
during the term of the support period.  Product support includes internet
and telephone access to technical support as well as on-site
visits.




For the
fiscal year ended December 31, 2007, upfront software license and related
maintenance revenue represented 9% of total revenues, a decrease from 14% of
total revenues for the same period in 2006.  This decrease was due to
the growing contribution by subscription-based customers to total revenue as
well as the nonrenewal of legacy maintenance agreements.  The Company
expects to continue to support existing customers but will not actively seek new
sales contracts
under this pricing model.


- 18
-


Professional Services and Other Revenue




Professional
services revenue is comprised of fees associated with implementation services,
consulting, customization projects as well as training.  Professional
services revenue is nonrecurring in nature and can fluctuate with the volume of
new customer sales as well as customization projects of existing
customers.  Other revenue consists of sales of third-party software
and hardware which are not material in amount or frequency.




Professional
services revenue was $953,000, or 15% of total revenue, for the fiscal year
ended December 31, 2007, as compared to $1.3
million, or
24% of total revenue, for the same period last year. The net decrease was
largely due to the one-time implementation revenueof $703,000recognized last year for the then-new customers, offset by a rise
in customization projects for existing customers of $310,000.




For the
fiscal year ended December 31, 2007, other revenue was $154,000, compared to
$195,000for the fiscal year ended December 31, 2006.




Concentration
Risk




For the
fiscal year ended December 31, 2007, we had two customers who individually
accounted for more than 10% of our total revenues in the amount of
$4.2 million and $928,000, respectively. In the same period last year, we
had three customers who individually accounted for more than 10% of our total
revenues in the amount of $3.0 million, $613,000, and $568,000,
respectively.






EXPENSES




During
the fiscal year ended December 31, 2007, we continued our focus on managing and
reducing our costs in an effort to keep them in line with expected
revenues.  For the fiscal year ended December 31, 2007, operating
expenses decreased by $2.4 million, or 30%, as compared to the same period in
2006. During the fiscal year ended December 31, 2007, the decrease of $786,000
in cost of revenue was primarily due to a decline in labor-related expenses from
the same period in 2006.  Additionally, we incurred certain one-time
administrative costs of approximately
$231,000during 2006 related to the 2006 Private Placements,
offset with a full year of non-cash expenses in the amount of $686,000 which we
charged to interest expense.  We incurred interest expense of $76,000
during the same period for the related $1.5 million senior secured convertible
note.  Lastly, we realized a decrease in totalstock option compensation cost, as required by SFAS 123R, which
totaled $118,000 for the fiscal year ended December 31, 2007, compared to
$351,000 for the same period in 2006.




Cost of
Revenues




The cost
of revenue consists primarily of the costs of full-time personnel and outside
contractors associated with providing the different types of services
offered.  Additionally, the network cost to support hosting services
and the cost of third-party software or hardware resold to customers are
included in cost of revenues.




The cost
of revenue decreased $786,000 to $1.7 millionfor
the fiscal year ended December 31, 2007, as compared to $2.5 million for the
fiscal year ended December 31, 2006.  The decrease was a direct result of
the cross-product training program for our technical staff that began in 2006.
The cross-training allows more flexibility to meet shifting customer and market
demands around our products and services. During 2007, we were able to better
utilize overall headcount while maintaining the required attention to each of
our customers.




Research and
Development




Research
and development expenses consist primarily of personnel and related costs
associated with our product development efforts.




Research
and development expenses decreased $63,000 to $1.4 million for the fiscal year
ended December 31, 2007, as compared to $1.5 million for the fiscal year ended
December 31, 2006.  The net decrease primarily resulted from a
decrease in use of outside contractors.




Selling, General
and Administrative




Sellingexpenses
consist primarily of sales and marketingpersonnel
costs,
travel
related
costs,public
relations,
andoutside
sales support.General
and administrative expenses consist primarily of public company related
expenses, professional fees, and employee salaries and related expenses for
executive, finance, administrative, facilities and information services
personnel.




Sales and marketing
expense for the fiscal year ended December 31, 2007 was $757,000, a
decrease of $1.2 million from $1.9 million for the same period in
2006.  During 2007, we significantly downsized our sales force and
shifted our focus to a small direct sales team, which resulted in a
decrease in labor and related costs of $1.1 million for the fiscal year
ended December 31, 2007.  Additionally, marketing related costs
declined $74,000 in 2007 compared to 2006 due to a reduction in recurring
marketing program costs.




General
and administrative expense for the fiscal year ended December 31, 2007 was $1.8
million, a decrease of $416,000 from $2.3 million for the same period in 2006.
During 2006, the Company had two privateplacementtransactions that resulted in higher professional servicescosts as
well as liquidated damages of $123,000.  Additionally, the Company
continued its efforts to manage costs, including legal costs and public companycosts.




Interest and Other
Expense, Net




Interest
and other expense generally consist of interest income, interest expense and any
gain or loss on the sale of assets.  Interest expense also includes the
amortization of the debt discount resulting from the warrants issued in
connection with
the 2006
Private Placements, the amortization of the beneficial conversion
feature, and the amortization of debt issuance costs.  Additionally, in
2006, the change in the fair value of the warrants recorded as liabilities is
reflected as other income or expense.




Interest and other
expenses, net was $872,000, an increase of $282,000 for the fiscal year ended
December 31, 2007 as compared to $590,000 for the fiscal year ended December 31,
2006.  The increase was primarily due to the impact of the recognizing
twelve months’ of expenses associated with the 2006 Private Placements in 2007
compared to nine months in 2006.  Additionally, the interest expense
associated with the operating note executed in December 2006 and paid in full in
October 2007 totaled $21,000 for the fiscal year ended December 31,
2007.


- 19
-


Income Tax
Provision




The
income tax provision for the fiscal years ended December 31, 2007 and 2006
consisted of the minimum state taxes due to the operating losses for these
years.




Depreciation and
Amortization




Depreciation
and amortization expense for the fiscal year ended December 31, 2007 was
$104,000, a decrease of $22,000 from $126,000 for fiscal year ended December 31,
2006.  This decrease resulted from certain fixed assets acquired in
previous years becoming fully depreciated at the beginning of 2007.







LIQUIDITY
AND CAPITAL RESOURCES


Increase/(Decrease)December
      31, 2007
            
            
            December
      31, 2006
            
            
            $
            
            
            %Cash
      and cash equivalents
            
            $
            524,000
            
            
            $
            382,000
            
            
            $
            142,000
            
            
            
            37
            %Restricted
      cash
            
            
            —
            
            
            
            103,000
            
            
            
            (103,000
            )
            
            
            (100
            )%Accounts
      receivable
            
            
            137,000
            
            
            
            268,000
            
            
            
            (131,000
            )
            
            
            (49
            )%Cash,
      cash equivalents and accounts receivable
            
            
            661,000
            
            
            
            753,000
            
            
            
            (92,000
            )
            
            
            (12
            )%Current
      assets
            
            
            805,000
            
            
            
            995,000
            
            
            
            (190,000
            )
            
            
            (19
            )%Accounts
      payable and accrued expenses
            
            
            965,000
            
            
            
            1,397,000
            
            
            
            (432,000
            )
            
            
            (31
            )%Current
      portion notes payable
            
            
            632,000
            
            
            
            741,000
            
            
            
            (109,000
            )
            
            
            (15
            )%Deferred
      revenue
            
            
            172,000
            
            
            
            220,000
            
            
            
            (48,000
            )
            
            
            (22
            )%Senior
      convertible debt, net of discount
            
            
            1,323,000
            
            
            
            —
            
            
            
            1,323,000
            
            
            
            100
            %Warrant
      liability
            
            
            —
            
            
            
            1,015,000
            
            
            
            (1,015,000
            )
            
            
            (100
            )%Current
      liabilities
            
            
            3,092,000
            
            
            
            3,373,000
            
            
            
            (281,000
            )
            
            
            (8
            )%Working
      capital deficit
            
            
            (2,287,000
            )
            
            
            (2,378,000
            )
            
            
            (91,000
            )
            
            
            (4
            )%Noncurrent
      liabilities
            
            
            764,000
            
            
            
            1,247,000
            
            
            
            (483,000
            )
            
            
            (39
            )%







Cash and Accounts
Receivable




Cash and
cash equivalents and accounts receivable collectively decreased by $92,000 at
December 31, 2007 from $753,000 at December 31, 2006, primarily due to the
paydown of two debt obligations during 2007, offset by the cash provided by
operations.  On December 31, 2006, we held restricted cash of $103,000
pursuant to a loan agreement with First Regional Bank, which was paid in fullin February 2007 and the restricted cash transferred to our operating
account.  Furthermore, the operating note of $250,000 executed in December
2006 was paid down in full in October 2007.  On December 31, 2007, the
accounts receivable balance was $137,000, a decrease of $131,000, or 49%, from
the balance of $268,000 on December 31, 2006. Our customers continue to
take advantage of discount terms for early payment for the monthly subscription
billings.  However, customers are not consistently utilizing the early
payment option for professional services.  As such, the overall
decrease in professional services revenue during fiscal year 2007 is consistent with
the decrease in the year-end accounts receivable balance.




Liabilities




Accounts
payable and accrued expenses decreased by $432,000 to
$965,000 at December 31, 2007 from $1.4 million at December 31, 2006
largely due to disbursements of $556,000 against accrued wages made during the
fiscal year ended December 31, 2007 as well as the timing of payments of
outstanding invoices and other accruals.  The decrease is also
attributable to the steady decrease in operating expenses for the fiscal year
ended December 31, 2007.


Pursuant to the
registration statement relating to the private placement in March 2006, the
Company owed
liquidated damages because the registration statement had not been
declared effective by the agreed-upon date.  In April 2007, we
executed five unsecured adjustable promissory notes to SSF in the principal
amount of $54,000, $9,000, $45,000, $1,000, and $10,000, respectively, to cover
these liquidated damages.  The original issuance date of these promissory
notes is December 22, 2006, the date the registration statement was declared
effective.  Interest on the unpaid principal balance accrued at an
adjustable rate based on the federal rate for short-term instruments, originally
at 4.93%, and reset to 4.85% on May 22, 2007. As of December 31, 2007,
the aggregate outstanding balance of the five notes totaled $119,000 and is
classified as a current liability.  The principal and accrued interest
balances were due in full on March 31, 2008.  On April 1, 2008, we
paid the outstanding aggregate principal balance of $119,000 plus the related
accrued interest in full.


During
the second quarter of 2007, the promissory note in the amount of
$250,000 due to Special Situations Private Equity Fund, L.P. was amended
to extend the maturity date from June 27, 2007 to October 2,
2007.  On
the amended maturity date of October 2, 2007, we paid the principal
balance plus the related accrued interest in full.




In
February 2007, we paid the $100,000 note payable to First Regional Bank in
full. Under the amended agreement, we opened a savings account as collateral
against the outstanding loan balance. With the full paydown of the note, the
restricted cash balance of $103,000 was released.




Based on the
amended terms of the note held by CyberSource, we were required to make
principal and interest payments of $22,000 beginning in July 2007 through
November 2011.  At the end of 2007, these monthly principal and
interest payments of $22,000 for the second half of 2007 remained
outstanding.  On April 15, 2008, we entered into a settlement
agreement with CyberSource and paid $100,000 in full settlement of the
outstanding note.  As of December 31, 2007, the outstanding principal
balance was $982,000 and the related accrued interest balance was
$39,000.  The agreement provides that CyberSource will release the
Company from further liability upon the later of (i) the expiration of one
hundred days from the date the $100,000 is received by CyberSource without
the occurence of an insolvency event, or (ii) in the event that an insolvency eventoccurs within such 100 days, the date that
any or all limitations periods for an action for the avoidance of payment has
passed.


- 20
-


As of December 31, 2007,
the total outstanding principal and accrued interest balance related to the
Spieker Obligation was $337,000 and was classified as a current
liability.  The Spieker Obligation was a result of an amendment to our
lease agreement. The total outstanding principal and accrued interest balance
was due on April 30, 2007, the end of the lease term.  During 2007,
the office building was sold to a new owner, and in May 2007, the Company
moved its corporate office to another office building that is not owned or
managed by the same landlord.  In February 2008, we paid $200,000 in
full settlement of this outstanding obligation.




Deferred
revenue on December 31, 2007 decreased $48,000, or 22%, to $172,000, as compared
to $220,000 on December 31, 2006. Deferred revenue represents all invoice
billings that have been collected from the customer but cannot yet be recognized
as revenue, including maintenance renewals and nonrecurring services. In
2006, the subscriber rate for an existing contract was downwardly adjusted
pursuant to the sales contract and resulted in a prepayment balance of $46,000
at December 31, 2006. This deferred revenue was ratably applied against the
monthly billings in 2007 and had been fully applied by the end of
2007.  This decrease was offset with an increase which resulted from
the timing of monthly recognition of revenue as the related service is provided
and future invoice billings.




Effective
March 31, 2008, we amended the senior convertible notes payable to SSF,
amending the payment terms and extending the maturity date to December 31, 2009
from March 31, 2008.  Pursuant to the amended terms of the notes, the
interest rate changed to 10% from 5% per annum, and we are required to make
quarterly principal and interest payments, beginning in June 2008.  The
first payment is in the amount of $60,000 due in June 2008, followed with a
payment $125,000 in September 2008 and a payment of $174,000 in December
2008.  In 2009, principal and interest payments of $212,000 are due each
quarter-end through September 2009 with a final payment of $712,000 in December
2009.  The senior convertible debt, net of discount, was reflected as a
current liability at December 31, 2007.




Additionally,
pursuant to a related Amendment Letter Agreement dated March 31, 2008
between the Company and SSF, on April 1, 2008, we paid the accrued interest
of $19,000 on the original senior convertible notes for the quarter ended March
31, 2008 as well as the outstanding principal and accrued interest balance of
the Liquidated Damages Notes.  The aggregate outstanding principal and
interest balance for the Liquidated Damages Notes totaled $126,000 as of March
31, 2008.


On
January 1, 2007, we adopted FASB Staff Position EITF 00-19-2, Accounting
for Registration Payment Arrangements ("EITF 00-19-2"). Pursuant
to EITF 00-19-2, we reversed the warrant liability related to our 2006
Private Placements. The warrant liability of $1.0 million on December 31, 2006
reflected the fair value of the warrants issued as part of the 2006 Private
Placements that are being accounted for as liabilities pursuant to Statement of
Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities.





Cash Flows




Net
cash provided by operating activities of $485,000 for the fiscal year ended
December 31, 2007 resulted primarily from a net loss of $290,000 that included
non-cash expenses for stock-based compensation of $118,000 and non-cash expenses
of $686,000 related to the 2006 Private
Placementsas well as a net decrease in operating liabilities
over operating assets of $140,000. Net cash used by operating activities of $2.0
million for the fiscal year ended December 31, 2006 resulted primarily from
a net loss that included non-cash expenses for stock-based compensation of
$351,000 and non-cash expenses of $457,000 related to the 2006 Private
Placements, coupled with decreases in current assets and current
liabilities.




For the
fiscal year ended December 31, 2007, net cash used in investing activities
totaled $22,000, compared to $10,000 for the same period in 2006.  Net
cash used for the fiscal year ended December 31, 2007 and 2006 was primarily due
to the acquisition of capital equipment.




Net cash
used in financing activities for the fiscal year ended December 31, 2007 was
primarily due to the paydown of First Regional Bank promissory note in the
amount of $100,000 and the operating note in the amount of
$250,000.  The settlement of the First Regional Bank promissory note
released the restricted cash held as collateral plus the accrued
interest.  The change from the net cash provided in financing
activities for the fiscal year ended December 31, 2006 of $1.6 million was
primarily due to the March 2006 Private Placement, which provided gross proceeds
of $1.5 million and net proceeds of $1.4 million.  In addition, we received
$175,000 of gross proceeds from the April 2006 Private Placement and $250,000
from the December 2007 Note during the fiscal year ended December 31, 2006.
Also, repayments on notes payable and capital lease obligations totaled $74,000
during the fiscal year ended December 31, 2007, as compared to $69,000 during
the fiscal year ended December 31, 2006.




The
following table includes all the contractual obligations, including principal
and interest payments, as of December 31, 2007:




Payments Due by PeriodContractual Obligations
            
            
            Total
            
            
            Lessthan
              1year
            
            
            1-3
              years
            
            
            3-5
              years
            
            Morethan
              5
      yearsLong-term
      debt
            
            $
            1,679,000
            
            $
            883,000
            
            $
            534,000
            
            $
            262,000
            
            $
            —Senior
      convertible debt
            
            
            1,519,000
            
            
            1,519,000
            
            
            —
            
            
            —
            
            
            —Operating
      lease obligations
            
            
            1,210,000
            
            
            293,000
            
            
            555,000
            
            
            362,000
            
            
            —$
            4,408,000
            
            $
            2,695,000
            
            $
            1,089,000
            
            $
            624,000
            
            $
            —





There
were no commercial commitments outstanding as of December 31,
2007.




April
2006 Private Placement










- 21
-


March 2006
Private Placement




On
March 31, 2006, we completed a private placement of $1.5 million in
aggregate principal amount of the Notes along with warrants to purchase 7.5
million shares of our common stock to SSF. The Notes were due March 31,
2008 and interest was paid semi-annually, in cash. The Notes are secured by
a first priority security interest in all of the Company’s assets. Events of
default under the Notes include failure to pay amounts due under the related
private placement documents (including the Registration Rights Agreement
described below) or failure to make any required principal payment on
indebtedness of $100,000 or more.  Upon election of SSF, at any time, any
or all of the outstanding principal and accrued but unpaid interest on the Notes
may be converted into shares of our common stock at a conversion price of $0.10
per share. The warrants to purchase our common stock expire March 31, 2011
and are exercisable for cash at an exercise price of $0.15 per share. The
conversion price of the Notes and the exercise price of
the warrants are subject to adjustment in certain circumstances, including
downward adjustment upon issuance by the Company of common stock or securities
convertible into shares of common stock at a per share price less than the
conversion price or exercise price of the warrants, respectively. SSF may, in
limited instances, exercise the warrant through a cashless
exercise.


Effective
March 31, 2008, we amended the Notes payable to SSF, amending the payment
terms and extending the maturity date to December 31, 2009 from March 31,
2008.  Pursuant to the amended terms of the Notes, the interest rate
changed to 10% from 5% per annum, and we are required to make quarterly
principal and interest payments, beginning in June 2008.  The first payment
is in the amount of $60,000 due in June 2008, followed with a payment $125,000
in September 2008 and a payment of $174,000 in December 2008.  In 2009,
principal and interest payments of $212,000 are due each quarter-end through
September 2009 with a final payment of $712,000 in December 2009.
  Additionally,
pursuant to a related Amendment Letter Agreement dated March 31, 2008
between us and SSF, on April 1, 2008, we paid the accrued interest of
$19,000 on the original senior convertible notes for the quarter ended March 31,
2008 as well as the outstanding principal and accrued interest balance of the
Liquidated Damages as discussed below.  The aggregate outstanding principal
and interest balance for the Liquidated Damages Notes totaled $126,000 as of
March 31, 2008.


Pursuant
to a Registration Rights Agreement entered into between us and SSF as part of
this private placement, we filed a registration statement, registering for
resale of the shares of common stock issuable upon conversion of the Notes and
exercise of the warrants on May 1, 2006.  The registration statement was
declared effective on December 22, 2006.  Because
the registration statement was not declared effective by  the
agreed-upon date of July 16, 2006, we owed liquidated damages of
$119,000, collectively, to SSF.  We paid the liquidated damages plus
accrued interest payable to SSF on April 1, 2008.   In addition, we
will be required to maintain and update the registration statement as
necessary in order to keep such registration statement current so that these
shares of common stock are freely tradable.  If we do not keep such
registration statement current, we may be required to pay additional liquidated
damages.




As a
result of certain anti-dilution provisions triggered by this private placement,
certain purchasers in the private placement completed in June 2004 (the “June
2004 Private Placement”) were issued 1,713,859 additional warrants to purchase
shares of the our common stock and the exercise price of the 6,869,566
outstanding warrants originally issued to these purchasers was repriced from
$0.28 to $0.22 per share. All warrants issued pursuant to the June 2004
Private Placement expire in June 2009.






Critical Accounting Policies








Revenue
Recognition




The
Company recognizes revenue based on the provisions of Statement of Position
No. 97-2, Software
Revenue Recognition (“SOP 97-2”), as amended by Statement of Position
No. 98-9,  Software Revenue Recognition with
Respect to Certain Arrangements (“SOP 98-9”), Emerging Issues Task Force
Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables (“EITF
00-21”).  Revenue is recognizable when: (1) the Company enters
into a legally binding arrangement with a customer; (2) the customer
accepts delivery of the product; (3) customer payment is deemed fixed or
determinable and free of contingencies or significant uncertainties; and
(4) collection is probable.




The
Company assesses whether fees are fixed or determinable at the time of sale and
recognize revenue if all other revenue recognition requirements are met. The
Company’s standard payment terms are net 30 or net 60. Payments that are due
within six months are generally deemed to be fixed or determinable based on the
Company’s successful collection history on such arrangements, and thereby
satisfy the required criteria for revenue recognition.




Most of
the Company’s software license arrangements do not include acceptance
provisions. However, if acceptance provisions exist, the Company provides for a
sales return allowance in accordance with Statement of Financial Accounting
Standards No. 48, Revenue
Recognition when Right of Return Exists (“SFAS 48”). If acceptance
provisions are long-term in nature or are not included as standard terms of an
arrangement or if the Company cannot reasonably estimate the incidence of
returns, revenue is recognized upon the earlier of receipt of written customer
acceptance or expiration of the acceptance period.




The
Company typically enters into a multiple element arrangement with its customers
which includes a license for the Company’s software, post-warranty maintenance
fees for technical support and product updates, and professional services fees
for installation, training and customization.  Most professional
services are sold separately and are all based on time spent and materials
used.  The Company evaluates whether the elements within the
arrangement qualify for separate accounting pursuant to the cited accounting
guidance above. The more significant factors considered in determining whether
the revenue should be accounted for separately include the nature of services
(i.e., consideration of whether the services are essential to the functionality
of the licensed product), degree of risk, availability of services from other
vendors, timing of payments and impact of milestones or acceptance criteria on
the realizability of the software license fee.




- 22
-


If a
multiple element arrangement does not qualify for separate accounting, the total
fee is generally recognized collectively based on contract accounting using
either the percentage-of-completion or completed-contract method. Contract
accounting is applied to any arrangements: (1) that include milestones or
customer specific acceptance criteria that may affect collection of the software
license fees; (2) where services include significant modification or
customization of the software; (3) where significant consulting services
are provided for in the software license contract without additional charge or
are substantially discounted; or (4) where the software license payment is
tied to the performance of consulting services.




Otherwise,
if a multiple element arrangement does qualify for separate accounting, the
Company recognizes revenue based on the following:




Subscription
revenue— Under a SaaS contract, the Company licenses the software under a
monthly subscription that includes maintenance support.  The monthly
subscription fee can also include application management and/or hosting the
Company’s software on the customer’s hardware.  The subscription
revenue is principally based on a contractual price per subscriber or similar
measure, and the monthly billing is based on the monthly subscriber volume for
each reporting period.  Under this type of arrangement, the Company
recognizes the software license revenue each month after the criteria have all
been met: (1) there is persuasive evidence of an arrangement;
(2) service has been provided to the customer; (3) amount of fees to
be paid by the customer is deemed fixed or determinable and free of
contingencies or significant uncertainties; and (4) collection is
probable.




License
and maintenance contract— A license and maintenance contract includes an
upfront license for the Company’s software and post-warranty maintenance fees
for technical support and product updates over an agreed-upon
period   During the post-warranty maintenance period, the
customer is entitled to receive software license updates, maintenance releases
and patches and product support and the fee is recognized ratably over the term
of the maintenance period.  Product support includes internet access
to technical content, as well as internet and telephone access to technical
support personnel.  The Company’s customers opt to purchase a
maintenance contract when they acquire software licenses and typically renew it
annually.




The
Company recognizes revenue from this type of contracts using the residual method
pursuant to the provisions of SOP 97-2, as amended by SOP 98-9, and EITF
00-21.  Under the residual method, revenue is recognized in a multiple
element arrangement when vendor-specific objective evidence (“VSOE”) of fair
value exists for all undelivered elements (i.e., maintenance) in the
arrangement, but does not exist for one of the delivered elements in the
arrangement (i.e., software license). The Company allocates revenue to each
element in the arrangement based on its respective fair value, with the fair
value determined by the price historically charged if that element is sold
separately. The Company defers revenue for the fair value of all undelivered
elements and recognizes revenue for the remainder of the arrangement fee
attributable to the delivered elements when the basic criteria in SOP 97-2 have
been met.




The
Company determines the fair value of the maintenance portion of the arrangement
based on the historical fee charged to the customer. The Company determines the
fair value of professional services, if included in a multiple element
arrangement, based on the hourly rates that the Company charges for these
services when sold independently from a software license. If VSOE of fair value
cannot be established for the undelivered elements of a multiple element
arrangement, the entire amount of revenue is deferred and recognized ratably
over the period that these elements are delivered.




Professional
Services and Other Revenue—In addition to the Company’s software products
and the related product support component, the Company offers professional
services, such as implementation services, training, consulting, and
customization. These professional services are typically sold under a separate
service agreement. The revenue from these arrangements is generally accounted
for separately from software license revenue and product support and upgrades
revenue and is generally recognized as the services are performed using the
percentage-of-completion method.   If there is a significant
uncertainty about the project completion or receipt of payment for the related
services, revenue is deferred until the uncertainty is sufficiently
resolved.




The
Company recognizes revenue from contracts with fixed or “not to exceed” fees
using the proportional performance method of accounting. The Company estimates
the proportional performance on these contracts on a monthly basis utilizing
hours incurred to date as a percentage of total estimated hours to complete the
project. The Company recognizes no more than 90% of the milestone or total
contract amount until acceptance is obtained. If the Company does not have a
sufficient basis to measure progress towards completion, revenue is recognized
upon the customer’s acknowledgement of final acceptance. When the total cost
estimate exceeds revenues, the estimated loss is accrued immediately using cost
estimates based upon an average fully burdened daily rate.





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 collectability of our accounts receivables and our future
operating results. See Risk Factor “Our revenues are generated from a limited
number of customers, the loss of any of which could substantially harm our
business.”


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 No. 144,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of  (“SFAS 144”).  In accordance with SFAS
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. We evaluate the
carrying value of long-lived assets for impairment of value based on
undiscounted future cash flows, which are subject to change. We cannot guarantee
that there will not be impairment in the future. Any future impairment charge
would negatively affect our results of operations.




Change in
Accounting for Goodwill and Other Intangible Assets On January 1, 2002 we
adopted SFAS 142, which 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. We completed our annual assessment and
determined that no goodwill impairment was present as of September 30, 2007. We
believe no events or circumstances have changed subsequent to September 30, 2007
that would require us to re-evaluate the fair value of our goodwill. We will
continue to complete an annual testing of goodwill for impairment on September
30th of each year. Such fair value measurements involve significant estimates
and assumptions, including the future cash flows, comparable market multiples
and discount rates. Changes in such estimates and assumptions could
significantly affect the fair value and potential impairment




- 23
-


Recently Issued
Accounting Pronouncements




In
December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141(R), Business
Combinations—a replacement of FASB Statement No. 141, ("SFAS 141R"),
which establishes principles and requirements for determining how an enterprise
recognizes and measures fair value of certain assets and liabilities acquired in
a business combination, including noncontrolling interests, contingent
consideration, and certain acquired contingencies.  SFAS 141R also requires
acquitision-related transaction expenses and restructuring costs be expensed as
incurred rather than capitalized as a component of the business
combination.  This statement is effective prospectively for the
Company's 2009 fiscal year. The adoption of SFAS 141R is not expected to have a
material impact on the Company's consolidated financial
statements.
  In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, Noncontrolling
Interests in Consolidated Financial Statements - An Amendment of ARB No.
51("SFAS 160").  SFAS 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary.  SFAS 160 also
requires that a retained noncontrolling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. 
SFAS 160 is effective for the Company's 2009 fiscal year.  The adoption of
SFAS 160 is not expected to have an effect on the Company's consolidated
financial statements.
  In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities- including
an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 gives
the Company the irrevocable option to carry most financial assets and
liabilities at fair value, with changes in fair value recognized in earnings.
SFAS 159 is effective for the Company’s 2008 fiscal year, although early
adoption is permitted. The adoption of SFAS 159 is not expected to have a
material effect on the Company’s consolidated financial
statements.




In
December 2006, the FASB issued FASB Staff Position EITF 00-19-2, Accounting
for Registration Payment Arrangements ("EITF 00-19-2"), which addresses
accounting for registration payment arrangements. EITF 00-19-2 specifies that
the contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with FASB
Statement No. 5, Accounting
for Contingencies. The guidance in this FASB Staff Position amends
Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities(“SFAS
133”), Statement of Financial Accounting Standards No. 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity, and Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, to include scope exceptions for
registration payment arrangements.  EITF 00-19-2 further clarifies
that a financial instrument subject to a registration payment arrangement should
be accounted for in accordance with other applicable generally accepted
accounting principles without regard to the contingent obligation to transfer
consideration pursuant to the registration payment arrangement.  The
Company adopted EITF 00-19-2 on January 1, 2007. Prior to adoption of this
EITF, the Company recorded a warrant liability as well as liquidated damages
related to the private placements in 2006. Upon adoption of EITF 00-19-2, the
Company reported the change in accounting principle through a cumulative-effect
adjustment to opening retained earnings, additional paid-in capital, and debt
discount related to the reclassification of the warrant liability, but
did not recognize any additional obligation related to the registration rights
agreements.




The FASB
issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (“FIN 48”) in June 2006. FIN 48 defines
the threshold for recognizing the benefits of tax return positions in the
financial statements as “more-likely-than-not” to be sustained by the taxing
authority. A tax position that meets the “more-likely-than-not” criterion shall
be measured at the largest amount of benefit that is more than 50% likely of
being realized upon ultimate settlement. FIN 48 applies to all tax positions
accounted for under Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes (“SFAS 109”). The Company adopted the provisions of FIN
48 as of January 1, 2007 and such provisions had no material impact on the
Company’s consolidated financial position or results of operations.




In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair
Value Measurements (“SFAS 157”) which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. This statement applies
under other accounting pronouncements that require or permit fair value
measurements and does not require any new fair value measurements. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods with those fiscal
years. The adoption of SFAS 157 is not expected to have a material effect on the
Company’s consolidated financial statements.




Item
      7.
                Financial
      Statements


follows




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


None.




Item
      8A.
                  Controls
      and Procedures


EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES




We
maintain disclosure controls and procedures designed to provide reasonable
assurance of achieving the objective that information in our Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified and pursuant to the regulations of the Securities and Exchange
Commission. Disclosure controls and procedures, as defined in Rule 13a-15(e) and
15d-15(e) under the Exchange Act, include controls and procedures designed to
ensure the information required to be disclosed by us in the reports we file or
submit under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer (who
performs the functions of principal executive officer and principal financial
officer),as appropriate, to allow timely decisions regarding
required disclosure. It should be noted that our system of controls, however
well designed and operated, can provide only reasonable, and not absolute,
assurance that the objectives of the system are met.




Our
management, with the participation of our Chief Executive Officer, evaluated the
effectiveness of our disclosure controls and procedures as of December 31, 2007,
the end of the period covered by this report.  Based on this evaluation, we
have concluded that our disclosure controls and procedures were effective as of
December 31, 2007.





- 24
-


MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING




Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as defined in Rule 13a-15(f) of the Exchange Act.  Our
internal control over financial reporting includes those policies and procedures
that (a) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and disposition of assets; (b)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and (c) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the financial statements.




Internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements prepared for external purposes in accordance with generally
accepted accounting principles. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. 
Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.




Management
conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2007, based on the framework set forth in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.  Management reviewed the results
of this evaluation with the Audit Committee of our Board of Directors, and based
on this evaluation, management has determined that as of December 31, 2007, our
internal control over financial reporting was effective based on the
criteria.  We believe that the consolidated financial statements included
in this report fairly present in all material respects our financial condition,
results of operations and cash flows for the periods
presented.











CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING




There
has been no change in our internal control over financial reporting during the
Company's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.


Item
      8B.
                  Other
      Information
  On March
13, 2008, the Company’s Board of Directors approved the performance
objectives under the Company's Executive Incentive Compensation Policy for the
Chief Executive Officer and the Chief Operating Officer for fiscal year
2008.   For the Chief Executive Officer, the total potential 2008
incentive compensation was set at 50% of total compensation with
approximately 66% to be earned based on the Company's revenue
generation over a set baseline number and the remainder based on a
cash-flow positive position and the restructuring of certain debt
obligations.  For the Chief Operating
Officer, the total potential 2008 incentive compensation was set at 62% of total
compensation, with approximately 64% to be earned based on the Company's revenue
generation over a set baseline number and 36% tied to meeting specific
product release milestones.
  In
establishing the Company’s corporate performance goals, the Company’s Board of
Directors and Compensation Committee assess both past and projected corporate
performance levels, as well as external market-place conditions, such as
economic outlook, competitive performance levels, projected industry volumes and
projected market share.
  Effective
March 31, 2008, we amended the senior convertible notes payable to Special
Situations Private Equity Fund, L.P., Special Situations Technology Fund, L.P.,
Special Situations Technology Fund II, L.P., Special Situations Fund III, L.P.,
and Special Situations Fund III QP, L.P. (collectively, "SSF"), amending the
payment terms and extending the maturity date to December 31, 2009 from March
31, 2008.  Pursuant to the amended terms of the notes, the interest
rate changed to 10% from 5% per annum, and we are required to make
quarterly principal and interest payments, beginning in June 2008.  The
first payment is in the amount of $60,000 due in June 2008, followed with a
payment $125,000 in September 2008 and a payment of $174,000 in December
2008.  In 2009, principal and interest payments of $212,000 are due each
quarter-end through September 2009 with a final payment of $712,000 in December
2009.  The senior convertible debt, net of discount, was reflected as a
current liability at December 31, 2007.
  Additionally,
pursuant to a related Amendment Letter Agreement dated March 31, 2008
between the Company and SSF, on April 1, 2008, we paid the accrued interest
of $19,000 on the original senior convertible notes for the quarter ended March
31, 2008 as well as the outstanding principal and accrued interest balance of
the five unsecure adjustable promissory notes collectively payable to SSF to
cover the liquidated damages related to the March 2006 private placement (the
"Liquidated Damages Notes").  The aggregate outstanding principal and
interest balance for the Liquidated Damages Notes totaled $126,000 as of March
31, 2008.
  On April 15, 2008, we entered into a settlement agreement with
CyberSource Corporation ("CyberSource"), the successor by way of merger to
Authorize.Net Holdings, Inc. (formerly known as Lightbridge, Inc.,
the successor by way of merger to Corsair Communications,
Inc.) related to the outstanding note of $982,000.  We paid $100,000
to CyberSource in full settlement of this debt obligation, including accrued
interest.  The agreement provides that CyberSource will release
the Company from further liability upon the later of (i) the expiration of one
hundred days from the date the $100,000 is received by CyberSource without
the occurence of an insolvency
event, or (ii) in the event that an insolvency event occurs within such 100 days, the date that
any or all limitations periods for an action for the avoidance of payment has
passed.
 - 25
-




PART III




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


EXECUTIVE OFFICERS AND
DIRECTORS




The
following table sets forth certain information regarding our executive officers
and directors as of March 17, 2008:




Name
            
            Age
            
            PositionJoseph
      R. Simrell
            
            
            50
            
            
            Chairman
      of the Board, Chief Executive Officer, President, Chief Financial Officer
      and SecretaryRobert
      Richardson
            
            
            41
            
            
            Chief
      Operating OfficerDavid
      Haynes
            
            
            42
            
            
            DirectorLouis
      A. Delmonico, Ph.D.
            
            
            67
            
            
            DirectorJohn
      E. Rehfeld
            
            
            67
            
            
            Director







Joseph
R. Simrell, Chairman of the Board, Chief Executive Officer, President, Chief
Financial Officer, and Secretary. Mr. Simrell joined Primal in January
1999 as Chief Financial Officer and Vice President of Finance and
Administration. Mr. Simrell was elected as Chief Executive Officer and President
as of January 31, 2003 (serving those positions on an interim basis from January
31, 2003 to May 12, 2003, when he became the permanent Chief Executive Officer
and President) and was elected Chairman of the Board as of February 3, 2003. Mr.
Simrell also served as our Chief Financial Officer and Secretary between October
15, 2004 and March 25, 2005. Mr. Simrell had previously served as Secretary from
August 2000 and as Chief Financial Officer from January 1999 until August 2003.
From August 1997 to December 1998, Mr. Simrell served as an outside consultant
to Primal. From November 1991 to July 1997, Mr. Simrell served as Executive Vice
President and Chief Financial Officer of GDI, an information technology company.
Prior to 1991, Mr. Simrell held various management positions at BellSouth,
InteGroup, and SCI.




Robert
Richardson, Chief Operating Officer. Mr. Richardson joined Primal in
August 2003 as the Senior Vice President of Services responsible for Customer
Support and Consulting Services and launching Primal’s new application
management and hosting services. In March 2006, Mr. Richardson was promoted to
Chief Operating Officer. From July 2004 to March 2006, Mr. Richardson was the
Executive Vice President of Operations. From December 2001 to August 2003, Mr.
Richardson was a consulting project manager for Sony Pictures Entertainment and
responsible for the delivery of the billing and cash application portions of a
custom accounting system. In January 1998, Mr. Richardson founded StrataSource,
Inc. and until October 2001 served as its Executive Vice President, responsible
for defining its strategic direction. Mr. Richardson earned his Bachelor of
Science degree in computer science from University of Southern
California.




David Haynes, Director.




Louis A. Delmonico, Ph.D, Director.




John E.Rehfeld,
Director.










Louis A.
Delmonico (Chairman), John E.Rehfeld and David Haynes are members of the Audit Committee of the
Company’s Board of Directors.  Mr. Rehfeld is an “audit committee
financial expert” in accordance with Securities and Exchange Commission (“SEC”)
rules. Stockholders should understand that this designation is a disclosure
requirement of the SEC related to Mr. Rehfeld’s experience and
understanding with respect to certain accounting and auditing matters. The
designation does not impose upon Mr. Rehfeld any duties, obligations, or
liability that are greater than are generally imposed on him as a member of the
Audit Committee and the Board. Also, Mr. Rehfeld’s designation as the Audit
Committee financial expert pursuant to this SEC requirement does not affect the
duties, obligations, or liability of any other member of the Audit Committee or
the Board. Because we are not a listed issuer, the members of the Audit
Committee are not subject to the independence requirements of any national
securities exchange or association.




We do not
have a class of equity securities registered under Section 12 of the
Exchange Act.




- 26
-


The
Company has adopted a Code of Conduct, which contains general guidelines for
conducting the Company’s business and is designed to help employees and officers
resolve ethical issues in an increasingly complex business environment. The Code
of Conduct applies to all employees, including the principal executive officer,
the principal financial officer, the controller, and any other employee with any
responsibility for the preparation and filing of documents with the SEC. The
Code of Conduct covers topics, including, but not limited to, conflicts of
interest, confidentiality of information, and compliance with laws and
regulations.  Any request for a copy of the Code of Conduct, without
charge, should be made to:  Primal Solutions, Inc.,
ATTN:  Investor Relations, 19732 MacArthur Boulevard, Suite 100,
Irvine, CA  92612.







Item 10.
                Executive
      Compensation


The
following table sets forth certain information with respect to the compensation
of our principal executive officer and each of our other most highly compensated
executive officers for the fiscal year ended December 31,
2007.




SUMMARY COMPENSATION TABLE


Name
      and Principal Position
            
            Year
            
            Salary
            
            
            Bonus
              (1)
            
            
            Option
              Awards
              (2)
            
            
            All
      Other Compensation
              (3)
            
            
            TotalJoseph
      R. Simrell
            
            2007
            
            $
            200,000
            
            
            $
            100,752
            
            
            $
            32,138
            
            
            $
            17,533
            
            
            $
            350,423ChiefExecutive Officer, President, and Chief Financial
      Officer
            
            2006
            
            
            200,000
            
            
            
            71,214
            
            
            
            86,368
            
            
            
            16,842
            
            
            
            374,424Robert
      Richardson
            
            2007
            
            
            150,000
            
            
            
            155,319
            
            
            
            9,049
            
            
            
            18,580
            
            
            
            332,948Chief
      Operating Officer
            
            2006
            
            
            150,000
            
            
            
            124,354
            
            
            
            23,841
            
            
            
            16,975
            
            
            
            315,170Sam Gilson
    (4)
            
            2007
            
            
            143,750
            
            
            
            13,738
            
            
            
            2,476
            
            
            
            12,641
            
            
            
            172,605Senior
      Vice President of Sales
            
            2006
            
            
            150,000
            
            
            
            57,712
            
            
            
            14,585
            
            
            
            10,975
            
            
            
            233,271





(1)
            See
      the discussion below under the heading “Executive Incentive Compensation
      Policy”.




(2)
            This column
      represent the dollar amount recognized for financial statement
      reporting purposes for fiscal year 2007 in accordance with Statement of
      Financial Accounting Standards No. 123R, Share-Based
      Payment(“SFAS 123R”).No options were granted to
      our named executives during 2007.  The value of the options
      granted to our named executives in 2006 were estimated pursuant
      to SFAS 123R, using the Black-Scholes option pricing model with the
      following weighted average assumptions:  expected life of 6.6
      years, volatility of 193.11%, risk-free interest of 4.29%, and no dividend
      yield.  On August 9, 2006, the following option awards were
      granted under our 2006 Stock Option Plan (the "2006 SOP") to the named
      executives with an exercise price of $0.07 per share:  Joseph R.
      Simrell - 3,973,916 shares; Robert Richardson - 1,743,809 shares; and Sam
      Gilson - 867,579 shares.  Option awards granted under the 2006
      SOP are nonqualified stock options.  Options granted under the
      2006 SOP vest fully upon the sale of all or substantially all of the
      assets of the Company, the acquisition by any person or group of more than
      50% beneficial ownership of the Company, or the merger, consolidation or
      other reorganization of the Company resulting in a more than 50% change in
      ownership of the Company.  The option awards granted on
      August 9, 2006 will expire on August 9, 2011.  In December 2007,
      50,010 option shares granted under the 2004 Flexible Incentive Plan
      in 2005 and 867,579 option shares granted under the 2006 SOP in August
      2006 were forfeited by Mr. Gilson as a result of the termination of his
      employment with the
  Company.




(3)
            Includes
      premiums paid by Primal on certain health insurance or term-life insurance
      policies, relocation costs, or contribution paid by us on behalf of the
      individual to our Section 401(k) Plan, which matches a portion
      of each such individual’s contributions to the same
      plan.




(4)
            Mr. Gilson
      became Senior Vice President of Sales on February 28, 2005. 
      Effective
      December 15, 2007, Mr. Gilson terminated his employment with the Company,
      not for "good
  reason".






EMPLOYMENT
AGREEMENTS




Employment
Agreement with Joseph R. Simrell




Effective
January 28, 2003, Mr. Simrell entered into an employment agreement with us,
which was amended as of May 17, 2004, then again as of December 16, 2005 and
again as of November 13, 2007. Under the terms of the employment agreement, as
amended, Mr. Simrell serves as our Chairman of the Board, Chief Executive
Officer and President. The term of the employment agreement expires on
December 31, 2008. The Board of Directors is required to begin good faith
negotiations with Mr. Simrell no later than October 31, 2008 for a new
employment agreement, which shall contain a clause for at least 12 months of
severance and benefits continuation. On January 30, 2008, the Compensation
Committee approved an increase to Mr. Simrell’s base annual salary to $225,000.
In addition, Mr. Simrell is entitled to receive bonuses in an amount not less
than 50% of his salary, subject to achieving performance goals set by the
Board of Directors; provided that any accrued and unpaid incentive compensation
payable to Mr. Simrell shall be paid no later than two and one-half months
following the close of the calendar year in which such incentive compensation
was earned.  However, if the Board of Directors, in its discretion,
determines the Company does not have sufficient available cash to pay such
amount on such date, the Board of Director may defer, without interest, payment
of an or all such payment, to not later than December 31 of the calendar year
following the calendar year in which the incentive compensation was earned. 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 us from time to time.




In the
event we terminate Mr. Simrell’s employment without cause or Mr. Simrell resigns
for good reason, Mr. Simrell shall be entitled to 12 months of severance, 100%
of his incentive compensation for that year calculated assuming 100% of the
targets under such bonus plans are achieved, and continuation of his medical,
dental, life, and disability coverage for himself and his spouse and dependents
for a period not to exceed 12 months, provided he signs a release in our favor.
Additionally, any accrued and unpaid payments owed to Mr. Simrell pursuant to
the terms of the employment agreement, as amended, shall be made no later than
two and one-half months following the close of the calendar year in which Mr.
Simrell is terminated, provided further, any such payments shall be accelerated,
if necessary, to prevent such two and one-half month period to be exceeded.
Notwithstanding the foregoing, in the event that Mr. Simrell receives payments
under the Third Amended and Restated Change of Control Agreement dated November
13, 2007 (as discussed below), then Mr. Simrell will not also receive the
payments in connection with the termination of his employment pursuant to his
employment agreement, as amended.




- 27
-


The
employment agreement, as amended 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
to enforce partially, these covenants.




Finally,
the employment agreement, as amended, provides that if, at the time of Mr.
Simrell’s termination of employment, Mr. Simrell is a “specified employee” as
defined in Section 409A of the Internal Revenue Code, and one or more of the
payments to be received by Mr. Simrell would constitute deferred compensation
within the meaning of Section 409A of the Internal Revenue Code, no such payment
may be provided until the earliest of (a) six months after the separation of Mr.
Simrell’s separation from service for reasons other than death or disability,
(b) the date of death or disability of Mr. Simrell, or (c) the effective date of
a change in effective control of the Company, to the extent required to mitigate
Mr. Simrell’s incurrence of any penalty tax or interest under Section 409A of
the Internal Revenue Code.




We have
also entered into a Change of Control Agreement with Mr. Simrell, amended as of
May 16, 2004, then again as of December 16, 2005, and then again as of November
13, 2007 (the “Simrell Change Agreement”).  The Simrell Change Agreement
shall expire no later than December 31, 2008.  The Simrell Change Agreement
provides that if, within three months of a “change of control transaction,” (i)
we terminate Mr. Simrell’s employment (except upon his death or disability, his
reaching the mandatory retirement age, if any, or upon other “cause to
terminate” his employment) or (ii) Mr. Simrell voluntarily terminates his
employment for “good reason”, we will tender in a single lump sum cash payment
(a) any accrued and unpaid salary and vacation through the termination date, (b)
any accrued and unpaid portion of the Mr. Simrell's incentive compensation and
other bonuses for fiscal year 2007, (c) an amount equal to 150% of Mr. Simrell’s
then-current annual salary and (d) an amount equal to 150% of Mr. Simrell’s
incentive compensation for that year, calculated assuming 100% of the targets
under such incentive compensation plans are achieved, payable within ten days of
termination provided that any such payment must be made within two and one-half
months following the close of the calendar year in which such termination
occurred; provided, that, in the event Mr. Simrell terminates his employment
with us for good reason, in no event will the lump sum payment payable to Mr.
Simrell commence prior to the six months following such separation; provided
further, within ten days after the effective date of Mr. Simrell’s resignation
for good reason and the effective date of any release executed by Mr. Simrell,
we shall make an irrevocable contribution to a rabbi trust in the form of the
model rabbi trust described in Internal Revenue Service Revenue Procedure 92 64.
Moreover, any portion of said lump sum payment not subject to Internal Revenue
Service Rule 409A shall be paid within ten days after the effective termination
date of Mr. Simrell. Further, we are obligated to tender such payments if, not
more than three months prior to the closing of a change of control transaction,
(i) we terminate Mr. Simrell’s employment, and such termination arose in
connection with or in anticipation of the change of control transaction or (ii)
Mr. Simrell voluntarily terminates his employment for good reason. Lastly, in
anticipation of a change of control transaction, the Board of Directors can
adopt a resolution deeming that a change of control transaction has closed for
purposes of activating the Simrell Change Agreement obligations.




The
Simrell Change Agreement additionally provides that, in the event the severance
payment is subject to excise tax, we 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, we will reduce a severance payment by the amount of any other
severance or termination benefits that it is obligated to pay to Mr. Simrell.
The Simrell Change Agreement further provides for up to 18 months following the
termination of Mr. Simrell’s employment, we will continue to provide Mr. Simrell
and his spouse and dependents with uninterrupted medical, dental, life, and
disability coverage, or a lump sum payment equal to the cost of obtaining
substantially similar coverage.




Additionally,
the Simrell Change Agreement provides that if, at the time of Mr. Simrell’s
termination of employment, Mr. Simrell is a “specified employee” as defined in
Section 409A of the Internal Revenue Code, and one or more of the payments to be
received by Mr. Simrell would constitute deferred compensation within the
meaning of Section 409A of the Internal Revenue Code, no such payment may be
provided until the earliest of (a) six months after the separation of Mr.
Simrell’s separation from service for reasons other than death or disability,
(b) the date of death or disability of Mr. Simrell, or (c) the effective date of
a change in effective control of the Company, to the extent required to mitigate
Mr. Simrell’s incurrence of any penalty tax or interest under Section 409A of
the Internal Revenue Code.




Lastly,
the Simrell Change Agreement provides that 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.




For
purposes of the Simrell Change Agreement, a “change of control transaction” will
have occurred if:




·
            an
      otherwise unaffiliated person acquires the beneficial ownership of 35% or
      more of the combined voting power of our then outstanding voting
      securities. The acquisition of the shares can be in one transaction or in
      a series of related transactions and the person’s ownership can be direct
      or indirect;




·
            an
      otherwise unaffiliated person acquires the beneficial ownership of 50% or
      more of the combined voting power of any of our material subsidiaries. The
      acquisition of the shares can be in one transaction or in a series of
      related transactions and the person’s ownership can be direct or indirect.
      A material subsidiary means a subsidiary that represents at least 50% of
      our combined revenue or assets;




·
            a
      change of a majority of the members of our Board of Directors during any
      12 consecutive months. If, by a two-thirds majority, our Board of
      Directors elected a new member or nominated a new member for election by
      our stockholders, such new member will be considered to have been an
      original member of our Board of
Directors;




·
            our
      stockholders have approved a complete liquidation or dissolution of us or
      a disposition of all or substantially all of our
  assets;




·
            we,
      in a single transaction or series of transactions, engage in a business
      combination transaction that results in our pre-transaction stockholders
      owning less than 50% of the combined voting power of the outstanding
      voting securities of the resulting entity;
or




·
            any
      other event occurs that would require disclosure of “Changes in Control of
      Registrant” through our filing of a Current Report on Form
      8-K.




Pursuant
to the Simrell Change Agreement, our “cause to terminate” Mr. Simrell means an
intentional act by the individual that materially injures us, an intentional
refusal or failure to follow lawful and reasonable directions of the Board of
Directors or an individual to whom the individual reports (as appropriate), the
willful or habitual neglect of duties, or conviction of, or the entering of a
guilty plea or plea of no contest with respect to, a felony involving an act of
moral turpitude.


- 28
-




As
defined in the Simrell Change Agreement, Mr. Simrell’s “good reason” to resign
means:




·
            our
      failure to cure a material breach of its obligations under any
      employment-related agreement;




·
            our
      unilateral, material reduction in the individual’s title, status, overall
      position, responsibilities or duties, reporting relationship, and general
      working environment;




·
            our
      requirement that the individual relocate his residence outside of Orange
      County, or the relocation of the individual’s office more than 50 miles
      from its location as of the date the applicable change agreement was
      executed;




·
            our
      failure to obtain an assumption by our successor or assignee of
      substantially all of our business of any material written agreement
      between the individual and us; or




·
            any
      material change in the benefits or incentive compensation offered to the
      individual from those in which the individual is participating as of the
      date the applicable change agreement was
  executed.










Employment
Agreement with Robert Richardson




Effective
August 14, 2003, the Company enterered into an at-will employment letter
agreement with Mr. Richardson, which was amended as of March 25, 2005, and
again as of August 9, 2006 (the "Amended Richardson Agreement").  Under the
terms of the Amended Richardson Agreement, Mr. Richardson serves as
our Chief Operating Officer. On January 30, 2008, the Compensation
Committee approved an increase in Mr. Richardson’s base annual salary to
$185,000. In addition, Mr. Richardson is entitled to receive incentive
compensation bonuses in an amount not less than 62% of his salary subject to
achieving certain individual and corporate performance goals. Mr. Richardson 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 us from time to time.




Subject to
Mr. Richardson entering into a standard form of separation and release agreement
with the Company, the Amended Richardson Agreement provides for 90 days of
transition assistance paid in accordance with the normal payroll schedule upon
involuntary termination of employment if other than for “cause.” 
Additionally, the Amended Richardson Agreement provides that upon a “change of
control,” termination without “cause,” or if Mr. Richardson terminates his
employment for “good reason” (as such terms are defined in the Amended
Richardson Agreement), all of his outstanding unvested stock options will
accelerate and vest.








- 29
-




Employment
Agreement with Sam Gilson




Effective
February 28, 2005, we entered into an at-will employment letter agreement with
Mr. Gilson, in which Mr. Gilson agreed to serve as our Senior Vice President of
Sales. Under the terms of the letter agreement, Mr. Gilson’s base annual salary
was $150,000. In addition, Mr. Gilson was entitled to receive incentive
compensation bonuses in an amount not less than 100% of his salary subject to
achieving certain individual and corporate performance goals. Mr. Gilson was
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 us from time to time.On
August 9, 2006, the Company entered into a Side Letter Agreement dated August 9,
2006 with Mr. Gilson (the “Gilson Agreement”) which provided that upon a “change
of control,” termination without “cause,” or if Mr. Gilson terminated his
employment for “good reason,” (as such terms are defined in the Gilson
Agreement), all of his outstanding unvested stock options would accelerate and
vest.On December
15, 2007, Mr. Gilson terminated his employment with the Company, not for "good
reason".






EXECUTIVE
INCENTIVE COMPENSATION POLICY




At
the beginning of each year, our Compensation Committee approves the performance
objectives for our executives.  The purpose of this the executive incentive
compensation plan is to increase shareholder value and the success of the
Company by motivating our executives to achieve the Company's key strategic
goals and to perform to the best of their abilities in support of those goals
within a yearly timeframe.  The plan is designed to
award our executives  for performance that achieves our key
strategic goals.




On March
20, 2007, the Company’s Compensation Committee approved the performance
objectives under the Company's Executive Incentive Compensation Policy for the
Chief Executive Officer, the Chief Operating Officer, and the Vice President of
Sales for fiscal year 2007.   For the Chief Executive Officer and
the Vice President of Sales, the total potential 2007 incentive compensation was
set at 33% and 50% of total compensation, respectively, to be earned based on
the Company's revenue generation from new accounts over a set baseline
number.  For the Chief Operating Officer, the total potential 2007
incentive compensation was set at 50% of total compensation, with approximately
80% to be earned based on the Company's revenue generation from new accounts
over a set baseline number and 20% tied to meeting specific product release
milestones.




In
establishing the Company’s corporate performance goals, the Company’s Board of
Directors and Compensation Committee assess both past and projected corporate
performance levels, as well as external market-place conditions, such as
economic outlook, competitive performance levels, projected industry volumes and
projected market share.




- 30
-


OUTSTANDING OPTIONS AT DECEMBER 31, 200 7




The
following table sets forth certain information regarding unexercised options
held by the officers named in the Summary Executive Compensation Table that were
outstanding as of December 31, 2007.  There were no shares of
stock that had not vested or equity incentive plan awards outstanding as of
December 31, 2007.




OUTSTANDING OPTION AWARDS AT FISCAL
YEAR-END
 Number of
      Securities Underlying Unexercised
      OptionsName
              
              Exercisable
                (shares)
              
              Unexercisable
                (shares)
              
              Option
                Exercise
                Price
              
              Option
                Expiration
                DateJoseph
      R. Simrell
              
              
              100,000
              
              
              —
              
              
              $
              0.07
              
              12/5/2011229,175
              
              
              —
              
              
              
              0.25
              
              1/19/20141,320,333
              
              
              264,130
              (1)
              
              
              0.16
              
              5/6/2015—
              
              
              3,973,916
              (2)
              
              
              0.07
              
              8/9/2011Robert
      Richardson
              
              
              360,000
              
              
              —
              
              
              
              0.08
              
              8/18/2013372,600
              
              
              74,538
              (3)
              
              
              0.16
              
              5/6/2015—
              
              
              1,743,809
              (2)
              
              
              0.07
              
              8/9/2011Sam
      Gilson
              
              
              249,990
              
              
              —
              
              
              
              0.14
              
              3/15/2008


(1)
            264,130
      shares will vest on May 6, 2008.




(2)
            Under
      the 2006 Stock Option Plan, the total balance will vest fully if certain
      events stipulated in the plan
occur.




(3)
            74,538
      shares will vest on May 6, 2008.









COMPENSATION OF
DIRECTORS




The
following table sets forth certain information regarding compensation earned
during the fiscal year ended December 31, 2007 by directors, unless the director
is also a named executive officer, in which case he receives no compensation for
service as a director.




COMPENSATION
OF DIRECTORS




Name
            
            Fees
      Earned or
              Paid
      in Cash
            
            
            Stock
              Awards
            
            
            Option
              Awards
            
            
            TotalLouis
      A. Delmonico(1)
            
            $
            24,000
            
            
            $
            —
            
            
            $
            —
            
            
            $
            24,000John
      Faltys (2)(5)
            
            
            5,500
            
            
            
            —
            
            
            
            —
            
            
            
            5,500David
      Haynes (3)
            
            
            24,000
            
            
            
            —
            
            
            
            —
            
            
            
            24,000John
      E. Rehfeld (4)
            
            
            26,812
            
            
            
            —
            
            
            
            —
            
            
            
            26,812





(1)
            180,000
      shares of common stock underlying options and 577,174 shares of common
      stock underlying warrants were outstanding and exercisable as of December
      31, 2007.  All option awards were granted and exercisable prior
      to the adoption of SFAS 123R.




(2)
            60,000
      shares of common stock underlying options and 476,087 shares of common
      stock underlying warrants were outstanding and exercisable as of December
      31, 2007.  All option awards were granted and exercisable prior
      to the adoption of SFAS 123R.




(3)
            60,000
      shares of common stock underlying options and 504,348 shares of common
      stock underlying warrants were outstanding and exercisable as of December
      31, 2007.  All option awards were granted and exercisable prior
      to the adoption of SFAS 123R.




(4)
            120,000
      shares of common stock underlying options and 1,033,696 shares of common
      stock underlying warrants were outstanding and exercisable as of December
      31, 2007.  All option awards were granted and exercisable prior
      to the adoption of SFAS 123R.


(5)
              On
      April 8, 2007, Mr. Faltys resigned as a member of the Board of Directors
      and Compensation Committee.


- 31
-


There are
currently two standing Board committees, an audit committee and a compensation
committee. In 2007, the committee meetings were scheduled on the same day as the
Board meetings.  Each of our non-employee directors received an annual
stipend of $14,000 and $2,000 for attending the Board and/or any respective
committee meetings scheduled on the same day.  In addition, each
non-employee director is entitled to reimbursement of travel
expenses.  In 2008, each of our non-employee directors will receive an
annual stipend of $14,000 and $2,000/day for attending any meeting scheduled on
that day.




During
2007, no warrants or stock options were issued to the non-employee members of
the Board of Directors.




Mr.
Rehfeld, our Lead Director, receives a stipend of $250 per hour with a per day
cap of $1,500. The Lead Director periodically performs strategic projects as
requested by the Board.  We periodically form and maintain ad hoc
committees for specific and limited purposes and duration. Such ad hoc committee
members may receive nominal compensation for such service.




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


As of
March 17, 2008, the Company had 38,373,634 shares of common stock
outstanding.




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.




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, 2008 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
            
            No. of Shares
            
            % of ClassJohn
      Faltys(1)
            
            
            2,490,541
            
            
            
            3.1
            %Joseph
      R. Simrell(2)
            
            
            3,448,218
            
            
            
            4.3
            %David
      Haynes(3)
            
            
            2,083,755
            
            
            
            2.6
            %John
      E. Rehfeld(4)
            
            
            3,629,322
            
            
            
            4.6
            %Louis
      A. Delmonico(5)
            
            
            1,006,522
            
            
            
            1.3
            %Robert
      Richardson(6)
            
            
            807,138
            
            
            
            1.0
            %Austin
      W. Marxe and David M. Greenhouse(7)
            
            
            45,621,163
            
            
            
            57.3
            %All
      executive officers and directors as a group (6 persons)(8)
            
            
            13,465,496
            
            
            
            16.9
            %





(1)
            Includes
      1,954,454 shares of common stock beneficially owned by Mr. Faltys and
      536,087 shares of common stock underlying warrants and options exercisable
      as of the date set forth above or within 60 days thereafter. The business
      address for this person is 19732 MacArthur Boulevard, Suite 100,
      Irvine, California 92612.




(2)
            Includes
      1,459,407 shares of common stock beneficially owned by Mr. Simrell
      and 1,988,811 shares of common stock underlying warrants and options
      exercisable as of the date set forth above or within 60 days thereafter.
      The business address for this person is 19732 MacArthur Boulevard,
      Suite 100, Irvine, California
92612.




(3)
            Includes
      1,459,407 shares of common stock beneficially owned by Mr. Haynes and
      624,348 shares of common stock underlying warrants and options exercisable
      as of the date set forth above or within 60 days thereafter. The
      business address for this person is 18881 19732 MacArthur Boulevard,
      Suite 100, Irvine, California
92612.




(4)
            Includes
      2,355,626 shares of common stock beneficially owned by Mr. Rehfeld and
      1,273,696 shares of common stock underlying warrants and options
      exercisable as of the date set forth above or within 60 days
      thereafter. The business address for this person is 19732 MacArthur
      Boulevard, Suite 100, Irvine, California
  92612.




(5)
            Includes
      159,348 shares of common stock beneficially owned by Dr. Delmonico
      and 847,174 shares of common stock underlying warrants and options
      exercisable as of the date set forth above or within 60 days thereafter.
      The business address for this person is 19732 MacArthur Boulevard,
      Suite 100, Irvine, California
92612.




(6)
            Includes
      807,138 shares of common stock underlying options exercisable by
      Mr. Richardson as of the date set forth above or within 60 days
      thereafter. The business address for this person is 19732 MacArthur
      Boulevard, Suite 100, Irvine, California
  92612.




(7)
            Consists
      of: (i) 110,505 shares of common stock, 110,000 shares of common stock
      issuable upon conversion of the outstanding principal amount of Notes and
      55,000 shares of common stock underlying warrants held by Special
      Situations Fund III, L.P. and exercisable as of the date set forth above
      or within 60 days thereafter; (ii) 1,260,860 shares of common stock,
      1,260,000 shares of common stock issuable upon conversion of the
      outstanding principal amount of Notes and 630,000 shares of common stock
      underlying warrants held by Special Situations Fund III QP, L.P. and
      exercisable as of the date set forth above or within 60 days thereafter;
      (iii) 1,084,978 shares of common stock, 1,090,000 shares of common stock
      issuable upon conversion of the outstanding principal amount of Notes and
      1,196,905 shares of common stock underlying warrants held by Special
      Situations Technology Fund, L.P. and exercisable as of the date set forth
      above or within 60 days thereafter; (iv) 5,713,561 shares of common stock,
      5,730,000 shares of common stock issuable upon conversion of the
      outstanding principal amount of Notes and 6,287,504 shares of common stock
      underlying warrants held by Special Situations Technology Fund II, L.P.
      and exercisable as of the date set forth above or within 60 days
      thereafter; and (v) 6,802,439 shares of common stock, 6,810,000 shares of
      common stock issuable upon conversion of the outstanding principal amount
      of Notes and 7,479,411 shares of common stock underlying warrants held by
      Special Situations Private Equity Fund, L.P. and exercisable as of the
      date set forth above or within 60 days thereafter. MGP Advisors Limited
      (“MGP”) is the general partner of the Special Situations Fund III, QP,
      L.P. and the general partner of and investment advisor to the Special
      Situations Fund III, L.P.  AWM Investment Company, Inc. (“AWM”) is
      the general partner of MGP, the general partner of and investment advisor
      to the Special Situations Cayman Fund, L.P. and the investment adviser to
      the Special Situations Fund III, QP, L.P., the Special Situations
      Technology Fund, L.P., the Special Situations Technology Fund II, L.P.,
      the Special Situations Private Equity Fund, L.P. and the Special
      Situations Life Sciences Fund, L.P.  Austin W. Marxe and David M.
      Greenhouse are the principal owners of MGP and AWM.  Through their
      control of MGP and AWM, Messrs. Marxe and Greenhouse share voting and
      investment control over the portfolio securities of each of the funds
      listed above.  The business address for Messrs. Marxe and Greenhouse
      is 527 Madison Avenue, Suite 2600, New York, NY
  10022.




(8)
            Includes
      all shares, options and warrants described in Notes 1, 2, 3, 4, 5, and 6
      above.




- 32
-


SPECIAL
SITUATIONS FUNDS




It is our
belief that Special Situations Fund III QP, L.P., Special Situations Fund III,
L.P., Special Situations Private Equity Fund, L.P., Special Situations
Technology Fund, L.P. and Special Situations Technology Fund II, L.P.
(collectively “SSF”) may be deemed to constitute a “group” within the meaning of
Section 13(d)(3) of the Exchange Act. As of March 17, 2008, persons
affiliated with SSF beneficially own 57.3% of our voting stock andpossess
the right to designate one person for election to the Board of Directors. As a
result, if some of the persons or entities affiliated with SSF 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. SSF has notified the Company that it has no present
intention to exercise the right to designate one person for election to our
Board. However, this intention may change in the future.




SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS




The
following table summarizes our equity compensation plan information as of
December 31, 2007.




EQUITY
COMPENSATION PLAN INFORMATION


Number of securities
              to be issued upon
              exercise of
              outstanding options,
              warrants and rights
            
            
            Weighted-average
              exercise price of
              outstanding options,
              warrants and rights
            
            
            Number of securities
              remaining available
              for future issuance
              under equity
              compensation plans
              (excluding securities
              reflected in column (a))Plan category
            
            (a)
            
            
            (b)
            
            
            (c)Equity
      compensation plans approved by security holders2001
      Flexible Incentive Plan
            
            
            2,802,204
            
            
            $
            0.10
            
            
            
            412,0962004
      Flexible Incentive Plan
            
            
            4,557,729
            
            
            
            0.13
            
            
            
            893,3442006
      Stock Option Plan
            
            
            7,132,421
            
            
            
            0.07
            
            
            
            867,579Equity
      compensation plans not approved by security holdersWarrants issued to
      Board Members(1)
            
            
            1,000,000
            
            
            
            0.10
            
            
            
            —Warrants issued to
      Board of Advisors Member(2)
            
            
            25,000
            
            
            
            0.22
            
            
            
            —Warrants issued to
      Board Members(3)
            
            
            750,000
            
            
            
            0.05
            
            
            
            —Total
            
            
            16,267,354
            
            
            $
            0.09
            
            
            
            2,173,019





(1)
            Issued
      in May 2006 to our non-employee Board members at an exercise price of
      $0.10 with a term of 10 years.




(2)
            Issued
      in August 2004 to a member of our Board of Advisors at an exercise
      price of $0.22 and with a term of 10
years.




(3)
            Issued
      in April 2003 to our non-employee Board members at an exercise price
      of $0.05, vesting over two years and with a term of 10 years. These
      warrants fully vested on June 15, 2004 as a result of the
      June 2004 Private Placement.




Item
      12.
                Certain
      Relationships and Related Transactions, and
      Director Independence


RELATED
TRANSACTIONS




On
November 2, 2006, William C. Bousema resigned as Chief Financial Officer,
Senior Vice President, and Secretary from the Company effective October 31,
2006.  Mr. Bousema's resignation was for "Good Reason" under his
employment letter dated March 25, 2005, as amended, and his change of control
agreement dated as of March 25, 2005, as amended.  Pursuant to these
agreements, the Company agreed to pay Mr. Bousema $176,234 in
installments beginning in May 2007.




In
December 2006, we issued a $250,000 note to Special Situations Private Equity
Fund, L.P., which beneficially owns 27% of our common stock and is an affiliate
of SSF. Interest accrues at 11.0% per annum, and there are no principal or
interest payments due until maturity which was originally June 27, 2007 but was
amended to October 2, 2007.  We paid the principal balance plus
accrued interest in full on October 2, 2007.




As part
of our private placement on April 27, 2006, we sold 1,750,000 shares of common
stock and 875,000 warrants to purchase shares of our common stock to two
accredited investors, one of which is currently a member of our Board of
Directors, for a purchase price of $175,000.  See "Item 6 - Management's
Discussion and Analysis - April 2006 Private Placement."





On March
31, 2006, we sold $1.5 million in aggregate principal amount of Notes along with
warrants to purchase 7.5 million shares of our common stock to SSF, which at the
time beneficially owned approximately 62% of our outstanding common stock. As a
result of certain anti-dilution provisions triggered by this issuance, SSF
received an additional 1,713,859 warrants to purchase shares of our common
stock. See "Item 6 - Management's Discussion and Analysis - March 2006 Private
Placement."




Effective
March 31, 2008, we amended the Notes payable to SSF, amending the payment
terms and extending the maturity date to December 31, 2009 from March 31,
2008.  Pursuant to the amended terms of the notes, the interest
rate changed to 10% from 5% per annum, and we are required to make
quarterly principal and interest payments, beginning in June 2008.  The
first payment is in the amount of $60,000 due in June 2008, followed with a
payment $125,000 in September 2008 and a payment of $174,000 in December
2008.  In 2009, principal and interest payments of $212,000 are due each
quarter-end through September 2009 with a final payment of $712,000 in December
2009.  The senior convertible debt, net of discount, was reflected as a
current liability at December 31, 2007.
  Additionally,
pursuant to a related Amendment Letter Agreement dated March 31, 2008
between us and SSF, on April 1, 2008, we paid the accrued interest of
$19,000 on the original senior convertible notes for the quarter ended March 31,
2008 as well as the outstanding principal and accrued interest balance of the
Liquidated Damages Notes (see discussion below).  The aggregate outstanding
principal and interest balance for the Liquidated Damages Notes totaled $126,000
as of March 31, 2008.


Pursuant to
the registration statement relating to the private placement in March 2006, the
Company owed
liquidated damages because the registration statement had not
been declared effective by the agreed-upon date.  In April
2007, we executed five unsecured adjustable promissory notes to SSF in the
principal amount of $54,000, $9,000, $45,000, $1,000, and $10,000, respectively,
to cover these liquidated damages.  The original issuance date of these
promissory notes is December 22, 2006, the date the registration statement was
declared effective.  Interest on the unpaid principal balance accrued
at an adjustable rate based on the federal rate for short-term instruments,
originally at 4.93%, and reset to 4.85% on May 22, 2007.As of
December 31, 2007, the aggregate outstanding balance of the five notes totaled
$119,000 and was classified as a current liability.  The principal and
accrued interest balances were due in full on March 31, 2008.  On
April 1, 2008, we paid the outstanding aggregate principal and the related
accrued interest balances in
full.




DIRECTOR
INDEPENDENCE




Each of
the Company's Directors is "independent" with the meaning of the independence
standards of the Nasdaq Stock Market (Marketplace Rule 4200(a)(15)), other than
Mr. Simrell.






- 33
-
 Item 13.
                Exhibits


Exhibit
              Number
            
            Description of Document2.1
            
            
            Primal
      Solutions, Inc. Preliminary 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 the Company’s registration Statement on Form SB-2
      filed July 30, 2004 and incorporated by reference
    herein)3.1
            
            
            Certificate
      of Correction to the Certificate of Amendment of the Certificate of
      Incorporation of the Company (filed as Exhibit 3.1 to the Company’s
      registration Statement on Form SB-2 filed July 30, 2004 and
      incorporated by reference herein)3.2
            
            
            Second
      Amended and Restated Bylaws (filed as Exhibit 3.3 to the Company’s
      quarterly report on 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 (filed as
      Exhibit 10.1 to the Company’s registration Statement on
      Form SB-2 filed July 30, 2004 and incorporated by reference
      herein)10.2
            
            
            Primal
      Solutions, Inc. 2001 Flexible Incentive Plan, as amended (filed as
      Exhibit 99.1 to the Company’s registration statement on Form S-8
      filed on May 4, 2001 (Registration No. 333-60298) and
      incorporated by reference herein)10.3
            
            
            Governance
      Document, as amended (filed as Exhibit 99.2 to the Company’s
      registration statement on Form S-8 filed on May 4, 2001
      (Registration No. 333-60298) and incorporated by reference
      herein)10.4
            
            
            Form of
      Indemnification Agreement (filed as Exhibit 10.2a to the Company’s
      annual report on Form 10-KSB filed March 27, 2002 and
      incorporated by reference herein)10.5
            
            
            Indemnification
      Agreement between Primal Solutions, Inc. and Louis A. Delmonico,
      dated April 25, 2001 (filed as Exhibit 10.12 to the Company’s
      annual report on Form 10-KSB filed March 27, 2002 and
      incorporated by reference herein)10.6
            
            
            Employment
      Agreement for David Haynes dated December 31, 2001 (filed as
      Exhibit 10.6 to the Company’s annual report on Form 10-KSB filed
      March 27, 2002 and incorporated by reference herein)10.7
            
            
            Form of
      Master Software License Agreement (filed as Exhibit 10.7 to Amendment
      No. 1 to the Company’s registration statement on Form SB-2 filed
      January 8, 2001 (Registration No. 333-46494) 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 Company’s quarterly report on 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 Company’s annual report on Form 10-KSB filed
      March 27, 2002 and incorporated by reference herein)10.10
            
            
            First
      Amendment to Lease between Spieker Properties, L.P. and Primal
      Solutions, Inc. dated June 13, 2001 (filed as Exhibit 10.9a
      to the Company’s annual report on Form 10-KSB filed March 27,
      2002 and incorporated by reference herein)10.11
            
            
            Promissory
      Note of Primal Solutions, Inc. in favor of Spieker Properties, L.P.,
      dated June 15, 2001 (filed as Exhibit 10.10 to the Company’s
      annual report on Form 10-KSB filed March 27, 2002 and
      incorporated by reference herein)10.12
            
            
            Assignment
      of Lease between Corsair Communications and Lightbridge, Inc., dated
      February 7, 2001 (filed as Exhibit 10.12 to the Company’s
      registration Statement on Form SB-2 filed July 30, 2004 and
      incorporated by reference herein)10.13
            
            
            Agreement
      of Sublease between Primal Solutions, Inc. and
      Lightbridge, Inc., dated January 30, 2004 (filed as
      Exhibit 10.14 to the Company’s registration Statement on
      Form SB-2 filed July 30, 2004 and incorporated by reference
      herein)10.14
            
            
            Landlord
      Consent to Sublease among CA-Tower 17 Limited Partnership,
      Lightbridge, Inc. and Primal Solutions, dated February 27, 2004
      (filed as Exhibit 10.15 to the Company’s registration Statement on
      Form SB-2 filed July 30, 2004 and incorporated by reference
      herein)10.15
            
            
            Employment
      Agreement between Primal Solutions, Inc. and Joseph R. Simrell
      dated January 28, 2003 (filed as Exhibit 10.14 to the Company’s
      annual Report on Form 10-KSB filed on March 28, 2003 and
      incorporated by reference herein)10.16
            
            
            Consolidation
      Agreement between Wireless Billing Systems dba Primal Billing Solutions
      and Metrocall, Inc. dated December 30, 2002 (filed as
      Exhibit 10.15 o the Company’s annual Report on Form 10-KSB filed
      on March 28, 2003 and incorporated by reference
    herein)10.17
            
            
            Purchase
      Agreement between registrant and certain institutional investors and
      accredited investors, dated June 8, 2004 (filed as exhibit 10.18
      to the Company’s current report on Form 8-K filed June 18, 2004
      and incorporated by reference herein)10.18
            
            
            Registration
      Rights Agreement between the registrant and the institutional investors
      and accredited investors, dated June 8, 2004 (filed as
      exhibit 10.19 to the Company’s current report on Form 8-K filed
      June 18, 2004 and incorporated by reference herein)10.19
            
            
            Form of
      Warrants for the issuance of warrants to the institutional investors and
      accredited investors (filed as exhibit 10.20 to the Company’s current
      report on Form 8-K filed June 18, 2004 and incorporated by
      reference herein)10.20
            
            
            Purchase
      Agreement between registrant and Management, dated June 8, 2004
      (filed as exhibit 10.21 to the Company’s current report on
      Form 8-K filed June 18, 2004 and incorporated by reference
      herein)10.21
            
            
            Registration
      Rights Agreement between registrant and Management, dated June 8,
      2004 (filed as exhibit 10.22 to the Company’s current report on
      Form 8-K filed June 18, 2004 and incorporated by reference
      herein)10.22
            
            
            Form of
      Warrants for the issuance of warrants to Management (filed as
      exhibit 10.23 to the Company’s current report on Form 8-K filed
      June 18, 2004 and incorporated by reference herein)10.23
            
            
            Form of
      Lock-up Agreement, dated June 8, 2004 (filed as exhibit 10.24 to
      the Company’s current report on Form 8-K filed June 18, 2004 and
      incorporated by reference herein)10.24
            
            
            Amended
      and Restated Change of Control Agreement, dated as of May 17, 2004,
      between Joseph R. Simrell and Primal Solutions, Inc. (filed as
      Exhibit 10.27 to the Company’s registration Statement on
      Form SB-2 filed July 30, 2004 and incorporated by reference
      herein)10.25
            
            
            Promissory
      Note by Primal Solutions, Inc. in favor of Sunwest Bank, dated
      April 8, 2002 (filed as Exhibit 10.28 to the Company’s
      registration Statement on Form SB-2 filed July 30, 2004 and
      incorporated by reference herein)




- 34
-




Exhibit
              Number
            
            Description
      of Document10.26
            
            
            Commercial
      Security Agreement, between Primal Solutions, Inc., Wireless Billing
      Systems, and Sunwest Bank, dated April 8, 2002 (filed as
      Exhibit 10.29 to the Company’s registration Statement on
      Form SB-2 filed July 30, 2004 and incorporated by reference
      herein)10.27
            
            
            Subordination
      Agreement between Wireless Billing Systems, Corsair
      Communication, Inc. and Sunwest Bank, dated April 8, 2002 (filed
      as Exhibit 10.30 to the Company’s registration Statement on
      Form SB-2 filed July 30, 2004 and incorporated by reference
      herein)10.28
            
            
            Business
      Loan Agreement between Primal Solutions, Inc. and Sunwest Bank, dated
      April 8, 2002 (filed as Exhibit 10.31 to the Company’s
      registration Statement on Form SB-2 filed July 30, 2004 and
      incorporated by reference herein)10.29
            
            
            Change
      in Terms Agreement between Primal Solutions, Inc. and Sunwest Bank,
      dated March 13, 2004 (filed as Exhibit 10.32 to the Company’s
      registration Statement on Form SB-2 filed July 30, 2004 and
      incorporated by reference herein)10.30
            
            
            Promissory
      Note between Primal Solutions, Inc. and Sunwest Bank, dated
      May 13, 2002 (filed as Exhibit 10.33 to the Company’s
      registration Statement on Form SB-2 filed July 30, 2004 and
      incorporated by reference herein)10.31
            
            
            Letter
      Agreement between Primal Solutions, Inc. and Robert Richardson dated
      August 14, 2003 (filed as Exhibit 10.34 to post-effective
      amendment no. 1 to the Company’s registration Statement on Form SB-2
      filed March 10, 2005 and incorporated by reference
      herein)10.32
            
            
            Letter
      Agreement between Primal Solutions, Inc. and Robert Richardson dated
      August 18, 2003 (filed as Exhibit 10.35 to post-effective
      amendment no. 1 to the Company’s registration Statement on Form SB-2
      filed March 10, 2005 and incorporated by reference
      herein)10.33
            
            
            Amended
      and Restated Letter Agreement between Primal Solutions, Inc. and
      Robert Richardson dated March 25, 2005 (filed as Exhibit 10.36
      to the Company’s annual report on Form 10-KSB filed March 31,
      2005 and incorporated by reference herein)10.34
            
            
            Letter
      Agreement dated March 25, 2005 between Primal and William C. Bousema
      (filed as Exhibit 10.37 to the Company’s annual report on
      Form 10-KSB filed March 31, 2005 and incorporated by reference
      herein)10.35
            
            
            Change
      of Control Agreement dated March 25, 2005 between Primal and William
      C. Bousema. (filed as Exhibit 10.38 to the Company’s annual report on
      Form 10-KSB filed March 31, 2005 and incorporated by reference
      herein)10.36
            
            
            Form Services
      Agreement (filed as Exhibit 10.39 to the Company’s annual report on
      Form 10-KSB filed March 31, 2005 and incorporated by reference
      herein)10.37
            
            
            Form Software
      License and Services Agreement (filed as Exhibit 10.40 to the
      Company’s annual report on Form 10-KSB filed March 31, 2005 and
      incorporated by reference herein)10.38
            
            
            Registrant’s
      Policy on Executive Compensation Plan (filed as Exhibit 10.1 to the
      Company’s report on Form 8-K filed on April 20, 2005 and
      incorporated by reference herein)10.39
            
            
            Form of
      Executive Incentive Compensation Award (filed as Exhibit 10.2 to the
      Company’s report on Form 8-K filed on April 20, 2005 and
      incorporated by reference herein)10.40
            
            
            2006
      Amended and Restated Secured Promissory Note, dated March 31, 2006
      made by Wireless Billing Systems, a wholly-owned subsidiary of Primal
      Solutions, Inc. in favor of Lightbridge, Inc. (filed as Exhibit
      10.40 to the Company’s annual report on Form 10-KSB filed April 17, 2006
      and incorporated by reference herein)10.41
            
            
            Confirmation
      of Guaranty dated March 31, 2006 by and between Primal
      Solutions, Inc. and Lightbridge, Inc. (filed as Exhibit 10.41 to
      the Company’s annual report on Form 10-KSB filed April 17, 2006 and
      incorporated by reference herein)10.42
            
            
            Subordination
      Agreement, dated as of March 31, 2006, by and among Lightbridge Inc.,
      Wireless Billing Systems, Primal Solutions, Inc. and the senior
      lenders whose names appear on the signature pages thereto (filed as
      Exhibit 10.42 to the Company’s annual report on Form 10-KSB filed April
      17, 2006 and incorporated by reference herein)10.43
            
            
            Second
      Amended and Restated Employment Agreement, dated December 16, 2005,
      between Primal Solutions, Inc. and Joseph R. Simrell (filed as
      Exhibit 10.43 to the Company’s annual report on Form 10-KSB filed April
      17, 2006 and incorporated by reference herein)10.44
            
            
            Amendment
      No. 1 to Employment Letter Agreement, dated December 16, 2005,
      between Primal Solutions, Inc. and William C. Bousema (filed as
      Exhibit 10.44 to the Company’s annual report on Form 10-KSB filed April
      17, 2006 and incorporated by reference herein)10.45
            
            
            Second
      Amended and Restated Change of Control Agreement, dated December 16,
      2005, between Primal Solutions, Inc. and Joseph R. Simrell
      (filed as Exhibit 10.45 to the Company’s annual report on Form 10-KSB
      filed April 17, 2006 and incorporated by reference herein)10.46
            
            
            Amended
      and Restated Change of Control Agreement, dated December 16, 2005,
      between Primal Solutions, Inc. and William C. Bousema (filed as
      Exhibit 10.46 to the Company’s annual report on Form 10-KSB filed April
      17, 2006 and incorporated by reference herein)10.47
            
            
            Form of
      5% Senior Secured Convertible Note, dated March 31, 2006, issued by
      Wireless Billings Systems to the investors under that certain Purchase
      Agreement dated as of March 31, 2006 (filed as Exhibit 4.1 to
      the Company’s report on Form 8-K on April 3, 2006 and
      incorporated by reference herein)10.48
            
            
            Purchase
      Agreement, dated as of March 31, 2006, by and among Primal
      Solutions, Inc., Wireless Billing Systems and the investors whose
      names appear on the signature pages thereto (filed as
      Exhibit 10.1 to the Company’s report on Form 8-K on
      April 3, 2006 and incorporated by reference herein)10.49
            
            
            Pledge
      and Security Agreement, dated as of March 31, 2006, by and among
      Primal Solutions, Inc., Wireless Billing Systems and the investors
      whose names appear on the signature pages thereto (filed as
      Exhibit 10.2 to the Company’s report on Form 8-K on
      April 3, 2006 and incorporated by reference herein)10.50
            
            
            Form of
      Warrant to purchase shares of Common Stock, dated March 31, 2006,
      issued by Primal Solutions Inc. to the investors under that certain
      Purchase Agreement dated as of March 31, 2006 (filed as
      Exhibit 10.3 to the Company’s report on Form 8-K on
      April 3, 2006 and incorporated by reference herein)




- 35
-


Exhibit
              Number
            
            Description
      of Document10.51
            
            
            Registration
      Rights Agreement, dated as of March 31, 2006, by and between Primal
      Solutions, Inc. and the investors whose names appear on the signature
      pages thereto (filed as Exhibit 10.4 to the Company’s report on
      Form 8-K filed on April 3, 2006 and incorporated by reference
      herein)10.52
            
            
            Primal
      Solutions, Inc. 2004 Flexible Incentive Plan (filed as
      Exhibit 99.1 to the Company’s registration Statement on Form S-8
      (Registration No. 333-121902) (“2004 S-8”) and incorporated by
      reference herein)10.53
            
            
            Registration
      Rights Agreement, dated as of April 27, 2006, by and between Primal
      Solutions, Inc. and the investors whose names appear on the signature
      pages thereto (filed as Exhibit 10.53 to the Company’s Post-Effective
      Amendment No. 4 on Form SB-2 (Registration Statement No. 333-117786) and
      incorporated by reference herein)10.54
            
            
            Purchase
      Agreement, dated as of April 27, 2006, by and among Primal Solutions, Inc.
      and the investors whose names appear on the signature pages thereto (filed
      as Exhibit 10.54 to the Company’s Post-Effective Amendment No. 4 on Form
      SB-2 (Registration No. 333-117786) and incorporated by reference
      herein)10.55
            
            
            Form
      of Warrant to purchase shares of Common Stock, dated April 27, 2006,
      issued by Primal Solutions Inc. to the investors under that certain
      Purchase Agreement dated as of April 27, 2006 (filed as Exhibit 10.55 to
      the Company’s Post-Effective Amendment No. 4 on Form SB-2 (Registration
      No. 333-117786) and incorporated by reference herein)10.56
            
            
            Form
      of Warrant to purchase shares of Common Stock, dated May 19, 2006 (filed
      as Exhibit 10.1 to the Company’s current report on Form 8-K on May 25,
      2006 and incorporated by reference herein)10.57
            
            
            Primal
      Solutions, Inc. 2006 Stock Option Plan (filed as Exhibit 10.1 to the
      Company’s current report on Form 8-K on August 15, 2006 and incorporated
      by reference herein)10.58
            
            
            Form
      on Non-Statutory Stock Option Agreement under Primal Solutions, Inc. 2006
      Stock Option Plan (filed as Exhibit 10.2 to the Company’s current report
      on Form 8-K on August 15, 2006 and incorporated by reference
      herein)10.59
            
            
            Amended
      and Restated Side Letter, dated as of August 9, 2006, by and between the
      Company and Bob Richardson (filed as Exhibit 10.3 to the Company’s current
      report on Form 8-K on August 15, 2006 and incorporated by reference
      herein)10.60
            
            
            Side
      Letter, dated as of August 9, 2006, by and between the Company and Sam
      Gilson (filed as Exhibit 10.4 to the Company’s current report on Form 8-K
      on August 15, 2006 and incorporated by reference herein)10.61
            
            
            Promissory
      Note between Primal Solutions, Inc. and Special Situations Private
      Equity Fund, L.P., dated December 27, 2006 (filed as Exhibit 4.1 to the
      Company’s current report on Form 8-K on December 29, 2006 and incorporated
      by reference herein)10.62
            
            
            2007
      Amended and Restated Secured Promissory Note, dated January 1, 2007 made
      by Wireless Billing Systems, a wholly-owned subsidiary of Primal
      Solutions, Inc. in favor of Lightbridge, Inc. (filed as Exhibit
      10.62 to the Company’s annual report on Form 10-KSB filed April 2, 2007
      and incorporated by reference herein)10.63
            
            
            Confirmation
      of Guaranty, dated January 1, 2007 by and between Primal
      Solutions, Inc. and Lightbridge, Inc. (filed as Exhibit 10.63 to
      the Company’s annual report on Form 10-KSB filed April 2, 2007 and
      incorporated by reference herein)10.64
            
            
            Subordination
      Agreement, dated as of March 31, 2006 (as amended and restated as of
      March 29, 2007), by and among Lightbridge Inc., Wireless Billing Systems,
      Primal Solutions, Inc. and the senior lenders whose names appear on
      the signature pages thereto (filed as Exhibit 10.64 to the Company’s
      annual report on Form 10-KSB filed April 2, 2007 and incorporated by
      reference herein)10.65
            
            
            Primal
      Solutions, Inc. Executive Incentive Compensation Policy (filed as Exhibit
      10.65 to the Company’s annual report on Form 10-KSB filed April 2, 2007
      and incorporated by reference herein)10.66
            
            
            Form
      of Adjustable Promissory Note to SSF (filed as Exhibit 4.1 to the
      Company’s current report on Form 8-K filed April 12, 2007 and incorporated
      by reference herein)10.67
            
            
            Form
      of Lease between CIP Centerpointe 123 LLC and Primal Solutions, Inc. dated
      April 16, 2007 (filed as Exhibit 10.1 to the Company’s quarterly report on
      Form 10-QSB filed August 14, 2007 and incorporated by reference
      herein)10.68
            
            
            Third
      Amended and Restated Employment Agreement, dated as of November 13, 2007,
      by and between the Company and Joseph R. Simrell (filed as
      Exhibit 10.1 to the Company’s quarterly report on Form 10-QSB filed
      November 14, 2007 and incorporated by reference herein)10.69
            
            
            Third
      Amended and Restated Change of Control Agreement, dated as of November 13,
      2007, by and between the Company and Joseph R. Simrell (filed as Exhibit
      10.2 to the Company’s quarterly report on Form 10-QSB filed November 14,
      2007 and incorporated by reference herein)10.70
            
            
            Side
      Letter Re: Minimum Value of Stock Options in the event of Change of
      Control, dated as of November 13, 2007, by and between the Company and Bob
      Richardson (filed as Exhibit 10.3 to the Company’s quarterly report on
      Form 10-QSB filed November 14, 2007 and incorporated by reference
      herein)10.71
            *
      ^
            
            Master
      Software License Agreement by and between Primal Solutions, Inc. and
      Time Warner Cable Information Services (Maine) LLC ("Time Warner"), dated
      December 11, 2002 (the "Master Agreement"), as amended and modified by
      Amendment 1 to the Master Agreement effective as of January 1, 2004,
      Amendment 2 to the Master Agreement effective as of January 1, 2005, the
      Third Amendment to the Master Agreement effective as of July 27, 2006, and
      the Fourth Amendment to the Master Agreement effective as of January 1,
      200610.72
            *
            
            Settlement
      Agreement with Mutual Releases, dated February 6, 2008, between
      Primal Solutions, Inc. and CA-Tower 17 Limited
      Partnership10.73
            *
            
            Form of Amended
      and Restated 10% Senior Convertible Note, dated March 31, 2006, as
      amended and restated as of March 31, 2008, issued by Primal Solutions,
      Inc. to the investors under that certain Purchase Agreement dated as of
      March 31, 200610.74
            *
            
            Amendment
      Letter Agreement, dated March 31, 2008, between Primal Solutions, Inc.,
      Wireless Billing Systems and the investors under that certain Purchase
      Agreement dated as of March 31, 200610.75
            *
            
            Settlement
      Agreement, dated April 15, 2008, between Primal Solutions, Inc., Wireless
      Billing Systems and CyberSource Corporation, the successor by merger to
      Authorize.Net Holdings, Inc., fomerly known as Lightbridge, Inc., the
      successor by merger to Corsair Communications, Inc.21.1
            
            
            Subsidiaries
      of Primal Solutions, Inc. (filed as Exhibit 21.1 to the Company’s
      Post-Effective Amendment No. 4 on Form SB-2 (Registration No. 333-117786)
      and incorporated by reference herein)23.1
            *
            
            Consent
      of Haskell & White LLP31.1
            *
            
            Certification
      pursuant to Section 302 of the Sarbanes-Oxley Act32.1
            *
            
            Certification
      pursuant to Section 906 of the Sarbanes-Oxley Act





*
            Filed
      herewith




^
            Portions
      omitted pursuant to a request for confidential
  treatment




- 36
-
 Item 14.
                  Principal
      Accountant Fees and Services


For the
fiscal year ended December 31, 2007 and 2006, Haskell & White LLP
audited the Company’s annual consolidated financial statements and provided tax
return and tax related services.  The
aggregate fees billed for professional services by Haskell & White LLP
in 2007 and 2006 were as follows:




2007
            
            
            2006Audit
      Fees(1)
            
            $
            97,000
            
            
            $
            108,000Audit
      Related Fees(2)
            
            
            —
            
            
            
            5,000Tax
      Fees(3)
            
            
            14,000
            
            
            
            17,000All
      Other Fees(4)
            
            
            11,000
            
            
            
            25,000Total
            
            $
            122,000
            
            
            $
            155,000





(1)
            Includes
      audit of annual financial statements included in Form 10-KSB and
      review of financial statements included in Form 10-QSB quarterly
      reports.




(2)
            Relates
      to assistance addressing SEC comment
letters.




(3)
            Tax
      return and related tax services.




(4)
            Relates
      to registration statements on Forms SB-2 and S-8 filed by the
      Company.




It is our
Audit Committee’s policy and procedure to approve in advance all audit
engagement fees and terms and all permitted non-audit services provided by our
independent registered accounting firm. We believe that all audit engagement
fees and terms and permitted non-audit services provided by our independent
registered accounting firm as described in the above table were approved in
advance by our Audit Committee.











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:
            /s/
      Joseph R. SimrellJoseph
      R. SimrellChief
      Executive Officer, President, Chief Financial Officer, and
      SecretaryDate:
      April 15, 2008







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. Simrell
            
            
            
            April
      15, 2008Joseph
      R. Simrell
            
            Chief
      Executive Officer, President, Chief Financial Officer,Secretary
      and Director (Principal Executive Officer, Principal Financial
      Officer and Principal Accounting
    Officer)/s/
      David Haynes
            
            
            
            April
      15, 2008David
      Haynes
            
            Director/s/
      Louis A. Delmonico
            
            
            
            April
      15, 2008Louis
      A. Delmonico
            
            Director/s/
      John E. Rehfeld
            
            
            
            April
      15, 2008John
      E. Rehfeld
            
            Director







- 37
-


PRIMAL
SOLUTIONS, INC.




INDEX
TO FINANCIAL STATEMENTS




PageReport of Independent Registered Public Accounting
      Firm
            
            
            39Financial
      Statements:Consolidated Balance Sheets at December 31,
      2007 and December 31, 2006
            
            
            40Consolidated Statements of Operations for the years
      ended December 31, 2007 and 2006
            
            
            41Consolidated Statements of
      Stockholders’ Deficit for the years ended December 31, 2007 and
      2006
            
            
            42Consolidated Statements of Cash Flows for the years
      ended December 31, 2007 and 2006
            
            
            43Notes to Consolidated Financial
      Statements
            
            
            44







- 38
-


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




The Board of
Directors and Stockholders


Primal
Solutions, Inc.




We
have audited the accompanying consolidated balance sheets of Primal
Solutions, Inc. (the “Company”) as of December 31, 2007 and
2006and the related consolidated statements of operations,
stockholders’ deficit and cash flows for each of 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. 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 consolidated financial position of Primal
Solutions, Inc. as of December 31, 2007 and
2006and the consolidated results of its operations and its cash flows
for each of the years then ended in conformity with accounting principles
generally accepted in the United States of America.




As
discussed in Note 2 to the consolidated financial statements, effective January
1, 2007, the Company adopted FASB Staff Position EITF 00-19-2, "Accounting
for Registration Payment Arrangements", and FASB Interpretation No. 48,
"Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB No. 109".




HASKELL &
      WHITE LLPIrvine,
      CaliforniaApril 15,
      2008





- 39
-


PRIMAL
SOLUTIONS, INC.


CONSOLIDATED
BALANCE SHEETS





December 31,2007
            
            
            2006ASSETSCurrent
      AssetsCash
      and cash equivalents
            
            $
            524,000
            
            
            $
            382,000Restricted
      cash
            
            
            —
            
            
            
            103,000Accounts
      receivable
            
            
            137,000
            
            
            
            268,000Prepaid
      expenses and other current assets
            
            
            144,000
            
            
            
            242,000Total
      current assets
            
            
            805,000
            
            
            
            995,000Property
      and equipment, net of accumulated depreciation of $1,512,000 and
      $1,551,000, respectively
            
            
            271,000
            
            
            
            360,000Goodwill
            
            
            593,000
            
            
            
            593,000Other
      assets
            
            
            76,000
            
            
            
            59,000Total
      assets
            
            $
            1,745,000
            
            
            $
            2,007,000LIABILITIES
      AND STOCKHOLDERS’ DEFICITCurrent
      LiabilitiesAccounts
      payable
            
            $
            57,000
            
            
            $
            301,000Accrued
      liabilities
            
            
            376,000
            
            
            
            463,000Accrued
      salaries and benefits
            
            
            532,000
            
            
            
            633,000Deferred
      revenue
            
            
            172,000
            
            
            
            220,000Short-term
      borrowings and current portion of long-term debt
            
            
            632,000
            
            
            
            741,000Senior convertible
      debt, net of discount of $177,000 and $0, respectively
            
            
            1,323,000
            
            
            
            —Warrant
      liability
            
            
            —
            
            
            
            1,015,000Total
      current liabilities
            
            
            3,092,000
            
            
            
            3,373,000Long-term
      debt, net of current portion
            
            
            706,000
            
            
            
            852,000Senior
      convertible debt, net of discount of $0 and $1,105,000,
      respectively
            
            
            —
            
            
            
            395,000Other
      long-term liabilities
            
            
            58,000
            
            
            
            —Total
      liabilities
            
            
            3,856,000
            
            
            
            4,620,000Commitments
      and contingencies (Notes 5, 7, and 8)Stockholders’
      DeficitPreferred
      stock, $0.01 par value; 5,000,000 shares authorized; none issued and
      outstanding
            
            
            —
            
            
            
            —Common
      stock, $0.01 par value; 95,000,000 shares authorized; 38,373,634 shares
      issued and outstanding in each period
            
            
            384,000
            
            
            
            384,000Additional
      paid-in capital
            
            
            13,998,000
            
            
            
            13,880,000Warrants
            
            
            2,172,000
            
            
            
            1,558,000Accumulated
      deficit
            
            
            (18,665,000
            )
            
            
            (18,435,000
            )Net
      stockholders’ deficit
            
            
            (2,111,000
            )
            
            
            (2,613,000
            )Total
      liabilities and stockholders' deficit
            
            $
            1,745,000
            
            
            $
            2,007,000











See
accompanying notes to consolidated financial statements










- 40
-


PRIMAL
SOLUTIONS, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
   Year ended December 31,2007
              
              
              2006Net
      revenues
              
              $
              6,372,000
              
              
              $
              5,648,000Cost
      of revenues
              
              
              1,747,000
              
              
              
              2,533,000Research
      and development
              
              
              1,436,000
              
              
              
              1,499,000Selling,
      general and administrative
              
              
              2,604,000
              
              
              
              4,186,000Total
      costs
              
              
              5,787,000
              
              
              
              8,218,000Income
      (loss) from operations
              
              
              585,000
              
              
              
              (2,570,000
              )Interest
      and other expenses, net
              
              
              (872,000
              )
              
              
              (590,000
              )Loss
      before income tax provision
              
              
              (287,000
              )
              
              
              (3,160,000
              )Income
      tax provision
              
              
              3,000
              
              
              
              2,000Net
      loss
              
              $
              (290,000
              )
              
              $
              (3,162,000
              )Basic
      and diluted net loss per share
              
              $
              (.01
              )
              
              $
              (.08
              )Weighted-average
      basic and diluted common shares outstanding
              
              
              38,373,634
              
              
              
              37,733,904









See
accompanying notes to consolidated financial statements
 - 41
-





PRIMAL
SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT




Common
              Stock
              Shares
            
            
            Common
              Stock
              Amount
            
            
            Additional
              Paid-in
              Capital
            
            
            Warrants
            
            
            Accumulated
              Deficit
            
            
            Total
              Stockholders’
              DeficitBALANCE
      at December 31, 2005
            
            
            36,363,641
            
            
            $
            364,000
            
            
            $
            13,249,000
            
            
            $
            1,217,000
            
            
            $
            (15,273,000
            )
            
            $
            (443,000
            )Exercise
      of stock options by employees
            
            
            259,993
            
            
            
            2,000
            
            
            
            12,000
            
            
            
            —
            
            
            
            —
            
            
            
            14,000Warrants
      issued in lieu of cash payment
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            97,000
            
            
            
            —
            
            
            
            97,000Warrants
      issued as sales incentive
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            14,000
            
            
            
            —
            
            
            
            14,000Repricing
      of warrants issued in 2004 private placement
            
            
            —
            
            
            
            —
            
            
            
            (189,000
            )
            
            
            189,000
            
            
            
            —
            
            
            
            —Beneficial
      conversion feature issued as part of March 2006 private
      placement
            
            
            —
            
            
            
            —
            
            
            
            505,000
            
            
            
            —
            
            
            
            —
            
            
            
            505,000Issuance
      of stock and warrants as part of April 2006 private placement, net of
      issuance costs
            
            
            1,750,000
            
            
            
            18,000
            
            
            
            48,000
            
            
            
            41,000
            
            
            
            —
            
            
            
            107,000Stock
      option compensation cost
            
            
            —
            
            
            
            —
            
            
            
            255,000
            
            
            
            —
            
            
            
            —
            
            
            
            255,000Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (3,162,000
            )
            
            
            (3,162,000
            )BALANCE
      at December 31, 2006
            
            
            38,373,634
            
            
            $
            384,000
            
            
            $
            13,880,000
            
            
            $
            1,558,000
            
            
            $
            (18,435,000
            )
            
            $
            (2,613,000
            )Adoption of EITF
      00-19-2 (Notes
      2 and 6)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            614,000
            
            
            
            60,000
            
            
            
            674,000Stock
      option compensation cost
            
            
            —
            
            
            
            —
            
            
            
            118,000
            
            
            
            —
            
            
            
            —
            
            
            
            118,000Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (290,000
            )
            
            
            (290,000
            )BALANCE
      at December 31, 2007
            
            
            38,373,634
            
            
            $
            384,000
            
            
            $
            13,998,000
            
            
            $
            2,172,000
            
            
            $
            (18,665,000
            )
            
            $
            (2,111,000
            )







See
accompanying notes to consolidated financial statements
 - 42
-





PRIMAL
SOLUTIONS, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS







Year
      ended December 31,2007
            
            
            2006Cash
      Flows from Operating ActivitiesNet
      loss
            
            $
            (290,000
            )
            
            $
            (3,162,000
            )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
            
            
            104,000
            
            
            
            126,000Amortization
      of conversion feature into interest expense
            
            
            268,000
            
            
            
            158,000Amortization
      of debt issuance cost
            
            
            98,000
            
            
            
            66,000Warrant
      expense
            
            
            320,000
            
            
            
            237,000Gain
      on change in fair value of warrant liability
            
            
            —
            
            
            
            (4,000
            )Non-cash
      stock-based compensation costs
            
            
            118,000
            
            
            
            351,000Issuance
      of warrants as sales incentive
            
            
            —
            
            
            
            14,000Loss/(gain)
      on disposal of assets
            
            
            7,000
            
            
            
            (3,000
            )Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            131,000
            
            
            
            323,000Prepaid
      expenses and other current assets
            
            
            50,000
            
            
            
            108,000Accounts
      payable and other accrued liabilities
            
            
            (259,000
            )
            
            
            1,000Non-current
      accrued interest
            
            
            (55,000
            )
            
            
            7,000Deferred
      revenue
            
            
            (48,000
            )
            
            
            (151,000
            )Other
      noncurrent assets and liabilities
            
            
            41,000
            
            
            
            (24,000
            )Net
      cash provided by (used in) operating activities
            
            
            485,000
            
            
            
            (1,953,000
            )Cash
      Flow from Investing ActivitiesPurchases
      of property and equipment
            
            
            (26,000
            )
            
            
            (13,000
            )Proceeds
      from sales of property and equipment
            
            
            4,000
            
            
            
            3,000Net
      cash used in investing activities
            
            
            (22,000
            )
            
            
            (10,000
            )Cash
      Flow from Financing ActivitiesChange
      in restricted cash
            
            
            103,000
            
            
            
            (2,000
            )Payments
      on capital lease obligations
            
            
            (24,000
            )
            
            
            (22,000
            )Retirement
      of promissory note
            
            
            (350,000
            )
            
            
            —Payments
      on notes payable
            
            
            (50,000
            )
            
            
            (47,000
            )Proceeds
      from promissory note
            
            
            —
            
            
            
            250,000Cost
      of private placements
            
            
            —
            
            
            
            (234,000
            )Proceeds
      from private placements
            
            
            —
            
            
            
            1,675,000Proceeds
      from issuance of common stock, net
            
            
            —
            
            
            
            14,000Net
      cash (used in) provided by financing activities
            
            
            (321,000
            )
            
            
            1,634,000Net
      increase (decrease) in cash and cash equivalents
            
            
            142,000
            
            
            
            (329,000
            )Cash
      and cash equivalents at beginning of year
            
            
            382,000
            
            
            
            711,000Cash
      and cash equivalents at end of year
            
            $
            524,000
            
            
            $
            382,000Supplemental cash
      flow disclosure:Cash
      paid during the period for:Interest
            
            $
            144,000
            
            
            $
            111,000Taxes
            
            
            3,000
            
            
            
            2,000Non-cash
      Financing Activities:Financing
      of business insurance premiums
            
            $
            50,000
            
            
            $
            47,000Financing
      of liquidated damages payable to 2006 Private Placement
      investors
            
            
            119,000
            
            
            
            —Modification
      of June 2004 Private Placement Warrants
            
            
            —
            
            
            
            189,000Issuance
      of 2006 Private Placement Warrants
            
            
            —
            
            
            
            995,000




See
accompanying notes to consolidated financial statements


- 43
-





PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY


Notes
to Consolidated Financial Statements








1.
            SUMMARY OF
      BUSINESS




Description
of Business




The
Company was incorporated on June 28, 1996 and has one wholly-owned
subsidiary, Wireless Billing Systems, (collectively, the “Company”). 
For
over a decade, the Company's technology has been deployed at both large and
small communications service providers ("CSPs") around the
world.  Our core billing, mediation, and rating solutions have been
used in 70 paging, cellular, wireline, fiber, and hybrid fibre-coaxial networks
to support tens of millions of subscribers and billions of
transactions.  With the emergence of Internet Protocol-based
communications networks, its capabilities have expanded beyond these traditional
back-office solutions to incorporate market-demanded real-time transaction
management and analytics capabilities.  The Company is a provider of
managed software solutions that enable CSPs primarily in the United
States to automatically capture, correlate, track, manage, monetize, and
analyze their communications transaction data.


2.
              SUMMARY OF SIGNIFICANT ACCOUNTING
      PRINCIPLES


Basis
of Presentation and 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.  The
accompanying consolidated financial statements of the Company as of December 31,
2007 and 2006 and for the fiscal years ended December 31, 2007 and 2006 have
been prepared in accordance with accounting principles generally accepted in the
United States.In the
opinion of management, all adjustments, including normal recurring adjustments,
considered necessary for a fair presentation have been
included.




Use
of Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the 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.





Recent
Accounting Pronouncements




In
December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141(R), Business Combinations—a replacement of
FASB Statement No. 141, ("SFAS 141R"), which establishes principles
and requirements for determining how an enterprise recognizes and measures fair
value of certain assets and liabilities acquired in a business combination,
including noncontrolling interests, contingent consideration, and certain
acquired contingencies.  SFAS 141R also requires acquitision-related
transaction expenses and restructuring costs be expensed as incurred rather than
capitalized as a component of the business combination.  This
statement is effective prospectively for the Company's 2009 fiscal year. The
adoption of SFAS 141R is not expected to have a material impact on the
Company's consolidated financial statements.
  In December 2007, the FASB
issued Statement of Financial Accounting Standards No. 160, Noncontrolling
Interests in Consolidated Financial Statements - An Amendment of ARB No. 51("SFAS
160").  SFAS 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary.  SFAS 160 also requires that a
retained noncontrolling interest upon the deconsolidation of a subsidiary be
initially measured at its fair value.  SFAS 160 is effective for the
Company's 2009 fiscal year.  The adoption of SFAS 160 is not expected to
have an effect on the Company's consolidated financial
statements.
  In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities- including
an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 gives
the Company the irrevocable option to carry most financial assets and
liabilities at fair value, with changes in fair value recognized in earnings.
SFAS 159 is effective for the Company’s 2008 fiscal year, although early
adoption is permitted. The adoption of SFAS 159 is not expected to have a
material effect on the Company’s consolidated financial
statements.




In
December 2006, the FASB issued FASB Staff Position EITF 00-19-2, Accounting
for Registration Payment Arrangements ("EITF 00-19-2"), which addresses
accounting for registration payment arrangements. EITF 00-19-2 specifies that
the contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with FASB
Statement No. 5, Accounting
for Contingencies. The guidance in this FASB Staff Position amends
Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities(“SFAS
133”), Statement of Financial Accounting Standards No. 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equity, and Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, to include scope exceptions for
registration payment arrangements.  EITF 00-19-2 further clarifies
that a financial instrument subject to a registration payment arrangement should
be accounted for in accordance with other applicable generally accepted
accounting principles without regard to the contingent obligation to transfer
consideration pursuant to the registration payment arrangement.  The
Company adopted EITF 00-19-2 on January 1, 2007. Prior to adoption of this
EITF, the Company recorded a warrant liability as well as liquidated damages
related to the private placements in 2006. Upon adoption of EITF 00-19-2, the
Company reported the change in accounting principle through a cumulative-effect
adjustment to opening retained earnings, additional paid-in capital, and debt
discount related to the reclassification of the warrant liability, but
did not recognize any additional obligation related to the registration rights
agreements.




The
FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes (“FIN 48”) in June 2006. FIN 48 defines
the threshold for recognizing the benefits of tax return positions in the
financial statements as “more-likely-than-not” to be sustained by the taxing
authority. A tax position that meets the “more-likely-than-not” criterion shall
be measured at the largest amount of benefit that is more than 50% likely of
being realized upon ultimate settlement. FIN 48 applies to all tax positions
accounted for under Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes (“SFAS 109”). The Company adopted the provisions of FIN
48 as of January 1, 2007 and such provisions had no material impact on the
Company’s consolidated financial position or results of operations.




In
September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, Fair
Value Measurements (“SFAS 157”) which defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. This statement applies
under other accounting pronouncements that require or permit fair value
measurements and does not require any new fair value measurements. This
statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods with those fiscal
years. The adoption of SFAS 157 is not expected to have a material effect on the
Company’s consolidated financial statements.


- 44
-
  
 PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY
 Notes
to Consolidated Financial Statements


Significant
Accounting Policies




Cash
and Cash Equivalents—The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to be
cash equivalents. Cash equivalents are carried at cost, which approximates fair
value.




Restricted
Cash—Pursuant to the secured promissory note with First Regional Bank
executed in February 2005 (Note
5),theCompany maintained a certificate of deposit of
$100,000 as collateral. This certificate of deposit matured in
February 2006, concurrently with the outstanding note balance. The Company
executed an amended and restated loan agreement for the original $100,000 in
February 2006 which required the collateral of $100,000 be held in a savings
account.  The loan balance was paid in full in February 2007 and the
restricted funds were released to the Company's operating account. The total
balance held by First Regional Bank, which included accrued interest at December
31, 2006, was reflected as Restricted Cash in the accompanying consolidated
balance sheet.




Fair
Value of Financial Instruments—The Company's financial
instruments consist primarily of cash and cash equivalents, accounts receivable,
accounts payable and short-term and long-term debt.  The carrying amounts
of these financial items, other than long-term debt approximate their fair
values due to the short-term nature of these instruments.  Based on the
borrowing rates available to the Company as of December 31, 2007 and 2006 for
loans with similar terms, the carrying amounts of its fixed-rate long-term debt
approximates fair value.




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:




Asset
      Classification
            
            Estimated Useful LifeComputer
      and office equipment
            
            2
      to 5 yearsFurniture
      and fixtures
            
            7
      yearsLeasehold
      improvements
            
            Shorter
      of the estimated useful life or life of the leaseCapitalized
      leases
            
            2
      to 7 years




Maintenance
and repairs are charged to expense as incurred. Renewal and improvements of a
significant nature are capitalized.  When assets are disposed of, the cost
and related accumulated depreciation and amortization are removed from their
respective accounts with any resulting gain or loss reflected in other income or
expense.





Capitalized
Software 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 Statement of Financial Accounting Standards
No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed(“SFAS 86”). 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, 2007 and 2006.




Goodwill
and Intangible Assets—In January 2002, the Company adopted Statement
of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets,(“SFAS 142”), which requires that goodwill
and other intangible assets with indefinite useful lives no longer be amortized.
SFAS 142 also established a new method of testing goodwill impairment on an
annual basis or on an interim basis if an event occurs or circumstances change
that would reduce fair value of a reporting unit below its carrying
value.




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




The
Company reviews of each of our reporting units in order to conclude if the fair
value of each reporting unit exceeds its carrying value, indicating no goodwill
impairment is present as of September 30 of each fiscal year. More frequent
impairment tests are performed when management determines that indicators of
impairment exist. In the case where goodwill appears to be impaired, the Company
will write down the goodwill balance to the fair value. 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.


- 45
-
  
 PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY
 Notes
to Consolidated Financial Statements


Revenue
Recognition—The
Company derives revenues from three sources:  (1) subscription
revenue, (2) upfront software license fees and related support revenue, and (3)
professional services and other revenue.  The Company typically enters
into a multiple element arrangement with the customer under either
a Software as a Service (“SaaS”) agreement or a license and maintenance
agreement.   These agreements include professional services fees
for installation, training and customization.  Both types of
agreements are based on the customer’s number of subscribers or a similar
measure.
  The
Company recognizes revenue based on the provisions of Statement of Position
No. 97-2, Software
Revenue Recognition (“SOP 97-2”), as amended by Statement of Position
No. 98-9,  Software
Revenue Recognition with Respect to Certain Arrangements (“SOP 98-9”),
Emerging Issues Task Force Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables (“EITF
00-21”).  Revenue is recognizable when: (1) the Company enters
into a legally binding arrangement with a customer; (2) the customer
accepts delivery of the product; (3) customer payment is deemed fixed or
determinable and free of contingencies or significant uncertainties; and
(4) collection is probable.
  The
Company assesses whether fees are fixed or determinable at the time of sale and
recognize revenue if all other revenue recognition requirements are met. The
Company’s standard payment terms are net 30 or net 60. Payments that are due
within six months are generally deemed to be fixed or determinable based on the
Company’s successful collection history on such arrangements, and thereby
satisfy the required criteria for revenue recognition.
  Most
of the Company’s software license arrangements do not include acceptance
provisions. However, if acceptance provisions exist, the Company provides for a
sales return allowance in accordance with Statement of Financial Accounting
Standards No. 48, Revenue
Recognition when Right of Return Exists (“SFAS 48”). If acceptance
provisions are long-term in nature or are not included as standard terms of an
arrangement or if the Company cannot reasonably estimate the incidence of
returns, revenue is recognized upon the earlier of receipt of written customer
acceptance or expiration of the acceptance period.
  The
Company typically enters into a multiple element arrangement with its customers
which includes a license for the Company’s software, post-warranty maintenance
fees for technical support and product updates, and professional services fees
for installation, training and customization.  Most professional
services are sold separately and are all based on time spent and materials
used.  The Company evaluates whether the elements within the
arrangement qualify for separate accounting pursuant to the cited accounting
guidance above. The more significant factors considered in determining whether
the revenue should be accounted for separately include the nature of services
(i.e., consideration of whether the services are essential to the functionality
of the licensed product), degree of risk, availability of services from other
vendors, timing of payments and impact of milestones or acceptance criteria on
the realizability of the software license fee.
  If
a multiple element arrangement does not qualify for separate accounting, the
total fee is generally recognized collectively based on contract accounting
using either the percentage-of-completion or completed-contract method. Contract
accounting is applied to any arrangements: (1) that include milestones or
customer specific acceptance criteria that may affect collection of the software
license fees; (2) where services include significant modification or
customization of the software; (3) where significant consulting services
are provided for in the software license contract without additional charge or
are substantially discounted; or (4) where the software license payment is
tied to the performance of consulting services.
  Otherwise,
if a multiple element arrangement does qualify for separate accounting, the
Company recognizes revenue based on the following:
  Subscription
revenue— Under a SaaS contract, the Company licenses the software under a
monthly subscription that includes maintenance support.  The monthly
subscription fee can also include application management and/or hosting the
Company’s software on the customer’s hardware.  The subscription
revenue is principally based on a contractual price per subscriber or similar
measure, and the monthly billing is based on the monthly subscriber volume for
each reporting period.  Under this type of arrangement, the Company
recognizes the software license revenue each month after the criteria have all
been met: (1) there is persuasive evidence of an arrangement;
(2) service has been provided to the customer; (3) amount of fees to
be paid by the customer is deemed fixed or determinable and free of
contingencies or significant uncertainties; and (4) collection is
probable.
  License
and maintenance contract— A license and maintenance contract includes an
upfront license for the Company’s software and post-warranty maintenance fees
for technical support and product updates over an agreed-upon
period   During the post-warranty maintenance period, the
customer is entitled to receive software license updates, maintenance releases
and patches and product support and the fee is recognized ratably over the term
of the maintenance period.  Product support includes internet access
to technical content, as well as internet and telephone access to technical
support personnel.  The Company’s customers opt to purchase a
maintenance contract when they acquire software licenses and typically renew it
annually.
  The
Company recognizes revenue from this type of contracts using the residual method
pursuant to the provisions of SOP 97-2, as amended by SOP 98-9, and EITF
00-21.  Under the residual method, revenue is recognized in a multiple
element arrangement when vendor-specific objective evidence (“VSOE”) of fair
value exists for all undelivered elements (i.e., maintenance) in the
arrangement, but does not exist for one of the delivered elements in the
arrangement (i.e., software license). The Company allocates revenue to each
element in the arrangement based on its respective fair value, with the fair
value determined by the price historically charged if that element is sold
separately. The Company defers revenue for the fair value of all undelivered
elements and recognizes revenue for the remainder of the arrangement fee
attributable to the delivered elements when the basic criteria in SOP 97-2 have
been met.
  The
Company determines the fair value of the maintenance portion of the arrangement
based on the historical fee charged to the customer. The Company determines the
fair value of professional services, if included in a multiple element
arrangement, based on the hourly rates that the Company charges for these
services when sold independently from a software license. If VSOE of fair value
cannot be established for the undelivered elements of a multiple element
arrangement, the entire amount of revenue is deferred and recognized ratably
over the period that these elements are delivered.
  Professional
Services and Other Revenue—In addition to the Company’s software products
and the related product support component, the Company offers professional
services, such as implementation services, training, consulting, and
customization. These professional services are typically sold under a separate
service agreement. The revenue from these arrangements is generally accounted
for separately from software license revenue and product support and upgrades
revenue and is generally recognized as the services are performed using the
percentage-of-completion method.   If there is a significant
uncertainty about the project completion or receipt of payment for the related
services, revenue is deferred until the uncertainty is sufficiently
resolved.


- 46
-
  
 PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY
 Notes
to Consolidated Financial Statements
   The
Company recognizes revenue from contracts with fixed or “not to exceed” fees
using the proportional performance method of accounting. The Company estimates
the proportional performance on these contracts on a monthly basis utilizing
hours incurred to date as a percentage of total estimated hours to complete the
project. The Company recognizes no more than 90% of the milestone or total
contract amount until acceptance is obtained. If the Company does not have a
sufficient basis to measure progress towards completion, revenue is recognized
upon the customer’s acknowledgement of final acceptance. When the total cost
estimate exceeds revenues, the estimated loss is accrued immediately using cost
estimates based upon an average fully burdened daily rate.


Stock-Based
Compensation—Effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123R, Share-Based
Payment(“SFAS 123R”). Under SFAS 123R, the Company is required
to measure the cost employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award. The measured
cost is recognized in the statement of operations over the period during which
an employee is required to provide service in exchange for the
award.  Additionally, if an award of an equity instrument involves a
performance condition, the related compensation cost is recognized only if it
probable that the performance condition will be
achieved.




The
Company adopted SFAS 123R using the modified prospective transition method,
which requires the application of the accounting standard as of January 1,
2006, the first day of the Company’s fiscal year 2006.  For the years
ended December 31, 2007 and 2006, the Company recognized compensation costs of
$118,000and $351,000,
respectively, pursuant to SFAS 123R.




Income
Taxes—Income taxes are accounted for in accordance SFAS 109. 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 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 the entire
deferred tax asset will not be realized. A full valuation allowance for deferred
tax assets has been provided at December 31, 2007 and
2006.




On
January 1, 2007, the Company adopted the provisions of FIN 48 and analyzed
its filing positions in all of the federal and state jurisdictions where it is
required to file income tax returns, as well as all open tax years in these
jurisdictions. The Company has identified its federal tax return and its state
tax return in California as a “major” tax jurisdiction, as defined by FIN 48.
The only periods subject to examination for the Company's federal return are the
tax years 2003 through 2006. The periods subject to examination for the
Company's state returns in California are tax years 2002 through 2006. The
Company believes that its income tax filing positions and deductions will be
sustained on audit and does not anticipate any adjustments that will result in a
material change to its financial position.  Therefore, no
reserves for uncertain income tax positions have been
recorded pursuant to FIN 48. In addition, the Company did not record a
cumulative effect adjustment related to the adoption of FIN 48.  The
Company recognizes interest and penalties related to uncertain tax positions as
a component of income taxes. For the fiscal year ended December 31, 2007, the
Company had no interest or penalties.




Concentration
of Credit Risk—TheCompany
sells its products to large communications companies, as well as emerging
communications carriers. Credit is extended based on an evaluation of the
customer’s financial condition, and collateral is generally not required. The
Company also evaluates its credit customers for potential credit losses. The
accounts receivable balances at December 31, 2007 and 2006 are primarily due
from the major customers indicated below.




For the
year ended December 31, 2007 and 2006, the Company had two and three customers,
respectively, that individually accounted for more than 10% of the Company’s
total revenues for the respective year.  At December 31, 2007, the
Company had three customers that individually accounted for more than 10% of the
net accounts receivable balance and in aggregate totaled $94,000.  At
December 31, 2006, the Company had four customers that individually accounted
for more than 10% of the net accounts receivable balance and in aggregate
totaled $195,000.




Comprehensive
Loss—Therewas
no difference between net loss and comprehensive loss for any period
presented.




Reclassification—Certainreclassifications have been made to prior year’s financial information to
conform to the current year presentation.  Such reclassifications did not
affect Net Loss, Earning Per Shareor
Cash Provided by Operations.
  Segment
Information—TheCompany
has adopted Statement of Financial Accounting Standards No. 131, Disclosures
About Segments of an Enterprise and Related Information (“SFAS
131”).   The Company currently operates in one business segment
providing solutions for streamlining and improving transaction management of
traditional voice services as well as services delivered via Internet Protocol
("IP") to customers primarily in the United States.  The
Company is not organized by market and does not operate any material separate
lines of business.  A single management team reports to the chief
operating decision maker who comprehensively manages the Company as one
business. Accordingly, pursuant to SFAS 131, the Company does not
accumulate discrete financial information with respect to separate lines of
business and does not have separately reportable segments.


- 47
-
 PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY
 Notes
to Consolidated Financial Statements


Net
Loss Per Share—TheCompany
has computed net loss per share in accordance with Statement of Financial
Accounting Standards 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.




As of December 31, 2007
and 2006, respectively,the Company had options and warrants to
purchase 955,823and
1,541,236shares
of common stock.  These common equivalent shares were anti-dilutive
for the yearsended
December 31, 2007 and 2006 and were accordingly, excluded from calculating the
diluted net loss per share.  Similarly, the Company held convertible
debt during the years ended December 31, 2007 and 2006.  This
convertible debt could be converted into 15 million shares of common stock
but was also excluded from the diluted EPS calculation due to its antidilutive
effect for 2007 and 2006.




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




For
      the Year ended December 31,2007
            
            
            2006Net
      loss
            $
            (290,000
            )
            
            $
            (3,162,000
            )Weighted-average
      shares - basic
            
            38,373,634
            
            
            
            37,733,904Dilutive
      effect of stock options
            
            —
            
            
            
            —Dilutive
      effect of warrants
            
            —
            
            
            
            —Dilutive
      effect of convertible debt
            
            —
            
            
            
            —Weighted-average
      shares - diluted
            
            38,373,634
            
            
            
            37,733,904Net
      loss per share - basic and diluted
            $
            (0.01
            )
            
            $
            (0.08
            )







3.
            PROPERTY AND
      EQUIPMENT





Property
and equipment consist of the following at December 31, 2007 and
2006:


December
      31, 2007
              
              
              December
      31, 2006Computer
      and office equipment
              $
              1,587,000
              
              
              $
              1,667,000Furniture
      and fixtures
              
              79,000
              
              
              
              97,000Leasehold
      improvements
              
              21,000
              
              
              
              51,000Capitalized
      leases
              
              96,000
              
              
              
              96,000Total
      property and equipment at cost
              
              1,783,000
              
              
              
              1,911,000Less: 
      accumulated depreciation and amortization
              
              (1,512,000
              )
              
              
              (1,551,000
              )Property
      and equipment, net
              $
              271,000
              
              
              $
              360,000
 
 Depreciation
expense for the years ended December 31, 2007 and 2006 was $104,000and $126,000,
respectively.  Amortization of equipment purchased
under capitalized leases is included in depreciation expense.  The
accumulated amortization on equipment acquired under capital
leases was $45,000 and $28,000 as of December 31, 2007 and 2006,
respectively.


4.
              GOODWILL
  The Company merged
with Avery on October 1, 1999.  In connection with the merger, 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.  The goodwill was pushed down to the Company's
balance sheet by Avery at the time of the merger.  On February 9, 2001, the
Company was spun off as a separate company by Avery, and the goodwill
balance of $8.3 million remained on the Company's balance sheet.  In
September 2001, the Company recorded a $5.6 million charge to adjust the balance
to the estimated recoverable value.
  In January 2002,
the Company adopted SFAS 142 which established a new method of testing goodwill
impairment on an annual basis or on an interim basis if an event occurs or
circumstances change that would reduce fair value of a reporting unit below its
carrying value.  As of September 30, 2007 and 2006, the Company completed
it annual assessment of goodwill impairment and concluded that as of
September 30 of each fiscal year, there was no goodwill impairment.  As of
December 31, 2007 and 2006, goodwill was $593,000.
  - 48
-
  
 PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY
 Notes
to Consolidated Financial Statements


5.
            BORROWINGS





The
Company’s borrowings consisted of the following principal balances and excluded
related accrued interest:


December
      31, 2007
              
              
              December
      31, 2006CyberSource
      Corporation (formerly, Authorize.Net Holdings, Inc.)
              $
              982,000
              
              
              $
              982,000Spieker
      Properties, L.P.
              
              200,000
              
              
              
              200,000Special
      Situations Funds
              
              119,000
              
              
              
              —Special
      Situations Private Equity Fund, L.P.
              
              —
              
              
              
              250,000CIT
      Group Inc. (formerly CITI Capital)
              
              37,000
              
              
              
              61,000First
      Regional Bank
              
              —
              
              
              
              100,000Total
      borrowings
              
              1,338,000
              
              
              
              1,593,000Less: 
      current portion
              
              (632,000
              )
              
              
              (741,000
              )Noncurrent
      portion
              $
              706,000
              
              
              $
              852,000
 
 Note
Payable to CyberSource Corporation





In 1999,
the Company executed a secured promissory note in the amount of $2.2 million,
originally payable to Corsair Communications, Inc. ("Corsair") as
consideration for the assets acquired by the Company from Corsair. As of
December 31, 2007, the current holder of this secured note was CyberSource
Corporation ("CyberSource"), the successor by way of merger to Authorize.Net
Holdings, Inc. (formerly Lightbridge, Inc., which succeeded to Corsair by way of
merger).  The note held a security interest in substantially all the
property and equipment originally acquired from Corsair.  Since 2001, the
terms of this secured note have been amended seven separate times and fully
settled in April 2008.





In
March 2006, this obligation was subordinated to the $1.5 million secured
convertible notes issued to Special Situations Fund III, QP, L.P. and four
related funds (“SSF”) in connection with the Company’s private
placement.  See Note 6.  Additionally, the payment terms for
the note were amended whereby the monthly interest-only payments of $7,000
continued from January 2006 through December 2006. Beginning in
January 2007, principal and interest payments of $20,000 would have
been due monthly until paid in full in December 2011. The interest
remained at 8.0%.




In
January 2007, the payment terms for the note were further
amended.  Under the amended terms, the monthly interest-only payments
of $7,000 continued from January 2007 through June 2007. Beginning in
July 2007, principal and interest payments of $22,000 were due monthly
through November 2011 with a final payment of $20,000 in
December 2011. The interest remained at 8.0%.  At the end
of 2007, the principal and interest payments of $22,000 per month for July
2007 through December 2007 remained outstanding.  At December 31,
2007, the outstanding principal balance of the note was $982,000.





On April 15, 2008, the Company entered into a settlement
agreement with CyberSource related to the outstanding note of $982,000. 
The Company paid $100,000 to CyberSource in full settlement of this debt
obligation, including accrued interest.  The agreement provides that
CyberSource will release the Company from further liability upon the later of
(i) the expiration of one hundred days from the date the $100,000 is received by
CyberSource without the occurence of an insolvency event, or (ii) in the
event that an insolvency event occurs within such 100 days, the date that any or
all limitations periods for an action for the avoidance of payment has
passed.


Note
Payable to Spieker Properties, L.P.
 
 In
June 2001, the Company executed an unsecured note in the amount of
$200,000, payable to Spieker Properties, L.P. (“Spieker”), its then
landlord.  This obligation was a result of an amendment to the
Company’s lease agreement.  Interest accrued at an interest rate of
9.0% and compounded monthly. The principal and accrued interest balance was
due on April 30, 2007, the end of the lease term.   During
2007, the office building was sold to a new owner and in May 2007, the Company
moved its corporate office to another office building that is not owned or
managed by the same landlord.  At
December 31, 2007, the outstanding principal and related accrued
interest balance totaled $337,000.In
February 2008, the Company agreed to and has remitted a one-time payment of
$200,000 as final settlement of the Company's obligation to its former
landlord.
 - 49
-
  
 PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY
 Notes
to Consolidated Financial Statements


Notes
Payable to Special Situations Funds




In
December 2006, the Company entered into an unsecured loan agreement with
Special Situations Private Equity Fund, L.P. in the amount of $250,000. Interest
accrued at an interest rate of 11.0% per annum and originally had a maturity
date of June 27, 2007. In June 2007, the note was amended to extend the maturity
date to October 2, 2007, at which time the principal and accrued interest was
due in full.  The outstanding principal balance of $250,000 plus the
accrued interest of $21,000 was paid in full on October 2, 2007.




Pursuant to
the registration statement relating to the private placement in March 2006, the
Company owed liquidated damages because the registration statement was not
declared effective by the agreed-upon date.  In April 2007, the
Company executed five unsecured adjustable promissory notes to Special
Situations Private Equity Fund, L.P., Special Situations Technology Fund, L.P.,
Special Situations Technology Fund II, L.P., Special Situations Fund III, L.P.,
and Special Situations Fund III QP, L.P. in the aggregate principal amount
of $54,000, $9,000, $45,000, $1,000, and $10,000, respectively to cover these
liquidated damages.  The original issuance date of these promissory notes
was December 22, 2006, the date the registration statement was declared
effective.  Interest on the unpaid principal balance accrued at an
adjustable rate based on the federal rate for short-term instruments, originally
at 4.93%, and reset to 4.85% on May 22, 2007. As of December 31, 2007, the total
outstanding balance of the five notes totaled $119,000.  The principal and
accrued interest balances were due in full on March 31, 2008.  On April 1, 2008, the
Company paid the outstanding aggregate principal balance and accrued interest
related to the five unsecured promissory notes in
full.




Note
Payable to CIT Group Inc. (formerly CITI Capital)
 
 In
June 2005, the Company entered into a 48-month equipment lease agreement
with CITI Capital Technology Finance, Inc. to finance the purchase of
equipment. The total amount financed under this agreement was $96,000 with
monthly payments including interest of $2,000 through May 2009. The
effective interest rate was 8.25%. As of December 31, 2007, the outstanding
balance was $37,000.  This lease is accounted for as a capital
lease.


Note
Payable to First Regional Bank





In
February 2005, the Company executed a secured promissory note in the amount
of $100,000 with First Regional Bank. The proceeds of this note were used to pay
down the outstanding balance of the line of credit with Sunwest Bank. The
collateral on this secured note was a certificate of deposit in the amount of
$100,000 plus any interest earned and was held with First Regional Bank. The
certificate of deposit earned interest at 1.90% annually and matured in
February 2006. The interest on the promissory note accrued at 3.0% over the
interest rate on the certificate of deposit.





In
February 2006, the Company executed an amended and restated loan agreement
for the original $100,000 principal balance. The certificate of deposit relating
to the original loan agreement matured and the $100,000 plus interest earned was
released as restricted cash. Under the amended agreement, the Company opened a
savings account as collateral against the outstanding loan balance. The interest
rate on the loan was reduced to 2% over the interest rate of the savings
account. The loan balance was paid in full in February 2007.





The following
table represents the contractual payments associated with the outstanding notes
payable as of December 31, 2007:




Year
      ending December 31:
            Principal
              Payment
            
            
            Interest
              Payment
            
            
            Total
              Payment2008
            $
            632,000
            
            
            $
            251,000
            
            
            $
            883,0002009
            
            224,000
            
            
            
            49,000
            
            
            
            273,0002010
            
            231,000
            
            
            
            30,000
            
            
            
            261,0002011
            
            251,000
            
            
            
            11,000
            
            
            
            262,000Total
            $
            1,338,000
            
            
            $
            341,000
            
            
            $
            1,679,000







6.
            PRIVATE
      PLACEMENTS





April 2006 Private
Placement





On April
27, 2006, the Company sold 1,750,000 shares of common stock and 875,000 warrants
to purchase shares of the Company’s common stock to two accredited investors in
a private placement (the “April 2006 Private Placement”), one of which is
currently a member of the Company’s Board of Directors (“Director Investor”).
The warrants expire March 31, 2011 and are exercisable for cash at an exercise
price of $0.15 per share. The exercise price of the warrants is subject to
adjustment in certain circumstances, including downward adjustment upon issuance
by the Company of common stock or securities convertible into shares of common
stock at a per share price less than the exercise price of the warrants. The
April 2006 Private Placement investors may, in limited instances, exercise the
warrant through a cashless exercise. The Company received gross proceeds of
$175,000 from the April 2006 Private Placement and used these proceeds for
general working capital purposes.




Pursuant
to a registration rights agreement entered into as part of the April 2006
Private Placement, the Company filed a registration statement, registering for
the resale of the shares of common stock and the shares of common stock issuable
upon exercise of the warrants on May 1, 2006. The registration statement was
declared effective on December 22, 2006.  Because the registration
statement was not declared effective by the agreed-upon date of July 16,
2006, the Company owed liquidated damages of $4,000 to the non-director
investor.  The Company paid $4,000 in liquidated
damages plus accrued interest payable to the non-director investor in
October 2007.  In addition, the Company is required to maintain and update
the registration statement as necessary in order to keep it current so that
these shares of common stock are freely tradable.  If the Company does
not keep such registration statement current, the Company may be required to pay
additional liquidated damages to the non-director investor.


- 50
-
  
 PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY
 Notes to
Consolidated Financial Statements


In
accordance with the provisions of Accounting Principles Board Opinion No. 14,
Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants (“APB 14”), the Company
allocated the total proceeds received from the Director Investor between the
shares of common stock and the warrants issued based on their relative estimated
fair values on the date of issuance. The Company calculated the fair value of
the warrants on the date of the issuance using the Black-Scholes model. As a
result of this analysis, the Company allocated $41,000 from the proceeds to
warrants.





At the
time of issuance in April 2006, under the provisions of SFAS 133 and Emerging
Issues Task Force Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock
(“EITF 00-19”), the Company accounted for the warrants issued to the
non-director investor as freestanding derivative instruments. The Company
calculated the fair value of the warrants on the date of issuance using the
Black-Scholes model at $24,000. The Company recognized a liability of $24,000
with the offsetting entry as a reduction to paid-in capital. Additionally, the
net increase in the fair value of the warrants during the fiscal year ended
December 31, 2006 was recorded as a loss of $8,000.





On
January 1, 2007, the Company adopted EITF 00-19-2 which clarifies that a
financial instrument subject to a registration payment arrangement should be
accounted for in accordance with other applicable generally accepted accounting
principles without regard to the contingent obligation to transfer consideration
pursuant to the registration payment arrangement. Pursuant to EITF 00-19-2,
the Company determined that the warrants issued to the non-director in the April
2006 Private Placement qualified for equity classification under EITF 00-19 and
should be accounted for under the provisions of APB 14. Additionally, the
Company determined that any additional liquidated damages payments under the
registration payment arrangement were not probable. The Company recorded a
cumulative-effect adjustment resulting only from the reclassification of the
warrants to equity, which included the reversal of the current fair value of the
warrant liability of $32,000, an offsetting credit to additional paid-in capital
for $16,000 and a credit of $16,000 to opening retained earnings. The credit to
additional paid-in capital equals the amount that the Company would have
allocated to the warrants based on the relative fair value on the date of
issuance under the provisions of APB 14.




March 2006 Private
Placement





On
March 31, 2006, the Company completed a private placement of $1.5 million
in aggregate principal amount of its 5% Senior Secured Convertible Notes (the
“Notes”) along with warrants to purchase 7.5 million shares of the Company’s
common stock (the “March 2006 Private Placement” and, together with the
April 2006 Private Placement, the “2006 Private Placements”) to Special
Situations Fund III, Q.P., L.P. and four related funds (“SSF”). The Notes are
due March 31, 2008 and pay interest semi-annually, in cash. The Notes are
secured by a first priority security interest in all of the Company’s assets.
Events of default under the Notes include failure to pay amounts due under the
related private placement documents (including the Registration Rights Agreement
described below) or failure to make any required principal payment on
indebtedness of $100,000 or more.





Upon
election of SSF, at any time, any or the entire outstanding principal and any
accrued but unpaid interest on the Notes may be converted into shares of the
Company’s common stock at a conversion price of $0.10 per share. The warrants to
purchase shares of the Company’s common stock expire March 31, 2011 and are
exercisable for cash at an exercise price of $0.15 per share. The conversion
price of the Notes and the exercise price of the warrants are subject to
adjustment in certain circumstances, including downward adjustment upon issuance
by the Company of common stock or securities convertible into shares of common
stock at a per share price less than the conversion price of the Notes or
exercise price of the warrants, respectively. SSF may, in limited instances,
exercise the warrant through a cashless exercise.




Effective
March 31, 2008, the Company amended the Notes payable to SSF, amending the
payment terms and extending the maturity date to December 31, 2009 from March
31, 2008.  Pursuant to the amended terms of the notes, the interest
rate changed to 10% from 5% per annum, and we are required to make
quarterly principal and interest payments, beginning in June 2008.  The
first payment is in the amount of $60,000 due in June 2008, followed with a
payment $125,000 in September 2008 and a payment of $174,000 in December
2008.  In 2009, principal and interest payments of $212,000 are due each
quarter-end through September 2009 with a final payment of $712,000 in December
2009.  The senior convertible debt, net of discount, was reflected as a
current liability at December 31, 2007.
  Additionally,
pursuant to a related Amendment Letter Agreement dated March 31, 2008
between the Company and SSF, on April 1, 2008, we paid the accrued interest
of $19,000 on the original senior convertible notes for the quarter ended March
31, 2008 as well as the outstanding principal and accrued interest balance of
the five unsecured promissory notes (see discussion below).  The aggregate
outstanding principal and interest balance for these five promissory notes
totaled $126,000 as of March 31, 2008.


Pursuant to a registration
rights agreement entered into as part of the March 2006 Private Placement,
the Company filed a registration statement, registering for the resale of the
shares of common stock issuable upon conversion of the Notes and exercise of the
warrants on May 1, 2006. The registration statement was declared effective on
December 22, 2006.  Because the registration statement was not
declared effective by the agreed-upon date of July 16, 2006, the Company
owed liquidated
damages of $119,000, collectively, to SSF.   As of December 31,
2007, the Company had executed five unsecured promissory notes to cover the
$119,000 in liquidated damages payable to SSF.  On April 1, 2008, the
Company paid the aggregate outstanding principal and accrued interest
related to these five unsecure promissory notes in full.In
addition, the Company is required to maintain and update the registration
statement as necessary in order to keep it current so that these shares of
common stock are freely tradable. If the Company does not keep such registration
statement current, it may be required to pay additional liquidated damages.




At the
time of issuance in March 2006, under the provisions of SFAS 133 and EITF 00-19,
the Company accounted for the warrants as freestanding derivative instruments.
The Company calculated the fair value of the warrants on the date of issuance
using the Black-Scholes model at $995,000. The Company recognized a liability of
$995,000 with an offsetting reduction to the carrying amount of the Notes. The
resulting debt discount of $995,000 was amortized over the life of the Notes,
using the effective interest method. Additionally, the net decrease in the fair
value during the fiscal year ended December 31, 2006 was recorded as a gain of
$12,000.




- 51
-
  
 PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY
 Notes
to Consolidated Financial Statements


On
January 1, 2007, the Company adopted EITF 00-19-2 which clarifies that a
financial instrument subject to a registration payment arrangement should be
accounted for in accordance with other applicable generally accepted accounting
principles without regard to the contingent obligation to transfer consideration
pursuant to the registration payment arrangement. Pursuant to EITF 00-19-2,
the Company determined that the warrants issued in the March 2006 Private
Placement qualified for equity classification under EITF 00-19 and should be
accounted for under the provisions of APB 14. Additionally, the Company
determined that any additional liquidated damages payment under the registration
payment arrangement was not probable. The Company recorded a cumulative-effect
adjustment resulting only from the reclassification of the warrants to equity,
which included the reversal of the current fair value of the warrant liability
of $982,000 with an offsetting credit to additional paid-in capital for $598,000
and debt discount of $340,000 as well as a credit of $44,000 to opening retained
earnings. The credit to additional paid-in capital equals the amount that the
Company would have allocated to the warrants based on the relative fair value on
the date of issuance under the provisions of APB 14. The debt discount of
$417,000 upon adoption of EITF 00-19-2 continues to be amortized over the
life of the Notes, using the effective interest method. For the fiscal year
ended December 31, 2007, the amortization of the debt discount totaled $320,000and was recorded as interest expense.




Pursuant
to Emerging Issues Task Force Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios (“EITF 98-5”) and Emerging Issues Task Force Issue No.
00-27, Application of Issue
No. 98-5 to Certain Convertible Instruments (“EITF 00-27”), the Company
calculated an effective conversion price of $0.03 per share for the embedded
conversion option on the date issuance. Because the market value of the common
stock was higher than the effective conversion price on the date of issuance,
the conversion feature was considered to be a beneficial conversion feature. The
Company recognized a beneficial conversion feature as a reduction to the net
carrying amount of the Notes and an addition to paid-in capital of $505,000,
which was based on the effective conversion rate, capped at the net carrying
amount of the Notes. The discount resulting from this allocation to the
beneficial conversion feature was being amortized over the life of the Notes,
using the effective interest method. For the fiscal years ended December 31,
2007 and 2006, the amortization of the debt discount totaled$268,000
and $158,000, respectively,and was recorded as interest expense.
The adoption of EITF 00-19-2 did not impact the accounting treatment of the
beneficial conversion feature.





2004 Private
Placement





On
June 15, 2004, the Company completed a private placement of our common
stock and warrants (the “June 2004 Private Placement”). Pursuant to the
June 2004 Private Placement, the Company issued an aggregate of 14,284,782
shares of common stock and warrants to purchase a total of 7,142,393 shares. The
effective price was $0.23 for each unit. The Company received gross proceeds of
$3.3 million in cash from the June 2004 Private Placement. As a result
of certain anti-dilution provisions triggered by the March 2006 Private
Placement, certain purchasers in the June 2004 Private Placement were issued
1,713,859 additional warrants to purchase shares of the Company’s common stock
(the “2004 Additional Warrants”) and the exercise price of the 6,869,566
outstanding warrants originally issued to these purchasers (the “Repriced
Warrants”) was repriced from $0.28 to $0.22 per share. All warrants issued
pursuant to the June 2004 Private Placement expire in
June 2009.





The
Company calculated the fair value of the Repriced Warrants just prior to the
date of issuance and the aggregate fair value of the Repriced Warrants and the
2004 Additional Warrants on the date of issuance using the Black Scholes model.
The Company reclassified the increase of $189,000 from additional paid-in
capital to warrants in shareholders’ equity.


7.
              COMMITMENTS AND
      CONTINGENCIES
  The Company leases
office space and certain equipment under various noncancelable operating
leases.  Rent expense under such operating leases was $349,000 and $469,000
for the fiscal years ended December 31, 2007 and 2006, respectively.  The
Company leased approximately 13,500 square feet of office space in Irvine,
California through April 2007 as well as an additional 7,000 square feet of
office space in Irvine, California through May 2006.  The Company entered
into a new lease agreement for approximately 10,000 square feet of office
space in Irvine, California beginning in May 2007.
  Future minimum lease
payments required under operating leases as of December 31, 2007 are as
follows:


Year
      ending December 31:
                
                Operating
                  Leases2008
                
                $
                293,0002009
                
                
                288,0002010
                
                
                267,0002011
                
                
                271,0002012
                
                
                91,000Total
                
                $
                1,210,000
 - 52
-
  
 PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY
 Notes
to Consolidated Financial Statements
 8.
              GUARANTEES AND
      INDEMNIFICATIONS


The
Company is subject to various legal proceedings from time to time as part of its
business. Other than routine litigation related to collections, 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.





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 also
entered into change of control agreements with the officers which
provide certain benefits in the event of a change of control, including a
minimum value guarantee of held options upon such change of control.The Company has not recorded any liability for these guarantees and
indemnities in the accompanying consolidated balance sheets. The Company
considers such factors as the degree of probability of an unfavorable outcome
and the ability to make a reasonable estimate of the amount of loss. To date,
the Company has not encountered material costs as a result of such obligations
and has not accrued any liabilities related to such indemnification in its
financial statements.




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





9.
            STOCK-BASED
      COMPENSATION





Stock
Options





In
February 2001, the Board of Directors approved the Company’s 2001 Flexible
Incentive Plan (the “2001 FIP”) and authorized approximately 3.9 million shares
to be reserved for issuance pursuant to the 2001 FIP. In October 2001, the
Board of Directors approved the Company’s 2001 FIP, as amended. Under the terms
of the 2001 FIP, 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
2001 FIP vest at the minimum rate of 20% per year from the grant date, but could
vest at an accelerated rate. At December 31, 2007 and 2006, options to
purchase 2,707,150 and 2,648,439 shares, respectively, of common stock were
exercisable under the 2001 FIP.





The
Company’s stockholders approved the adoption of Primal’s 2004 Flexible Incentive
Plan (the “2004 FIP”) at the Company’s 2004 Annual Meeting of Stockholders, held
November 12, 2004. Pursuant to the 2004 FIP, the Company may issue up to an
aggregate of 5,451,073 shares of the Company’s common stock, $0.01 par value per
share.  For optionees that have been with the Company for less than
one year, options granted under the 2004 FIP vest one-third on the one-year
anniversary of the grant date with the remaining two-thirds vesting in four
equal semi-annual installments after the one-year anniversary date. For all
other optionees, options granted under the 2004 FIP vest in six equal
semi-annual installments commencing on the six-month anniversary of the grant
date. At December 31, 2007 and 2006, options to purchase 2,905,475 and
2,782,171 shares, respectively, of common stock were exercisable under the 2004
FIP.




In
accordance with the provisions of SFAS 123R, the Company recognized stock-based
compensation expense related to the 2001 FIP and 2004 FIP totaling $118,000 and
$255,000 for the fiscal years ended December 31, 2007 and 2006,
respectively.  The fair value of each option granted was estimated on
the date of grant using the Black-Scholes option-pricing model. The expected
volatility is based on historical volatility of the Company’s stock. The
risk-free rate is based on the U.S. Treasury yield curve in effect at the time
of grant. The expected term of options granted is based on historical data.
The following assumptions were used for the options granted during the fiscal
years ended December 31, 2007 and 2006:


For
      the Year ended December 31,2007
              
              
              2006Expected
      volatility
              
              179.02%-201.43%
              
              
              
              150.00%-207.88%Weighted-average
      volatility
              
              194.21%
              
              
              
              159.82%Risk-free
      rate
              
              4.56%-4.76%
              
              
              
              4.82%-4.86%Expected
      term
              
              5 -
      7.14 years
              
              
              
              10
      years




A summary
of option activity under the 2001 FIP and the 2004 FIP as of December
31, 2007, and changes during the fiscal year ended December 31, 2007 are presented
below:




Number of
              Shares
            
            
            Weighted-
              Average
              Exercise
              Price
            
            
            Weighted-Average
      Remaining Contractual
              Term
            
            
            Aggregate
              Intrinsic
              ValueOutstanding
      as of January 1, 2007
            
            
            7,500,130
            
            
            $
            0.13Granted
            
            
            1,789,386
            
            
            
            0.07Exercised
            
            
            —
            
            
            
            —Forfeited
      or expired
            
            
            (1,929,583
            )
            
            
            0.13Outstanding
      as of December 31, 2007
            
            
            7,359,933
            
            
            $
            0.12
            
            
            
            6.62
            
            
            $
            —Exercisable
      as of December 31, 2007
            
            
            5,612,625
            
            
            $
            0.12
            
            
            
            5.95
            
            
            $
            —








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-








PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY


Notes
to Consolidated Financial Statements




The
weighted-average grant-date fair value of options granted during the fiscal
years ended December 31, 2007 and 2006 was $0.07 for both periods.  No
options were exercised during the fiscal year ended December 31,
2007.  The total intrinsic value of options exercised during the
fiscal year ended December 31, 2006 was $25,000.  Cash received from
option exercise under all share-based payment arrangements was $14,000 for the
fiscal year ended December 31, 2006.





A summary
of the status of the Company’s nonvested shares as of December 31, 2007, and
changes during the fiscal year ended December 31, 2007 are presented
below:




Number
      of
                  Shares
                
                
                Weighted-Average
                  Grant
      Date
                  Fair
      ValueNonvested
      as of January 1, 2007
                
                2,069,521
                
                
                $
                0.14Granted
                
                1,789,386
                
                
                
                0.07Vested
                
                (1,651,768
                )
                
                
                0.13Forfeited
                
                (459,831
                )
                
                
                0.08Nonvested
      as of December 31, 2007
                
                1,747,308
                
                
                $
                0.09
  As of
December 31, 2007, there was $63,000 of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under
the 2001 FIP and the 2004 FIP.  This cost is expected to be recognized
over a period of 2.42 years.




Performance
Stock Options




In August
2006, the Board of Directors approved and adopted the Company’s 2006 Stock
Option Plan (the "2006 SOP”), as recommended by the Board’s Compensation
Committee. The purpose of the 2006 SOP is to assist the Company in attracting
and retaining selected individuals to serve as officers and employees of the
Company who contribute to the Company’s success and to achieve objectives which
inure to the benefit of the stockholders of the Company through the additional
incentive inherent in the ownership of the Company’s common stock. The Plan is
administered by the Board’s Compensation Committee, which determines to whom
options are granted, the number of options to be granted, the option price and
the other terms (including vesting) of each option granted under the 2006 SOP.
Options granted under the 2006 SOP are nonqualified stock options. There have
been reserved 8.0 million shares for issuance upon exercise of options granted
pursuant to the 2006 SOP. Options granted under the 2006 SOP vest fully upon the
sale of all or substantially all of the assets of the Company, the acquisition
by any person or group of more than 50% beneficial ownership of the Company, or
the merger, consolidation or other reorganization of the Company resulting in a
more than 50% change in ownership of the Company.  The 2006 SOP will expire
in July 2016. At December 31, 2007 and 2006, there were no options to
purchase shares of common stock exercisable under the 2006 SOP.


The fair
value of each option granted was estimated on the date of grant using the
Black-Scholes option-pricing model and assumes that performance goals will be
achieved. The expected volatility is based on historical volatility of the
Company’s stock. The risk-free rate is based on the U.S. Treasury yield curve in
effect at the time of grant. The expected term of options granted is based
on historical data. The following assumptions were used for the options
granted during the fiscal years ended December 31, 2007 and 2006:
 For
      the Year ended December 31,2007
                  
                  
                  2006Expected
      volatility
                  
                  175.96%
                  
                  
                  
                  176.73%-179.93%Weighted-average
      volatility
                  
                  175.96%
                  
                  
                  
                  179.82%Risk-free
      rate
                  
                  4.56%
                  
                  
                  
                  4.50%-4.86%Expected
      term
                  
                  5 years
                  
                  
                  
                  5
      years
  - 54
-
  
 PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY
 Notes
to Consolidated Financial Statements
 A summary
of option activity under the 2006 SOP as of December 31, 2007, and changes
during the fiscal year ended December 31, 2007 are presented
below:
  Number of
                  Shares
                
                
                Weighted-
                  Average
                  Exercise
                  Price
                
                
                Weighted-Average
      Remaining Contractual
                  Term
                
                
                Aggregate
                  Intrinsic
                  ValueOutstanding
      as of January 1, 2007
                
                
                7,022,845
                
                
                $
                0.07Granted
                
                
                977,155
                
                
                
                0.07Exercised
                
                
                —
                
                
                
                —Forfeited
      or expired
                
                
                (867,579
                )
                
                
                0.07Outstanding
      as of December 31, 2007
                
                
                7,132,421
                
                
                $
                0.07
                
                
                
                3.72
                
                
                $
                —Exercisable
      as of December 31, 2007
                
                
                —
                
                
                $
                —
                
                
                
                —
                
                
                $
                —
   The
weighted-average grant-date fair value of options granted during the fiscal
years ended December 31, 2007 and 2006 was $0.07 for both periods.  No
options were exercised during the fiscal years ended
December 31, 2007 and 2006.For any option granted under the 2006
SOP, the Company determines if it is probable that the performance condition
will be achieved.  Until a performance condition is deemed to be
probable, the compensation cost of these option grants is included in the total
unrecognized compensation cost.  As of December 31, 2007, there was
$491,000 of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the 2006
SOP.


Warrants





In July
2006, the Company issued to a new customer a five-year warrant to purchase up to
1.5 million shares of the Company’s common stock at an exercise price of $0.28
per share (subject to adjustment in certain circumstances). The warrants were
issued in connection with entering into a three-year software license and
services agreement. Upon the issuance of the warrants, the right to purchase
300,000 shares vested and the remainder vest in 400,000 share increments if and
when stated targets of cumulative license fee and maintenance revenue paid to
the Company under the license and services agreement are met. Vested warrants
are exercisable for three years after the vesting date and expire immediately
prior to a change in control of the Company.





Pursuant
to Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given
by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)
(“EITF 01-9”) and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services (“EITF 96-18”), the Company recognized the
fair value of the initial 300,000 warrants which totaled $14,000 as a reduction
against the revenue earned from this customer and as paid-in capital during the
quarter ended September 30, 2006. The fair value of these 300,000 warrants was
estimated on the vesting date using the Black-Scholes option-pricing model. For
the remaining 1.2 million warrants, for each reporting period, the Company will
estimate the then-current fair value of the warrants estimated to have been
earned as of the period end based on a pro-rata percentage of revenue earned by
the customer during that reporting period. If and when the stated target is met
by the customer, and a measurement date has been established, the Company will
compute the fair value of each additional 400,000 share increment using the
Black-Scholes option-pricing model and record the necessary adjustment to
previous estimates of the award based on this measurement date fair
value.




In May
2006, the Company issued to non-employee members of the Board of Directors a
total of 1.0 million warrants to purchase common stock at a price of $0.10 per
share, fair market value at the time of the grant.  These warrants
were fully vested at issuance.  The Company recognized stock-based
compensation expense of $97,000 during the fiscal year ended December 31, 2006
related to these warrants.


- 55
-




PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY


Notes
to Consolidated Financial Statements







The fair
value of each warrant granted was estimated on the date of grant using the
Black-Scholes option-pricing model. The expected volatility is based on
historical volatility of the Company’s stock. The risk-free rate is based on the
U.S. Treasury yield curve in effect at the time of grant. The expected term of
warrants granted is based on the remaining contractual life of the
warrant.  During the fiscal year ended December31,
2007, the Company did not issue any warrants.  The following
assumptions were used for the compensation-based warrants granted during the
fiscal year ended December 31, 2006:


Year
      ended
              December
      31, 2006Expected
      volatility
            
            140%Risk-free
      rate
            
            5.09%Expected
      term
            
            5.8
      years






A summary
of compensation-based warrant activity as of December 31, 2007, and changes
during the fiscal year ended December 31, 2007 arepresented below:




Number of
                Shares
              
              
              Weighted-
                Average
                Exercise
                Price
              
              
              Weighted-Average
      Remaining Contractual
                Term
              
              
              Aggregate
                Intrinsic
                ValueOutstanding
      as of January 1, 2007
              
              
              3,927,174
              
              
              $
              0.18Granted
              
              
              —
              
              
              
              —Exercised
              
              
              —
              
              
              
              —Forfeited
      or expired
              
              
              —
              
              
              
              —Outstanding
      as of December 31, 2007
              
              
              3,927,174
              
              
              $
              0.18
              
              
              
              4.63
              
              
              $
              —Exercisable
      as of December 31, 2007
              
              
              2,727,174
              
              
              $
              0.14
              
              
              
              5.12
              
              
              $
              —


10.
              INCOME
    TAXES
  For the
fiscal years ended December 31, 2007 and 2006, the expense for income taxes
was $3,000 and $2,000, respectively.  The expense for income taxes for the
fiscal years ended December 31, 2007 and 2006 mostly reflects the minimum
tax due in California.A
reconciliation of the provision for the income taxes to the amount of income tax
expense that would result from applying the federal statutory rate of 34% to
income before provision for income taxes is as follows:
 For
      the Year Ended December 31,2007
              
              
              2006Benefit
      at statutory rate
              
              $
              (98,000
              )
              
              $
              (1,074,000
              )State
      taxes, net of federal benefit
              
              
              2,000
              
              
              
              1,000Adjustment
      of net operating loss, credit carryforwards and
    depreciation
              
              
              (282,000
              )
              
              
              (106,000
              )Change
      in valuation allowance
              
              
              338,000
              
              
              
              1,089,000Other
              
              
              43,000
              
              
              
              92,000$
              3,000
              
              
              $
              2,000
  - 56
-
 PRIMAL
SOLUTIONS, INC. AND SUBSIDIARY
 Notes
to Consolidated Financial Statements
  The tax
effects of temporary differences used in determining the Company’s deferred tax
assets and liabilities are presented below at December 31, 2007 and
2006:
  For
      the Year Ended December 31,2007
              
              
              2006Deferred
      tax assets:Net
      operating loss carryforwards
              
              $
              2,753,000
              
              
              $
              2,653,000Accruals
              
              
              178,000
              
              
              
              196,000Credits
              
              
              690,000
              
              
              
              585,000State
      taxes
              
              
              —
              
              
              
              1,000Other
              
              
              3,000
              
              
              
              10,000Total
      deferred tax assets
              
              
              3,624,000
              
              
              
              3,445,000Less
      valuation allowance
              
              
              (3,565,000
              )
              
              
              (3,158,000
              )Net
      deferred tax assets
              
              
              59,000
              
              
              
              287,000Deferred
      tax liabilities:Basis
      difference in fixed assets
              
              
              (53,000
              )
              
              
              (280,000
              )Other
              
              
              (6,000
              )
              
              
              (7,000
              )Total
      deferred tax liabilities
              
              
              (59,000
              )
              
              
              (287,000
              )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 fiscal years ended
December 31, 2007 and 2006, as it is more likely than not that the
Company’s deferred tax asset will not be realized.
  At
December 31, 2007, the Company’s federal net operating loss carryforward
and research and development credit carryforward were $7,018,000 and
$561,000,
respectively.  Both of these carryforwards will begin to expire in
2021.  The
Company’s state net operating loss carryforward and research and development
credit carryforward balances were $6,283,000and
$195,000,
respectively.  The net operating loss carryforward will begin to
expire in 2012. Current tax
laws may limit the amount available annually to offset against future taxable
income.
  On January 1, 2007, the
Company adopted the provisions of FIN 48 and analyzed its filing positions
in all of the federal and state jurisdictions where it is required to file
income tax returns, as well as all open tax years in these jurisdictions. The
Company has identified its federal tax return and its state tax return in
California as a “major” tax jurisdiction, as defined by FIN 48. The only periods
subject to examination for the Company's federal return are the tax years 2003
through 2006. The periods subject to examination for the Company's state returns
in California are tax years 2002 through 2006. The Company believes that its
income tax filing positions and deductions will be sustained on audit and does
not anticipate any adjustments that will result in a material change to its
financial position.  Therefore, no reserves for uncertain
income tax positions have been recorded pursuant to FIN 48. In
addition, the Company did not record a cumulative effect adjustment related to
the adoption of FIN 48.  The Company recognizes interest and penalties
related to uncertain tax positions as a component of income taxes.  For the
2007 calendar
year, the Company had no interest or penalties.





- 57
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