<PAGE>   1
                                                                    EXHIBIT 13.1


                    PHOENIX INTERNATIONAL 1999 ANNUAL REPORT







<PAGE>   2


                              PHOENIX INTERNATIONAL



                                Table of Contents


<TABLE>
<S>                                                                        <C>
Company Profile                                                             1

Letter to Shareholders                                                      2

Selected Financial and Operating Data                                       8

Management's Discussion and Analysis                                        9

Consolidated Balance Sheets                                                16

Consolidated Statements of Operations                                      17

Consolidated Statements of Shareholders' Equity

Consolidated Statements of Cash Flows                                      19

Notes to Consolidated Financial Statements                                 20

Report of Independent Auditors                                             31

Officers and Directors                                                     32

Corporate Information                                       Inside Back Cover
</TABLE>

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                                                           PHOENIX INTERNATIONAL

Company Profile

Phoenix International, based in Orlando, Florida, is a leading provider of
installed client/server core banking and e-commerce solutions for the financial
services industry. Phoenix's flagship product is the Phoenix System, a powerful
and flexible client/server-based system designed to allow financial institutions
to better serve their customers and meet their business and financial
objectives. Among Phoenix's complementary product offerings are: Phoenix
Intranet, a rapid intranet development tool; Phoenix Web Services, which include
website development, maintenance, and hosting; and Phoenix Internet Banking, an
integrated online and real-time Internet banking application. Phoenix also
offers the use of the Phoenix System in an outsourced service bureau environment
through its newly acquired application service centers. In addition, Phoenix
offers clients a full complement of professional and systems integration
services.

The common stock of Phoenix International is traded on The Nasdaq National
Market under the symbol PHXX.



[MAP of the world showing locations of operations of Phoenix with the following
sentence printed below it:]



The Phoenix System has been licensed by over 90 institutions in 29 states in the
       United States, and by over 50 institutions in 24 other countries.


                                                                               1
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PHOENIX INTERNATIONAL


To our shareholders:

1999 was a challenging year for Phoenix International. We had many operating
successes in 1999 that will shape our company in 2000 and beyond. While our
financial results did not meet our expectations, we believe our fundamental
business strategy is sound and we intend to build upon our solid foundation and
advance our position as a leader in installed client/server-based core
processing solutions for the financial services industry. Our goal for 2000 is
to return the company to higher growth levels and earnings performance and to
meet our primary objective as a public company - to build value for our
shareholders. This Annual Report, while communicating last year's results, will
also focus on Phoenix's underlying strengths and our future market potential.

The past year was difficult for providers of core software solutions for
financial institutions, including Phoenix. For most of 1999, new technology
purchase decisions were put on hold while banks addressed Year 2000 issues. Even
though the Phoenix System is Year 2000 compliant, conservative regulatory and
management policies regarding system changes prevented many potential United
States customers from changing their core banking systems prior to the year
2000. We witnessed similar conservative behavior by financial institutions in
many of the foreign markets in which we do business. While frustrating, we
believed that this situation would be temporary and remained focused on our core
strategy and on building our infrastructure for the future. With 1999 behind us,
we are optimistic that sales of core application software will return to more
normal levels in 2000, and that Phoenix will be prepared to capitalize on the
opportunities before us. We have witnessed some positive indications in our
sales pipelines and we are encouraged about our prospects. In addition, our
backlog, or contracted but unrecognized revenue, increased last year, with $39.9
million recorded at the end of 1999 compared with $35.9 million at the end of
the 1998.

During the past several years, the Internet has and will continue to
significantly alter the financial services landscape as it has in most every
other industry. It has ushered in a historic shift in the way we work, the way
we communicate, and the way we transact business. More specifically, Internet
technologies have empowered consumers to demand faster and more convenient
delivery channels for goods and services, including financial services. Simply
put, financial institutions have to change the way they do business to remain
competitive. In today's world, managing a financial institution means managing
technology. Now, more than ever, financial institutions need the right
technology to be competitive and those who have put off technology investments
need to catch up. As a result, we believe there will be an increase in the
demand for new technology and we believe that Phoenix is well-positioned to meet
this demand.


2

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                                                           PHOENIX INTERNATIONAL


Investing for the Future

Throughout 1999, we continued to invest in Phoenix and in our products. We
stayed in touch with our clients and prospects in order to understand their
needs and enable us to better serve them. Our strategy has been to continue to
invest in the future to ensure our clients are positioned to take advantage of
future market opportunities and maximize their technology investments. Over the
past year, we continued to invest heavily in our infrastructure - from enhancing
our implementation and training capabilities to strengthening our commitment to
research and development for future products to improving our quality assurance
programs. We believe these initiatives send a message to the market about the
value of our technology and our commitment to the future of Phoenix.

Commitment to Our Customers

We entered 2000 with over 140 financial institutions around the world that have
been licensed to operate the Phoenix System. In 1999, we completed a record 37
implementations, a significant increase over the 25 banks converted in 1998. We
believe this demonstrates the strength of our operations and our ability to
support a growing client base. One of the key factors that enabled us to reach
this milestone was our initiative to expand our implementation and training
capacity and improve client satisfaction levels. In 1999 we focused on expanding
the depth and breadth of our implementation staff, developed cross-training
programs, and enhanced our pre- and post- conversion training efforts. Inherent
in this strategic initiative is our philosophy to approach every client
relationship as an alliance. Further evidence of the success of this strategic
initiative was the positive feedback we received from our clients about our
products and services at our annual PHOCUS users conference in Orlando. Our
commitment to offer advanced technology and enhance the long-term value of the
Phoenix System is an essential component of our operating strategy, and we are
confident that our products and services will continue to receive favorable
recognition in the global marketplace.

Maintaining Technology Leadership

From our inception, our goal has always been to offer the best technology
solutions to our clients. As we enter 2000 our commitment to leverage the
strength of the Phoenix System by maintaining our technology leadership is as
strong as ever. More importantly, an integral part of our business strategy is
to continue to drive the evolution of our products to meet the technology
requirements of our clients. At Phoenix, we are mindful of our client's needs to
offer their customers the latest products and services. As such, we have
continued to expand


               Our strategy has been to continue to invest in the
               future to ensure our clients are positioned to take
                  advantage of future market opportunities and
                     maximize their technology investments.


                                                                               3
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PHOENIX INTERNATIONAL

                 Our commitment to offer advanced technology and
              enhance the long-term value of the Phoenix System is
              an essential component of our operating strategy, and
              we are confident that our products and services will
             continue to receive favorable recognition in the global
                                  marketplace.

our efforts to bring clients the latest technological innovations that are
revolutionizing the banking industry. In 1999 we released new versions of the
Phoenix System, one for our United States clients and a separate version for our
international clients. In addition, we delivered enhanced versions of our trade
finance product to international clients in seven countries. In the United
States, we completed an enhanced version of our Internet banking product, which
has been licensed to over 40 institutions worldwide, and we believe that the
demand for this product will accelerate in 2000. In addition, we are currently
developing additional product enhancements that are slated for release in 2000.

Global Market Opportunities

Phoenix extended its geographic reach in 1999 as financial institutions in the
United States and around the globe embraced our technology. In the United States
the Phoenix System has been licensed by over 90 institutions in 29 states,
ranging in size from start up, or "de novo," banks to large and established
financial institutions, confirming the flexibility and scalability of our
product. In 1999 we entered a number of new international markets including
Jamaica, Saudi Arabia, the Philippines, and Namibia, further strengthening our
position as a global provider of client/server-based core banking solutions. At
the end of 1999, the Phoenix System was licensed to over 50 institutions located
in 24 countries outside the United States. We continue to focus on identifying
opportunities in new markets to replace the aging "legacy" software systems
still in use by many international financial institutions. We believe the
Phoenix System offers the functionality and performance value banks need to be
competitive in today's global marketplace.

As a result of a strategic alliance with Data Action and Siemens Business
Services, we made significant inroads into the Australian credit union
marketplace in 1999. To further support this effort, we established a new,
full-scale application development center in Sydney, Australia, designed to
serve the technology needs that are unique to the Asia-Pacific financial
marketplace. The Sydney center replicates our United States development center
model and is fully staffed with software designers, developers, documentation
specialists, and quality assurance professionals responsible for developing new
products and services for the region, ensuring the


4

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                                                           PHOENIX INTERNATIONAL


quality of our international code line, and providing a full range of regional
client care services. We believe there is a tremendous opportunity in this
important region to offer the Phoenix System to a new segment of the global
financial services market. We will continue to focus on offering financial
institutions in the United States and around the world what we believe to be the
right solution to meet their changing technology needs.

e-Commerce Initiatives

One of our most exciting new initiatives is our e-commerce strategy, which we
believe will be an important driver of our future performance. Because of the
architectural strengths of our technology platform, the Phoenix System already
provides financial institutions with the foundation to facilitate e-commerce and
other advanced service delivery solutions such as Internet banking. Financial
institutions can leverage the flexibility of our open architecture and fully
integrated, customer-centric design to take advantage of enhanced product
choices and convenient delivery channels. In 1999, Phoenix also began offering
Intranet development services to empower the bank's desktop and serve as an
important internal communications tool. We introduced web development and
hosting services for financial institutions that want to create a transactional
website and establish an Internet presence. By utilizing Phoenix's Internet
banking product, which is fully integrated with our core system, a financial
institution can offer customers on-line, real-time Internet banking services. In
2000, we intend to introduce "aggregator" services that will allow our financial
institution clients to offer additional on-line services to their customers,
such as insurance and brokerage services. Using these technology based,
value-added services, our clients will be able to generate additional
non-interest income opportunities, both an important financial objective and
competitive advantage in today's financial marketplace.

Toward the end of 1999, we acquired two application service centers, or "ASCs",
through which we now offer comprehensive data processing services using the
Phoenix System. The ASCs allow us to bring the power and flexibility of the
Phoenix System to smaller institutions and to institutions which are not
interested in running their own data processing operations, a significant
segment of the United States market which we had not previously addressed. We
estimate that as many as 50% of United States financial institutions prefer to
outsource their information technology operations rather than manage this
function in-house. In addition to expanding our market, the ASC model should
provide recurring revenue


                 We will continue to focus on offering financial
                institutions in the United States and around the
             world what we believe to be the right solution to meet
                        their changing technology needs.


                                                                               5

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PHOENIX INTERNATIONAL


                BUILDING STRONG RELATIONSHIPS WITH OTHER LEADING
                TECHNOLOGY COMPANIES AND THIRD-PARTY VENDORS HAS
                ENHANCED OUR ABILITY TO EXTEND OUR GLOBAL REACH,
             PROVIDE SUPPORT ON A LOCAL BASIS, AND DELIVER ADVANCED
                    SOLUTIONS FOR THE BENEFIT OF OUR CLIENTS.

which we believe is an important factor for our revenue model.

The opening of these ASCs in New York and Florida is an important component of
Phoenix's e-commerce strategy. Under the ASC model, a financial institution will
have access to the Phoenix System as well as a gateway to a wide range of
e-commerce and other innovative banking solutions. With the ability to handle an
institution's core account processing, ancillary services, Internet banking, and
web hosting, we believe that Phoenix is uniquely positioned to offer an
integrated "front-to-back" customer information management solution which we
believe represents a compelling value proposition for financial institutions in
today's market.

Strategic Alliances

Throughout 1999, we continued to position Phoenix for the future by
strengthening our strategic alliances. Building strong relationships with other
leading technology companies and third-party vendors has enhanced our ability to
extend our global reach, provide support on a local basis, and deliver advanced
solutions for the benefit of our clients. As part of our ongoing strategy to add
value to our core banking software offerings, we entered into a strategic
alliance with Financialware, Inc., a Microsoft Certified Solution Provider that
develops Windows-based imaging solutions. Under this agreement, Phoenix can
offer its clients a full suite of document imaging, archive, and delivery
technologies.

We established another key relationship in 1999 with SunGard Recovery Services
to provide Phoenix clients with an array of business and disaster recovery
services, including hot sites, cold sites, disaster recovery planning and
consulting, electronic vaulting, network recovery, and mobile data centers.
SunGard has an outstanding reputation for successful business recovery services
and we are confident that they will provide Phoenix clients with the highest
level of contingency planning and recovery services to protect their information
asset investments.

We have also established a relationship with GE Capital Information Technology
Solutions North America, a leading provider of network consulting, acquisition,
and implementation service. Pursuant to our arrangement, GE will assist our
customers in the design, acquisition, establishment, and maintenance of their
networks, including hardware, software and


6

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                                                           PHOENIX INTERNATIONAL


communication systems, freeing Phoenix to focus on the delivery and
implementation of its products.

We believe that these new strategic alliances, in addition to other existing
alliances, serve not only to strengthen our service offering, but also send a
clear message to the market that Phoenix and its products have gained favorable
recognition among some of the world's leading technology providers.

Commitment to Our Vision

Phoenix is extremely fortunate to be supported by very dedicated people who have
continued to support the company and our vision. Our clients, alliance partners
and employees all played a pivotal role in an unusual and difficult year for
Phoenix and the financial services technology industry. With their support, we
faced our toughest challenges head-on with a strong conviction that we would
prevail. From the leadership of our senior management team to the dedication of
our staff, Phoenix employees continue to be the foundation of our confidence in
our future prospects. We are grateful for their valued contributions and for the
continued support of our clients and their belief in our mission and vision for
the future. Finally, as a shareholder, we thank you for your investment in
Phoenix and the confidence in our future that your investment represents.

Our goal for 2000 is to leverage the investments in infrastructure, products and
people that we made in 1999 to help us to regain our momentum. We are committed
to our mission and to growth of value for our shareholders. We will continue to
focus on our objectives and strive to achieve greater results for our clients,
our employees, our strategic alliance partners, and our investors.

Thank you for your ongoing support.

Sincerely,

/s/ Bahram Yusefzadeh


Bahram Yusefzadeh

Chairman and Chief Executive Officer
/s/ Raju M. Shivdasani


Raju M. Shivdasani

President and Chief Operating Officer

                                    [PHOTO]


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PHOENIX INTERNATIONAL

SELECTED FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
                                                                                                                     Eleven months
                                                  Year ended       Year ended         Year ended       Year ended        ended
                                                 December 31,     December 31,       December 31,      December 31,   December 31,
                                                     1999             1998               1997              1996          1995(1)
----------------------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
<S>                                              <C>               <C>               <C>               <C>            <C>

Revenues:
  License fees and other                         $  7,749,923      $ 16,034,499      $ 12,664,491      $  6,827,699    $ 3,467,547
  Implementation, customer and software
    support and other service fees                 11,901,279         9,903,709         5,178,543         3,577,848      1,556,164
                                                  --------------------------------------------------------------------------------
Total revenues                                     19,651,202        25,938,208        17,843,034        10,405,547      5,023,711

Expenses:
  Cost of license fees and other                    4,103,952         1,693,769         1,594,711           674,037        375,783
  Cost of implementation, customer and
    software support and other service fees         9,108,984         6,356,617         3,886,878         2,272,710      1,246,886
  Sales and marketing                               5,295,021         4,440,521         3,264,055         1,377,353        983,290
  General and administrative                        6,200,858         4,561,586         2,743,100         1,822,871      1,058,190
  Product development                              10,451,006         6,869,311         3,274,238         1,760,691        654,797
                                                 ---------------------------------------------------------------------------------
Total expenses                                     35,159,821        23,921,804        14,762,982         7,907,662      4,318,946

Other income (expense):
  Interest income                                   1,013,490         1,698,308           799,676           223,548        121,815
  Interest expense                                    (43,958)          (57,102)          (52,376)          (19,231)       (12,060)
  Other income (expense)                              (34,860)           82,407           133,656            (2,242)        (4,252)
                                                 ---------------------------------------------------------------------------------
Income (loss) before minority interest and
 income taxes                                     (14,573,947)        3,740,017         3,961,008         2,699,960        810,268
Minority interest                                      54,248                --                --                --             --
                                                 ---------------------------------------------------------------------------------
Income (loss) before income taxes                 (14,519,699)        3,740,017         3,961,008         2,699,960        810,268
Income tax expense                                  1,155,470         1,309,006           920,492           481,666        255,999
                                                 ---------------------------------------------------------------------------------
Net income (loss)                                $(15,675,169)     $  2,431,011      $  3,040,516      $  2,218,294    $   554,269
                                                 =================================================================================

Net income (loss) per share-basic                $      (1.84)     $       0.29      $       0.45      $       0.43    $      0.13
                                                 =================================================================================
Net income (loss) per share-diluted              $      (1.84)     $       0.27      $        .41      $       0.40    $      0.12
                                                 =================================================================================
Weighted average shares outstanding-basic           8,518,323         8,378,784         6,698,317         5,110,173      4,394,276
                                                 =================================================================================
Weighted average shares outstanding-diluted         8,518,323         8,865,782         7,329,383         5,572,680      4,543,877
                                                 =================================================================================

OTHER DATA
Total product development expenditures(2)        $ 20,506,714      $ 11,705,993      $  5,132,271      $  2,966,515      1,788,172
Total personnel(3)                                        372               368               193               124             87
Implemented customers(4)                                  101                64                39                27             12
Backlog(5)                                       $ 39,900,000      $ 35,900,000      $ 21,200,000      $  6,800,000    $ 7,300,000
</TABLE>

<TABLE>
<CAPTION>
                                                                                          At
                                                 ---------------------------------------------------------------------------------
                                                 December 31,      December 31,      December 31,      December 31,   December 31,
                                                     1999              1998              1997              1996           1995
----------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
<S>                                              <C>               <C>               <C>               <C>             <C>
Current assets                                   $ 14,688,465      $ 29,605,489      $ 31,905,572      $  9,174,111    $ 1,533,053
Total assets                                       44,523,804        59,502,573        52,157,495        12,083,167      3,228,289
Current liabilities                                 9,569,354         5,515,343         4,417,543         2,309,150      3,796,391
Long-term obligations                                 472,517           357,299           595,821           190,000             --
Total shareholders' equity (deficit)               34,481,933        50,811,992        45,835,131         9,584,017       (568,102)
</TABLE>

(1) During 1995 Phoenix changed its fiscal year end from January 31 to December
    31. Accordingly, the consolidated financial statements for the period ended
    December 31, 1995, include only eleven months of operations.
(2) The total of capitalized software development costs, product development
    expenses and purchased software.
(3) All personnel, including contract workers and part-time employees.
(4) Customers that have used a Phoenix product to support daily operations. Does
    not reflect mergers.
(5) Contract value of executed license and service agreements minus revenues
    recognized from those contracts.

See accompanying notes to consolidated financial statements.


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                                                           PHOENIX INTERNATIONAL


Management's Discussion and Analysis


You should read this discussion in conjunction with our consolidated financial
statements and related notes, which are included elsewhere in this Annual Report
and you should read our Disclosure Regarding Forward Looking Statements
beginning on page 15 of this Annual Report.

REVENUES

Our revenues are derived primarily from two sources: (1) license fees for our
software products, principally the Phoenix System, and commissions and other
fees from the sale of third party software and hardware products; and (2) fees
for services, which include implementation services, custom programming,
training, interface development for third party products, ongoing software
support, and Internet/Intranet consulting services.

During 1997, we recognized revenues in accordance with AICPA Statement of
Position 91-1, Software Revenue Recognition. During 1998 and 1999, we recognized
revenues in accordance with Statement of Position 97-2, Software Revenue
Recognition issued by the American Institute of Certified Public Accountants, or
the "AICPA," as such statement was amended by Statements of Position 98-4 and
98-9. In accordance with Statement of Position 97-2, as amended, we recognize
software license fee revenue upon execution of a contract and delivery of the
software, provided that the license fee is fixed and determinable, the software
is functional without significant modification, and collection is considered
probable by management. If a software license agreement does not meet such
requirements, then contract accounting is applied to the entire agreement.

We recognize service fee revenues as the services are performed. When we receive
advance payments for services, we defer recognition of the revenue until the
services are performed. We invoice support services in advance and recognize the
revenue over the related service period.

Costs incurred internally to develop a computer software product are charged to
product development expense when incurred until technological feasibility has
been established for the product. Thereafter, all software production costs are
capitalized and recorded at the lower of cost or net realizable value.
Capitalization ceases upon general release of the software to customers. After
general release, capitalized costs are amortized using the straight-line method
over the estimated useful life of the related product, currently five years.

MARKETS

We market the Phoenix System both in the United States and internationally. In
the U.S., we have two different kinds of customers: financial institutions who
license our software and operate it themselves on an "in-house" basis, and
financial institutions who rely on us to host and manage the software for them
through our application service centers, or "ASCs." Our in-house target market
includes financial institutions with assets in the range of $100 million to $3
billion (over 4,000 institutions), and our ASC target market includes financial
institutions with assets of less than $300 million (over 9,000 institutions). As
these markets overlap to some extent, our total potential target market in the
U.S. consists of approximately 10,000 financial institutions.

Internationally, we also have two different types of customers: retail-oriented
financial institutions with up to 300 branches and/or two million accounts which
use our software for all of their operations, and larger institutions which use
our software only for particular divisions and/or regional operations.

We intend to pursue potential customers in all of our markets by increasing our
direct and indirect distribution channels. Historically, the majority of our
revenue has come from our direct sales force. We believe that in the future our
revenue will increasingly come from sales made by our marketing agents,
strategic partners, and other indirect sales channels, particularly in the
international market. Our gross margins and the composition of our revenue and
expenses will vary depending on the relative proportions of direct and indirect
sales. We do not believe, however, that the difference in the margins obtained
from direct and indirect sales will have a material adverse effect on our
business, operating results, or financial condition.

                                                                               9
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PHOENIX INTERNATIONAL


Management's Discussion and Analysis


COMPETITION

We have experienced intense competition in our markets and expect increased
competition from many sources. Many of our competitors have significantly
greater resources and operating histories than we do. We intend to invest
significantly in product development and other aspects of our business to stay
competitive. We believe that the banking software market for financial
institutions is diffuse with several barriers to entry, including costs of entry
and time to market. We believe that the use of client/server technology such as
the Phoenix System and the other products we offer will continue to gain market
share in the financial services industry, displacing older "legacy" hardware and
software systems for at least the next several years. Although client/server
technology is rapidly evolving, the open architecture design of the Phoenix
System allows us to adapt to and incorporate changing technologies. We intend to
maintain our leadership position by integrating new technologies, adding new
applications, and enhancing and increasing the functionality of our existing
applications.

FLUCTUATIONS IN FINANCIAL RESULTS

Our quarterly and annual operating results have varied significantly in the past
and may vary significantly in the future. Factors that may cause our future
operating results to vary include, but are not limited to:

-        whether adverse market conditions and other factors that hindered our
         sales in 1999 continue to impact our efforts;
-        the size and timing of significant orders;
-        the mix and timing of U.S. and foreign sales;
-        the mix of direct and indirect sales;
-        possible delays or other problems in new product announcements;
-        changes in our pricing policies and those of our competitors;
-        possible delays or other problems in the development, implementation,
         and release of our products and enhancements;
-        the distraction of management's time, adverse impact on sales and
         marketing efforts and possible increased costs due to pending
         litigation against the company;
-        changes in our strategy and operating expenses; and
-        increased competition and general economic factors.

Product revenues are difficult to forecast because the market for client/server
application software products is evolving and affected by many different
factors, including general considerations beyond our control such as the recent
slowdown attributable to Year 2000 concerns. Additionally, our sales cycle
varies substantially from customer to customer and can exceed 12 months in some
cases. We do not believe that quarter-to-quarter comparisons of our results of
operations should be relied upon as indications of our future performance.


10
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                                                           PHOENIX INTERNATIONAL


Management's Discussion and Analysis


RESULTS OF OPERATIONS

The following table shows the percentage of total revenues represented by some
of the line items in our statement of operations for the periods indicated.

<TABLE>
<CAPTION>

                                                                              Percent of Total Revenues
                                                                    -----------------------------------------
                                                                     1999              1998              1997
-------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>               <C>
Revenues:
  License fees and other                                             39.4%             61.8%             71.0%
  Implementation, customer and software support
    and other service fees                                           60.6%             38.2%             29.0%
                                                                    -----------------------------------------
    Total revenues                                                  100.0%            100.0%            100.0%

Expenses:
  Cost of license fees and other                                     20.9%              6.5%              8.8%
  Cost of implementation, customer and software
    support and other service fees                                   46.4%             24.5%             21.8%
  Sales and marketing                                                26.9%             17.1%             18.3%
  General and administrative                                         31.5%             17.6%             15.4%
  Product development                                                53.2%             26.5%             18.4%
                                                                    -----------------------------------------
    Total expenses                                                  178.9%             92.2%             82.7%

Other income (expense):
  Interest income                                                     5.1%              6.5%              4.5%
  Interest expense                                                   (0.2)%            (0.2)%            (0.3)%
  Other income (expense)                                             (0.2)%             0.3%              0.7%
                                                                    -----------------------------------------
Income (loss) before minority interest and income taxes             (74.2)%            14.4%             22.2%
Minority interest                                                     0.3%              0.0%              0.0%
                                                                    -----------------------------------------
Income (loss) before income taxes                                   (73.9)%            14.4%             22.2%
Income tax expense                                                    5.9%              5.0%              5.2%
                                                                    -----------------------------------------
Net income (loss)                                                   (79.8)%             9.4%             17.0%
                                                                    =========================================
</TABLE>

Comparison of the Year Ended December 31, 1999, to the Year Ended December 31,
1998

REVENUES. Our total revenues decreased 24.2% to $19.7 million in 1999 from $25.9
million in 1998. International sales accounted for approximately 55.3% of total
revenues in 1999, compared to 63.0% of total revenues in 1998. License fee
revenues decreased 51.7% to $7.7 million in 1999 from $16.0 million in 1998, due
to a decrease in new contract signings. We believe this decrease was largely
attributable to an industry-wide slowdown in software sales caused by delays in
purchase decisions related to the Year 2000 and to the adverse impact on sales
and marketing of publicity related to litigation against us. Service fees
increased 20.2% to $11.9 million in 1999 from $9.9 million in 1998, due
primarily to an increased number of installations and an increase in the number
of customers under support agreements.

EXPENSES. Our operating expenses increased 47.0% to $35.2 million in 1999 from
$23.9 million in 1998.

Cost of license fees and commissions from the sale of third party products
increased 142.3% to $4.1 million in 1999 from $1.7 million in 1998. The increase
was mainly attributable to higher amortization of capitalized software
development costs of $1.4 million, the write-off of $431,000 of purchased
software and prepaid royalties, and $600,000 in royalties related to third party
products that are integrated into the Phoenix System.

Cost of implementation, customer software support, and other service fees
increased 43.3% to $9.1 million in 1999 from $6.4 million in 1998 primarily as a
result of increased staffing levels, and travel and personnel-related costs
required to support an increased number of installations and customers under
support agreements. Cost of service fees consists primarily of personnel-related
costs incurred in providing implementation, training, and customer support
services.


                                                                              11
<PAGE>   14


PHOENIX INTERNATIONAL


Management's Discussion and Analysis


Sales and marketing expenses increased 19.2% to $5.3 million in 1999 from $4.4
million in 1998, primarily as a result of an increase of $542,000 in staffing,
commissions, travel, and personnel-related costs, $221,000 of expenses related
to the new Singapore sales office, and increased advertising and marketing costs
of $101,000.

General and administrative expenses increased 35.9% to $6.2 million in 1999 from
$4.6 million in 1998, primarily as a result of increases of $548,000 in
professional service fees, $100,000 in staffing, $521,000 in bad debt expense,
and $417,000 in connection with resolution of customer issues.

Product development expense increased 52.1% to $10.5 million in 1999 from $6.9
million in 1998. Product development expenses increased primarily as a result of
$1.0 million in increased personnel-related costs in the United States, and $2.6
million in expenses related to the new Australian software development center.
Capitalized software development costs increased 107.9% to $10.1 million in 1999
from $4.8 million in 1998. The total of product development expenses and
capitalized software development costs increased 75.2% to $20.5 million during
1999 from $11.7 million during 1998. This increase was primarily attributable to
$2.9 million in expense related to increased staffing to expand and enhance our
product line in the United States, and $5.9 million in expenses associated with
the new Australian software development center.

OTHER INCOME (EXPENSE). Interest income was $1.0 million in 1999 compared to
$1.7 million in 1998. Interest income decreased in 1999 primarily due to a
decrease in interest-yielding funds. Interest expense was $44,000 in 1999
compared to $57,000 in 1998.

MINORITY INTEREST. During 1999, we increased our ownership interest in Phoenix
International New York, Inc. (formerly Servers On-Line, Inc.) to 54% of the
outstanding common shares, which was in addition to the convertible preferred
stock position we acquired in 1998 for $300,000. Phoenix International New York
runs our Northeast application service center and had a net loss for fiscal year
1999. Minority interest of approximately $54,000 was recognized in 1999 to
reflect the portion of this loss attributable to the minority shareholders of
Phoenix International New York.

INCOME TAX EXPENSE. In 1999, we had income tax expense of $1,155,000 resulting
in an effective tax rate of negative 8.0%, compared to our income tax expense of
$1.3 million in 1998, which resulted in an effective tax rate of 35%. As a
result of a shortfall in revenue and the recording of a pre-tax loss in the
fourth quarter of 1999, we determined that the deferred tax assets resulting
principally from net operating losses and tax credit carryforwards and other tax
benefits no longer met the requirements for future realization under Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes.
Accordingly, we recorded a net tax expense of approximately $4.6 million in the
fourth quarter of 1999 to establish a valuation allowance against the net
deferred tax assets previously recognized.

NET INCOME. Net income decreased to a $15.7 million loss for 1999 from a $2.4
million profit in 1998. The decline in net income was primarily the result of
decreased license fee revenues, increased costs, and the effect of the tax
valuation allowance provided in the fourth quarter.

Comparison of the Year Ended December 31, 1998, to the Year Ended December 31,
1997

REVENUES. Total revenues increased 45.4% to $25.9 million in 1998 from $17.8
million in 1997. International sales accounted for approximately 63.0% of total
revenues in 1998, an increase from 53.0% from 1997. License fees and other
revenues increased 26.6% to $16.0 million in 1998 from $12.7 million in 1997 due
to increased prices for licenses of the Phoenix System and an expanded product
line. Implementation, customer and software support and other service fees
increased 91.2% to $9.9 million in 1998 from $5.2 million in 1997.
Implementation, customer and software support and other service fees increased
due to increased numbers of installations and customers under support
agreements.

EXPENSES. Our operating expenses increased 62.0% to $23.9 million in 1998 from
$14.8 million in 1997.


12
<PAGE>   15

                                                          PHOENIX INTERNATIONAL


Management's Discussion and Analysis


Cost of license fees and other fees increased 6.2% to $1.7 million in 1998 from
$1.6 million in 1997. These costs increased in the 1998 period mainly as a
result of higher amortization of capitalized software development costs.

Cost of implementation, customer and software support, and other service fees
increased 63.5% to $6.4 million in 1998 from $3.9 million in 1997 as a result of
increased staffing levels required to support increased numbers of installations
and customers under support agreements.

Sales and marketing expenses increased 36.0% to $4.4 million in 1998 from $3.3
million in 1997, primarily as a result of increased staffing, travel, and
personnel costs related to our sales efforts.

General and administrative expenses increased 66.3% to $4.6 million in 1998 from
$2.7 million in 1997. The increase was primarily the result of $592,000 of
increased professional service fees, $500,000 of increased rent, a $600,000
increase in personnel-related costs, and a $200,000 increase in bad debt
expense.

Product development expenses increased 109.8% to $6.9 million in 1998 from $3.3
million in 1997. Product development expenses increased primarily as a result of
increased personnel-related costs for our product development efforts.
Capitalized software development costs increased 156.9% to $4.8 million for 1998
from $1.9 million in 1997. The total of product development expenses and
capitalized software development costs increased 128.1% to $11.7 million during
1998 from $5.1 million during 1997. This increase was primarily attributable to
increased staffing to expand and enhance our product line.

OTHER INCOME (EXPENSE). Interest income was $1.7 million in 1998 compared to
$800,000 in 1997. Interest income increased in 1998 due to twelve full months of
income earned from interest bearing accounts in 1998, compared to five months in
1997. Interest income is primarily the result of income earned from the
investment of proceeds from our secondary public offering of common stock which
we completed in August 1997. Interest expense was $57,000 in 1998 and $52,000 in
1997. Other income was $82,000 in 1998 compared to $134,000 in 1997, primarily
as a result of fulfilling obligations under an economic development grant and
realizing foreign gains from the operations of two of our foreign subsidiaries,
Phoenix International A.P. Limited and Phoenix EMEA Limited.

INCOME TAX EXPENSE. Income tax expense was $1.3 million in 1998, resulting in an
effective tax rate of 35.0%, compared to $920,000 in 1997, resulting in an
effective rate of 23.2%. We determined that the net deferred tax assets
resulting principally from the net operating loss and tax credit carryforwards
and other tax benefits were more likely than not to be realized, and eliminated
the valuation allowance related to these deferred tax assets in 1997. As a
result, our effective tax rate in 1998 was not similarly reduced in 1998 by the
benefit from the reduction in this valuation allowance.

NET INCOME. Net income decreased 20.0% to $2.4 million in 1998 from $3.0 million
in 1997. The decline in net income was primarily the result of decreased
operating margins.

BACKLOG

Backlog, defined as the total contract value over the life of all executed
agreements less the revenue already recognized from these agreements, totaled
$39.9 million at December 31, 1999, compared to $35.9 million at December 31,
1998, and $21.2 million at December 31, 1997. At December 31, 1999, backlog
consisted of $1.3 million for software licenses, $3.9 million for implementation
services, $4.3 million for other professional services, and $30.4 million for
the remaining terms of our customer support service agreements, which generally
have five year terms. The backlog of software license and implementation
revenues is expected to be realized within a period of approximately one year,
and the backlog of customer support service revenue is expected to be realized
over a period of approximately five years.


                                                                              13
<PAGE>   16

PHOENIX INTERNATIONAL


Management's Discussion and Analysis


LIQUIDITY AND CAPITAL RESOURCES

We fund our cash needs through existing cash and investment balances, sales of
our capital stock, interest on investments and, to a lesser extent, through cash
flow from operations. We do not rely on lines of credit or other borrowings to
fund our operations. At December 31, 1999, we had cash and cash equivalents of
$2.5 million, and long term investments of $9.0 million. Long term investments
consist primarily of U.S. Treasury securities. For 1999, net cash used by
operations was $2,628,000.

Investing activities provided net cash of $1.3 million, which included $14.8
million from the sale of investments, reduced primarily by $10.1 million
invested in capitalized software development costs, $1.9 million in investment
purchases, $0.7 million for purchase of property and equipment, and $0.6 million
for the purchase of our applications service center and account processing
contracts. The prepayment of royalties, included in other assets, used $0.2
million of cash.

Financing activities provided $140,000 of cash, primarily from the issuance of
common stock, and used $144,000 for the payment of capital lease obligations.
Working capital was $5.1 million as of December 31, 1999.

In February 2000, we sold 861,623 shares of our common stock to London Bridge
Software Holdings plc for a total purchase price of $5.0 million. Including the
cash from this sale, we believe our cash balances, investments, and cash flow
from operations will be sufficient to meet our working capital, capital
expenditure, and software development requirements at least through 2000. Cash
flows from operating activities are dependent on continued advance payments from
customers, and we cannot be sure that we will continue to receive these payments
or that we will continue to receive these payments in advance of contract
performance on the same terms as we have in the past. We anticipate that our
operating and investing activities may use cash in the future, due primarily to
growth in operations and development activities. Consequently, future growth,
including acquisitions, may require us to obtain additional equity or debt
financing. These statements are "forward looking" statements which are subject
to risks and uncertainties as discussed below.

IMPACT OF NEW ACCOUNTING STANDARDS

In December 1998, the AICPA issued Statement of Position 98-9. Statement of
Position 98-9, which amends Statement of Position 98-4, Deferral of the
Effective Date of a Provision of Statement of Position 97-2, extends the
application of some provisions of Statement of Position 97-2 through fiscal
years beginning on or before March 15, 1999. Statement of Position 98-9 allows
the recognition of revenue using the "residual method" when valuing certain
elements of software agreements when vendor specific objective evidence of the
value of each element of the contract does not exist for all elements of a
multiple element arrangement. All provisions of Statement of Position 98-9 have
been adopted as of January 1, 2000, and we do not believe that this statement
will have a significant effect on our future results of operations.

In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative financial instruments and requires
recognition of derivatives in the statement of financial position to be measured
at fair value. Gains or losses resulting from changes in the value of
derivatives would be accounted for depending on the intended use of the
derivative and whether it qualifies for hedge accounting. This statement is
effective for our financial statements beginning in 2001. We are currently
studying the future effects of adopting this statement. However, due to our
limited use of derivative financial instruments, adoption of Statement No. 133
is not expected to have a significant effect on our financial position or
results of operation.

YEAR 2000 ISSUES

We discussed in our reports filed in 1998 and 1999 the nature and progress of
our plans to become Year 2000 ready. In late 1999, we completed the remediation
and testing of our systems. As a result of those planning and


14
<PAGE>   17

                                                           PHOENIX INTERNATIONAL


Management's Discussion and Analysis


implementation efforts, we experienced no significant disruptions in
mission-critical information technology and non-information technology systems
due to the Year 2000, and believe our systems successfully responded to the Year
2000 date change. We are not aware of any material problems resulting from Year
2000 issues, either with our products, our internal systems, or the products and
services of third parties used in our operations. We will continue to monitor
our mission-critical computer applications and those of our suppliers and
vendors throughout the Year 2000 to help ensure that we promptly address any
latent Year 2000 matters that may arise.

INFLATION

The effects of inflation on our operations were not significant during the
periods presented in the financial statements accompanying this Annual Report.
Generally, throughout the periods discussed, any increases in revenue have
resulted primarily from higher volumes, rather than price increases.

DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These statements appear in a number of places in this Annual Report and include
all statements that are not historical statements of fact regarding our intent,
belief, current expectations, and those of our management with respect to, among
other things:

-        our financing plans;
-        trends affecting our financial condition or results of operations;
-        our growth strategy and operating strategy (including, but not limited
         to, the development and implementation of the Phoenix System and our
         other products);
-        sales performance and prospects; and
-        the possible impact on our operations and financial performance of
         market conditions and other factors that have hindered us in the past,
         such as currently-pending litigation and the slowdown in purchases of
         software during 1999.

The words "may," "would," "could," "continue," "will," "expect," "estimate,"
"anticipate," "goal," "strategy," "believe," "intend," "plan," and similar
expressions and variations thereof are intended to identify forward-looking
statements. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties, many of which are beyond our
ability to control. Actual results may differ materially from those projected in
the forward-looking statements as a result of various factors. Among the key
risks, assumptions and factors that may adversely affect our operating results,
performance, and financial condition are:

-        whether the market conditions and other factors which hindered our
         success in 1999, such as a slowdown in purchase decisions as a result
         of Year 2000 concerns and the negative publicity and litigation against
         us, will continue to affect our efforts in the future;
-        unanticipated delays in developing new products and enhancements or in
         deploying our products and services through our ASCs;
-        whether the market accepts our new products and services, including
         those under development and the e-commerce operating environment and
         services we offer;
-        our reliance on significant new customers to reach or exceed market
         expectations for our performance;
-        the timing of customer contracts slipping from one quarter to later
         quarters of fiscal periods;
-        our ability to leverage our sales force, marketing relationships and
         other distribution channels worldwide to generate new customers;
-        the distraction of management's time and attention, increased legal and
         other costs, and other adverse impacts of pending litigation and
         negative publicity;
-        our ability to grow and manage our growth despite adverse market and
         other factors described above; and
-        competition and other factors discussed in detail in our prior press
         releases and filings with the Securities Exchange Commission, including
         the "Risk Factors" section of our registration statements.


                                                                              15
<PAGE>   18

PHOENIX INTERNATIONAL


Consolidated Balance Sheets


<TABLE>
<CAPTION>

                                                                              December 31,           December 31,
                                                                                 1999                    1998
-----------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                    <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                   $  2,484,977           $  3,795,962
  Investments available for sale                                                        --              5,995,640
  Accounts receivable, net of allowance for doubtful accounts
    of $655,000 and $473,000 at December 31, 1999
    and 1998, respectively                                                       8,313,598              8,158,104
  Unbilled accounts receivable                                                   2,918,867              7,497,682
  Deferred tax asset                                                                    --              3,737,198
  Prepaid expenses and other current assets                                        971,023                420,903
                                                                              -----------------------------------
Total current assets                                                            14,688,465             29,605,489

Long term investments, available for sale                                        8,964,771             16,533,770
Property and equipment:
  Computer equipment and purchased software                                      5,087,369              4,245,907
  Furniture, office equipment and leasehold improvements                         2,481,248              2,307,329
                                                                              -----------------------------------
                                                                                 7,568,617              6,553,236
  Accumulated depreciation and amortization                                     (3,964,923)            (2,224,508)
                                                                              -----------------------------------
                                                                                 3,603,694              4,328,728
Capitalized software costs, net of accumulated amortization of
  $4,655,000 and $2,282,000 at December 31, 1999
  and 1998, respectively                                                        14,540,780              7,155,436
Goodwill and other intangible assets                                             1,210,268                     --
Equity investments and other assets                                              1,515,826              1,879,150
                                                                              -----------------------------------
Total assets                                                                  $ 44,523,804           $ 59,502,573
                                                                              ===================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                            $    908,556           $    599,660
  Accrued expenses                                                               2,245,738              1,293,335
  Accrued contractor services                                                    1,683,496                830,933
  Capital lease, current portion                                                   155,223                142,051
  Deferred revenue                                                               4,576,341              2,649,364
                                                                              -----------------------------------
Total current liabilities                                                        9,569,354              5,515,343

Deferred tax liability                                                                  --              2,817,939
Capital lease, long term portion                                                   199,870                357,299
Minority interests                                                                 272,647                     --

Shareholders' equity:
  Preferred stock, $0.01 par value:
    10,000,000 shares authorized, none issued and outstanding                           --                     --
  Common stock, $0.01 par value:
    50,000,000 shares authorized, 8,526,942 and 8,498,633 issued and
    outstanding at December 31, 1999 and 1998, respectively                         85,269                 84,986
  Additional paid-in capital                                                    46,331,394             46,191,279
  Unrealized (losses) gains on investments available for sale                     (557,283)               238,005
  Retained (deficit) earnings                                                  (11,377,447)             4,297,722
                                                                              -----------------------------------
Total shareholders' equity                                                      34,481,933             50,811,992
                                                                              -----------------------------------
Total liabilities and shareholders' equity                                    $ 44,523,804           $ 59,502,573
                                                                              ===================================
</TABLE>


See accompanying notes to consolidated financial statements.


16
<PAGE>   19

                                                           PHOENIX INTERNATIONAL


Consolidated Statements of Operations


<TABLE>
<CAPTION>

                                                        Year ended             Year ended             Year ended
                                                       December 31,           December 31,           December 31,
                                                           1999                   1998                   1997
-----------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                    <C>                    <C>
Revenues:
  License fees and other                               $  7,749,923           $ 16,034,499           $ 12,664,491
  Implementation, customer and software
    support and other service fees                       11,901,279              9,903,709              5,178,543
                                                       ----------------------------------------------------------
Total revenues                                           19,651,202             25,938,208             17,843,034

Expenses:
  Cost of license fees and other                          4,103,952              1,693,769              1,594,711
  Cost of implementation, customer and
    software support and other service fees               9,108,984              6,356,617              3,886,878
  Sales and marketing                                     5,295,021              4,440,521              3,264,055
  General and administrative                              6,200,858              4,561,586              2,743,100
  Product development                                    10,451,006              6,869,311              3,274,238
                                                       ----------------------------------------------------------
Total expenses                                           35,159,821             23,921,804             14,762,982

Other income (expense):
  Interest income                                         1,013,490              1,698,308                799,676
  Interest expense                                          (43,958)               (57,102)               (52,376)
  Other income (expense)                                    (34,860)                82,407                133,656
                                                       ----------------------------------------------------------

Income (loss) before minority interest and
 income taxes                                           (14,573,947)             3,740,017              3,961,008
Minority interest                                            54,248                     --                     --
                                                       ----------------------------------------------------------
Income (loss) before income taxes                       (14,519,699)             3,740,017              3,961,008
Income tax expense                                        1,155,470              1,309,006                920,492
                                                       ----------------------------------------------------------
Net income (loss)                                      $(15,675,169)          $  2,431,011           $  3,040,516
                                                       ==========================================================

Net income (loss) per share - basic                    $      (1.84)          $       0.29           $       0.45
                                                       ==========================================================

Net income (loss) per share - diluted                  $      (1.84)          $       0.27           $       0.41
                                                       ==========================================================

Weighted average shares outstanding - basic               8,518,323              8,378,784              6,698,317
                                                       ==========================================================

Weighted average shares outstanding - diluted             8,518,323              8,865,782              7,329,383
                                                       ==========================================================
</TABLE>

See accompanying notes to consolidated financial statements.


17
<PAGE>   20

PHOENIX INTERNATIONAL

Consolidated Statements of Shareholders' Equity

<TABLE>
<CAPTION>

                                                                                          Unrealized
                                           Common Stock       Additional               Gains/(Losses) on
                                           All Classes        Additional     Stock        Investments      Retained       Total
                                      ---------------------    Paid-In    Subscription   Available for     Earnings/   Shareholders'
                                        Shares       Amount    Capital     Receivables       Sale          (Deficit)       Equity
------------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>           <C>      <C>          <C>           <C>              <C>           <C>
BALANCE, DECEMBER 31, 1996            5,758,365     $57,583  $ 10,708,061   $(110,683)    $      --      $ (1,070,944) $  9,584,017
  Common stock issued in
     connection with a public
     offering, net of expenses        2,211,000      22,110    31,508,362          --            --                --    31,530,472
  Issuance of common stock from
     exercise of stock options           68,622         686       234,915          --            --                --       235,601
  Payment on employee stock
     receivable                              --          --            --      97,323            --                --        97,323
  Issuance of common stock in
     connection with acquisition        115,140       1,152        (1,089)         --            --                --            63
  Retained deficit recorded in
     connection with acquisition             --          --            --          --            --          (102,861)     (102,861)
  Reduction of deferred tax valuation
     allowance related to restricted
     stock and stock options                 --          --     1,450,000          --            --                --     1,450,000
  Net income                                 --          --            --          --            --         3,040,516     3,040,516
                                      ----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997            8,153,127      81,531    43,900,249     (13,360)           --         1,866,711    45,835,131
  Comprehensive income:
     Net income                              --          --            --          --            --         2,431,011     2,431,011
     Other comprehensive income:
       Unrealized appreciation on
       certain securities available
       for sale (net of taxes
       of $128,000)                          --          --            --          --       238,005                --       238,005
                                                                                                                         ----------
       Comprehensive income                  --          --            --          --            --                --     2,669,016
  Issuance of common stock from
     exercise of stock options          345,506       3,455     1,331,030          --            --                --     1,334,485
  Payment on employee stock
     receivable                              --          --            --      13,360            --                --        13,360
  Tax benefit related to
     non-qualified and incentive
     stock options                           --          --       960,000          --            --                --       960,000
                                      ----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998            8,498,633      84,986    46,191,279          --       238,005         4,297,722    50,811,992
  Comprehensive income:
     Net loss                                --          --            --          --            --       (15,675,169)  (15,675,169)
     Other comprehensive loss:
       Unrealized depreciation
       on certain securities
       available for sale (net
       of reversal of taxes of
       $128,000)                             --          --            --          --      (795,288)               --      (795,288)
                                                                                                                        -----------
       Comprehensive loss                    --          --            --          --            --                --   (16,470,457)
  Issuance of common stock from
     exercise of stock options and
     employee stock purchase plan        28,309         283       140,115          --            --                --       140,398
                                      ----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999            8,526,942     $85,269  $ 46,331,394   $      --     $(557,283)     $(11,377,447) $ 34,481,933
                                      ==============================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


18
<PAGE>   21

                                                     PHOENIX INTERNATIONAL


Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>

                                                               Year ended              Year ended            Year ended
                                                               December 31,           December 31,          December 31,
                                                                   1999                   1998                   1997
------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                    <C>                    <C>
OPERATING ACTIVITIES
Net income (loss)                                             $(15,675,169)          $  2,431,011           $  3,040,516
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
  Depreciation and amortization                                  4,410,961              2,455,797              1,157,665
  Bad debt expense                                                 867,801                347,150                140,000
  Deferred taxes                                                 1,123,206                960,741                530,298
  Revenue under economic development grant                              --                (95,000)               (95,000)
  Minority interest                                                (54,248)                    --                     --
Changes in operating assets and liabilities, net
  of effects of purchase of
  business:
  Accounts receivable                                           (1,061,992)            (3,926,769)            (4,068,749)
  Unbilled accounts receivable                                   4,359,082             (3,731,360)            (2,578,040)
  Prepaid expenses and other current assets                       (615,874)               (62,229)               (43,895)
  Accounts payable                                                 285,864                (25,264)               240,231
  Accrued expenses                                               1,804,966                313,606                888,622
  Deferred revenue                                               1,926,977                797,404                849,543
                                                              ----------------------------------------------------------
Net cash provided by (used in) operating activities             (2,628,426)              (534,913)                61,191

INVESTING ACTIVITIES
Sales of investments, available for sale                        14,827,261              1,930,450                     --
Purchases of investments, available for sale                    (1,866,094)            (3,428,841)           (18,062,189)
Purchases of property and equipment                               (696,911)            (3,235,769)            (1,352,946)
Capitalized software costs                                     (10,055,708)            (4,836,683)            (1,883,033)
Acquisition of business, net of cash acquired                     (255,548)                    --                     --
Acquisition of service bureau contracts                           (375,000)                    --                     --
Increase in other assets                                          (256,700)              (349,150)            (1,266,400)
                                                              ----------------------------------------------------------
Net cash provided by (used in) investing activities              1,321,300             (9,919,993)           (22,564,568)

FINANCING ACTIVITIES
Capital lease payments                                            (144,257)              (131,468)               (96,182)
Net proceeds from issuance of common stock                         140,398              1,334,485             31,765,838
Cash payments for stock subscription receivables                        --                 13,360                 97,323
                                                              ----------------------------------------------------------
Net cash provided by (used in) financing activities                 (3,859)             1,216,377             31,766,979

Net increase (decrease) in cash and cash equivalents            (1,310,985)            (9,238,529)             9,263,602
Cash and cash equivalents at beginning of period                 3,795,962             13,034,491              3,770,889
                                                              ----------------------------------------------------------
Cash and cash equivalents at end of period                    $  2,484,977           $  3,795,962           $ 13,034,491
                                                              ==========================================================

SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for:
  Interest                                                    $     38,501           $     54,352           $     50,597
                                                              ==========================================================

  Income taxes                                                $    213,120           $     43,727           $     24,500
                                                              ==========================================================

SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Equipment financed by capital lease                           $         --           $         --           $    727,000
                                                              ==========================================================

Purchase of developed software through
  forgiveness of receivable                                   $         --           $         --           $    286,000
                                                              ==========================================================

Investment in common stock through
  cancellation of prepaid royalties                           $         --           $    650,000           $         --
                                                              ==========================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                                                              19

<PAGE>   22
PHOENIX INTERNATIONAL


Notes to Consolidated Financial Statements


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Phoenix International Ltd., Inc. was formed on January 11, 1993, and designs,
develops, markets, and supports highly adaptable, enterprise-wide client/server
application software for the financial services industry and provides account
processing services for financial institutions using such software. Phoenix's
primary market is small to mid-sized financial institutions.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Phoenix, its
majority-owned subsidiary Phoenix International New York, Inc. (formerly
Servers On-Line, Inc.), and the following wholly-owned subsidiaries: Phoenix
International A.P. Limited in New Zealand, Phoenix EMEA Limited in the United
Kingdom, Phoenix International (Australia) Pty. Limited, Phoenix International
Software (Singapore) Pte. Ltd., and Phoenix FSC Inc., a company domiciled in
the U.S. Virgin Islands. All significant intercompany balances and transactions
have been eliminated.

Minority interests represent outside shareholders' 46% ownership of the common
stock of Phoenix International New York, Inc., a provider of bank processing
and consulting services in which Phoenix purchased a 54% interest during 1999.
The acquisition was recorded as a purchase and the earnings of Phoenix
International New York are included in our results of operations from the date
of the acquisition. The loss attributable to the minority shareholder interest
in 1999 was $54,248 and is included in minority interest in the consolidated
statements of operations.

USE OF ESTIMATES

The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.

NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income
per share:

<TABLE>
<CAPTION>
                                                          1999                    1998                     1997
-------------------------------------------------------------------------------------------------------------------

<S>                                                   <C>                      <C>                     <C>
Numerator - net income (loss) available
  to common shareholders                              $(15,675,169)            $  2,431,011            $  3,040,516
                                                      =============================================================
Denominator for basic net income per share
  - weighted average shares outstanding                  8,518,323                8,378,784               6,698,317
Effect of dilutive securities -
  employee stock options                                        --                  486,998                 631,066
                                                      -------------------------------------------------------------
Denominator for diluted net income per
  share - adjusted weighted average shares
  outstanding and assumed conversion
  of dilutive securities                                 8,518,323                8,865,782               7,329,383
                                                      =============================================================
Net income (loss)  per share - basic                  $      (1.84)            $       0.29            $       0.45
                                                      =============================================================
Net income (loss) per share - diluted                 $      (1.84)            $       0.27            $       0.41
                                                      =============================================================
</TABLE>

REVENUE RECOGNITION

Our revenues are primarily derived from the two following sources: (i) license
fees for our software products and commissions and other fees from the sale of
third party software and hardware products; and (ii) fees for services, which
include implementation services, custom programming, training, interface
development for third party products, ongoing software support, and
Internet/Intranet consulting services.


20
<PAGE>   23


                                                          PHOENIX INTERNATIONAL


Notes to Consolidated Financial Statements


During 1997, we recognized revenues in accordance with AICPA Statement of
Position 91-1, Software Revenue Recognition. During 1998 and 1999, we
recognized revenues in accordance with Statement of Position 97-2, Software
Revenue Recognition issued by the American Institute of Certified Public
Accountants, or the "AICPA," as such statement was amended by Statements of
Position 98-4 and 98-9. In accordance with Statement of Position 97-2, as
amended, we recognize software license fee revenue upon execution of a contract
and delivery of the software, provided that the license fee is fixed and
determinable, the software is functional without significant modification, and
collection is considered probable by management. If a software license
agreement does not meet such requirements, then contract accounting is applied
to the entire agreement.

We recognize service fee revenues as the services are performed. When we
receive advance payments for delivery of a product or for providing services,
we defer recognition of the revenue until the services are performed. We bill
support services in advance, and recognize the revenue over the related service
period.

In December 1998, the AICPA issued Statement of Position 98-9. Statement of
Position 98-9, which amends Statement of Position 98-4, Deferral of the
Effective Date of a Provision of Statement of Position 97-2, extends the
application of some provisions of Statement of Position 97-2 through fiscal
years beginning on or before March 15, 1999. Statement of Position 98-9 allows
the recognition of revenue using the "residual method" when valuing certain
elements of software agreements when vendor specific objective evidence of the
value of each element of the contract does not exist for all elements of a
multiple element arrangement. All provisions of Statement of Position 98-9 have
been adopted as of January 1, 2000, and we do not believe that this statement
will have a significant effect on our future results of operations.

CASH, CASH EQUIVALENTS AND INVESTMENT SECURITIES

We consider all highly liquid investments with a maturity of three months or
less to be cash equivalents. Investments in marketable securities are
classified as available-for-sale and are recorded at fair value with any
unrealized holding gains or losses, net of deferred taxes, included as a
component of equity and other comprehensive income.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost, less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets (generally three to five years for
computer equipment and purchased software, and four to seven years for
furniture and office equipment). Depreciation expense was $1,699,612 in 1999,
$1,252,066 in 1998, and $525,488 in 1997. Leasehold improvements are amortized
over the related lease term. Property and equipment includes $787,281 of
furniture purchased under a capital lease, with accumulated amortization of
$309,289 at December 31, 1999, and $196,820 at December 31, 1998.

CAPITALIZED SOFTWARE COSTS

We capitalize certain software development costs in accordance with Statement
of Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed. Costs incurred internally
to develop a computer software product are charged to product development
expense when incurred until technological feasibility has been established for
the product. Thereafter, all software production costs are capitalized and
recorded at the lower of unamortized cost or net realizable value.
Capitalization ceases upon general release to customers. After general release,
capitalized costs are amortized using the straight-line method over the
estimated useful life of the related product (currently five years).
Capitalized software costs also include purchased software costs of $1,262,000
at December 31, 1999, and $761,000 at December 31, 1998. Amortization of
capitalized software development costs and purchased software was $2,670,365 in
1999, $1,203,731 in 1998, and $632,177 in 1997. These amounts are included in
costs of license fees and other.

GOODWILL AND OTHER INTANGIBLE ASSETS

Intangible assets, consisting primarily of goodwill and purchased contracts of
approximately $876,000 and $375,000, respectively, resulting from acquisitions
during 1999, are amortized on a straight-line basis over periods ranging from
3.5 years for contracts to 15 years for goodwill. Goodwill and other intangible
assets are


                                                                             21
<PAGE>   24


PHOENIX INTERNATIONAL


Notes to Consolidated Financial Statements


periodically reviewed for impairment based on an assessment of future
operations to ensure they are appropriately valued. Accumulated amortization as
of December 31, 1999, was $40,986.

STOCK-BASED COMPENSATION

Stock options granted to our employees are generally for a fixed number of
shares with an exercise price equal to or greater than the fair value of the
shares at the date of grant. We account for stock option grants in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees and related
interpretations, and accordingly recognizes no compensation expense for stock
option grants for which the terms are fixed. Compensation expense is recognized
for increases in the estimated fair value of common stock for stock options
with variable terms. We have adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, which encourages, but does not require, companies to adopt a fair
value based method for determining expense related to stock-based compensation.

RECENTLY ISSUED ACCOUNTING STANDARDS

Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, was issued in June 1998. This statement
establishes accounting and reporting standards for derivative financial
instruments and requires recognition of derivatives in the Statement of
Financial Position to be measured at fair value. Gains or losses resulting from
changes in the value of derivatives would be accounted for depending on the
intended use of the derivative and whether it qualifies for hedge accounting.
This statement is effective for our financial statements beginning in 2001. We
are currently studying the future effects of adopting this statement. However,
due to our limited use of derivative financial instruments, adoption of
Statement No. 133 is not expected to have a significant effect on our financial
position or results of operations.

2.  FINANCIAL INSTRUMENTS

CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject Phoenix to significant
concentrations of credit risk consist principally of cash and cash equivalents,
investments, and trade accounts receivable.

Our cash and cash equivalents at December 31, 1999, were held primarily by a
single financial institution. Trade accounts receivable are unsecured and due
under stated terms from a small number of customers which are primarily in the
banking business and are generally subject to regulatory oversight. Trade
receivables due from foreign customers comprised 74% of total trade receivables
as of December 31, 1999, and 73% of total trade receivables as of December 31,
1998. Our long-term investments are held principally by a single financial
institution and consist of United States Treasury bills and United States
Treasury notes with maturities of less than three years (for which interest
rate risk is not considered material).

FAIR VALUE

We used the following methods and assumptions in estimating our fair value
disclosures for financial instruments:

     -  Cash and Cash Equivalents:  The carrying amount reported in the balance
        sheet approximates the fair value of cash and cash equivalents.
     -  Investments: Available for sale investments are carried at market value
        as determined by quoted market prices.

3.  LEASE COMMITMENTS

We lease furniture and computer equipment under a capital lease, and office
space and equipment under non-cancelable operating leases. Total rent expense
for all operating leases was $2,315,327 in 1999, $1,382,926 in 1998, and
$701,617 in 1997.


22
<PAGE>   25


                                                          PHOENIX INTERNATIONAL


Notes to Consolidated Financial Statements


Future minimum lease payments under capital leases and aggregate non-cancelable
operating leases with terms of one year or more consisted of the following at
December 31, 1999:

<TABLE>
<CAPTION>
                                                 Capital      Operating
                                                 Leases        Leases
------------------------------------------------------------------------
Years ending December 31,
  <S>                                           <C>         <C>
  2000                                          $180,552    $  2,199,493
  2001                                           180,552       2,071,254
  2002                                            30,092       1,803,992
  2003                                                 -       1,736,997
  2004                                                 -       1,756,780
  Thereafter                                           -       4,491,595
                                                ------------------------
Total minimum lease payments                     391,196      14,060,111
Amounts representing interest                    (36,103)              -
                                                ------------------------
Net minimum lease payments                      $355,093     $14,060,111
                                                ========================
</TABLE>

4.  ACQUISITIONS

During October 1999, Phoenix increased its ownership interest in Phoenix
International New York, Inc. (formerly Servers On-Line, Inc.) to 54% of the
outstanding common shares, which was in addition to the convertible preferred
stock position acquired in 1998 for $300,000. Phoenix International New York,
Inc. runs our Northeast application service center. The purchase price and
related costs of approximately $960,000 were satisfied by the issuance of a
$389,000 promissory note, conversion of $311,000 of Phoenix International New
York's liabilities to Phoenix into equity, and payment of $260,000 in cash.

Upon satisfaction of specific performance criteria, the minority shareholders
of Phoenix International New York, Inc. have the option to sell their remaining
interests to Phoenix in exchange for a total of $250,000 in cash and $350,000
in Phoenix common stock. The acquisition of Phoenix International New York,
Inc. was accounted for as a purchase under Accounting Principles Board Opinion
No. 16. In accordance with such opinion, we allocated the purchase price based
on the fair value of the assets acquired and liabilities assumed. Acquired
intangibles, which include renewable contracts and goodwill, total
approximately $870,000 and are being amortized over periods ranging from 3.5 to
15 years.

Pro forma financial statements for the Servers On-Line acquisition are not
required under APB No. 16 as the effect of the acquisition is not material to
the Company's results of operations.

5. CAPITALIZATION

In May 1997, the shareholders approved an amendment to our articles of
incorporation increasing the number of shares of common stock authorized for
issuance to 50,000,000.

In August 1997, Phoenix completed a secondary public offering of its common
stock. We issued 2,211,000 shares of common stock, including the underwriter's
over-allotment option, at a price of $15.67 per share. The proceeds to Phoenix
from the offering, net of underwriting discounts and offering expenses, were
approximately $31.5 million.

In May 1998, Phoenix effected a three-for-two stock split in the form of a 50%
stock dividend, distributed on May 18, 1998, to shareholders of record on May
11, 1998. Accordingly, all share and per share amounts have been adjusted to
reflect this split.

The Board of Directors is authorized to issue up to 10,000,000 shares of
preferred stock, par value $0.01 per share. The terms of preferred stock have
not been designated and no shares have been issued.


                                                                             23
<PAGE>   26


PHOENIX INTERNATIONAL


Notes to Consolidated Financial Statements


6.  STOCK OPTIONS

Phoenix has various stock option plans that authorize its Board of Directors to
grant employees, officers, and directors qualified and non-qualified options to
purchase shares of its common stock. Stock options are generally granted with
an exercise price at or above the fair market value of Phoenix common stock on
the date of the grant. As of December 31, 1999, we had three stock incentive
plans:

     -  the Phoenix International Ltd., Inc. 1995 Employee Stock Option Plan,
        effective March of 1995;
     -  the Phoenix International Ltd., Inc. 1995 Employee Stock Option Plan,
        effective October of 1995; and
     -  the Phoenix International Ltd., Inc. 1996 Director Stock Option Plan.

Up to 780,000 shares of Phoenix common stock may be issued pursuant to options
granted under the March 1995 Employee Stock Option Plan; however, the Board
does not intend to issue any additional shares under this plan. As of December
31, 1999, the October 1995 Employee Stock Option Plan authorized the grant of
options to purchase up to 1,304,959 shares of Phoenix common stock and the 1996
Director Stock Option Plan authorized the grant of options to purchase up to
352,480 shares of Phoenix common stock. Stock options granted under these plans
have varying vesting schedules, but options typically vest over a three to five
year period from the date of grant and options expire within ten years from the
date of grant. Stock options granted under the 1996 Stock Option Director Plan
are non-qualified, have a term of five years, and may be exercised only after
the six month anniversary of the date of grant.

At December 31, 1999, we had 63,231 shares available for issuance under the
March 1995 Employee Stock Option Plan, 162,126 shares under the October 1995
Employee Stock Option Plan, and 106,480 shares under the 1996 Director Stock
Option Plan. We have reserved 2,781,939 shares of common stock for issuance
upon exercise of options and warrants to purchase common stock.

Phoenix's Board of Directors approved in February 2000 an amendment to increase
the total number of shares available for issuance under the October 1995
Employee Stock Option Plan to 2,100,000 shares, and an amendment to increase
the number of shares available for issuance under the 1996 Director Stock
Option Plan to total 500,000 shares. Each of these amendments will be subject
to approval of Phoenix's shareholder at the next annual shareholders meeting.

We have elected to follow APB Opinion No. 25 and related interpretations in
accounting for our employee stock options rather than the alternative fair
value accounting provided for under Statement of Financial Accounting Standards
No. 123. Under APB Opinion No. 25, because the exercise price of our employee
stock options generally equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.


24
<PAGE>   27


                                                          PHOENIX INTERNATIONAL

Notes to Consolidated Financial Statements

Pro forma information regarding net income (loss) and net income (loss) per
share is required by Statement of Financial Accounting Standards No. 123, which
also requires that the information be determined as if Phoenix had accounted
for our employee stock options granted subsequent to December 31, 1994, under
the fair value method of Statement of Financial Accounting Standards No. 123.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted average
assumptions and fair values:

<TABLE>
<CAPTION>
                                  No dividend yield, weighted
                                average volatility factors of the     Weighted average     Weighted average
              Risk-free             expected market price of          expected life of         fair value of
Year        interest rates            Phoenix common stock            options granted       options granted
------------------------------------------------------------------------------------------------------------
<S>         <C>                 <C>                                   <C>                  <C>
1997            6.24%                         0.49                      3.97 years              $8.86
1998            5.18%                         0.54                      2.80 years              $5.21
1999            5.64%                         0.68                      2.02 years              $2.80
</TABLE>

For purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the option's vesting period. Our pro forma
information follows:

<TABLE>
<CAPTION>
                                                   1999                    1998                    1997
-----------------------------------------------------------------------------------------------------------
<S>                                         <C>                      <C>                     <C>
Pro forma net income (loss)                 $  (18,230,317)          $    1,202,673          $    1,929,129
  Pro forma net income (loss)
    per share - diluted                     $        (2.14)          $         0.14          $         0.29
Pro forma net income (loss)
    per share - basic                       $        (2.14)          $         0.14          $         0.27
</TABLE>

A summary of our option activity and related information follows:

<TABLE>
<CAPTION>
                                                                      Weighted
                                                                      Average
                                                                      Exercise
                                                       Options         Price
------------------------------------------------------------------------------
<S>                                                  <C>               <C>
Outstanding at December 31, 1996                       987,030         $ 4.71
  Granted                                              408,450         $13.97
  Exercised                                            (68,622)        $ 3.47
  Cancelled                                            (11,343)        $ 4.10
                                                     ---------
Outstanding at December 31, 1997                     1,315,515         $ 7.66
  Granted                                              639,457         $14.04
  Exercised                                           (345,506)        $ 4.15
  Cancelled                                           (128,294)        $ 9.65
                                                     ---------
Outstanding at December 31, 1998                     1,481,172         $11.06
  Granted                                              492,200         $ 7.72
  Exercised                                            (22,352)        $ 2.94
  Cancelled                                           (204,354)        $11.94
                                                     ---------
Outstanding at December 31, 1999                     1,746,666         $10.11
                                                     =========
</TABLE>


                                                                             25
<PAGE>   28


PHOENIX INTERNATIONAL


Notes to Consolidated Financial Statements

Exercise prices for options outstanding as of December 31, 1999, range from
$2.86 to $19.34 per share. There were 790,094 options exercisable at a weighted
average exercise price of $10.02 at December 31, 1998, and 774,383 options
exercisable at a weighted average exercise price of $6.72 at December 31, 1997.
The following table sets forth by group of exercise price ranges, the number of
shares, weighted average exercise price, and weighted average remaining
contractual life of options outstanding, and the number and weighted average
exercise price of options currently exercisable as of December 31, 1999.

<TABLE>
<CAPTION>
                                     Options Outstanding                 Options Exercisable
                         ----------------------------------------------------------------------
                                          Weighted
                                          Average      Weighted                        Weighted
                                         Remaining      Average                         Average
    Range of             Number of      Contractual    Exercise        Number of       Exercise
 Exercise Prices           Shares       Life (Years)    Price           Shares           Price
-----------------------------------------------------------------------------------------------
<S>                      <C>            <C>            <C>             <C>             <C>
$ 2.86 - $ 6.67            600,028         7.23         $ 4.95           342,453         $ 4.03
$ 8.00 - $13.75            622,388         7.07         $10.65           433,326         $10.35
$14.08 - $19.34            524,250         5.85         $15.39           404,700         $15.30
-----------------------------------------------------------------------------------------------
$ 2.86 - $19.34          1,746,666         6.76         $10.11         1,180,479         $10.21
</TABLE>

We have warrants outstanding at December 31, 1999, to purchase up to 28,500
shares of common stock at an exercise price of $9.60 per share which were
issued in July 1997 to the underwriters of our initial public offering pursuant
to the underwriting agreement. The warrants are exercisable through July 2001.

7.  INCOME TAXES

Significant components of the provision for income taxes are as follows for the
years ended December 31, 1999, December 31, 1998, and December 31, 1997.

<TABLE>
<CAPTION>
                                                     1999              1998              1997
------------------------------------------------------------------------------------------------
<S>                                              <C>               <C>               <C>
Current foreign tax expense                      $     32,264      $    348,265      $   390,194
Deferred domestic tax expense                       1,123,206           960,741          530,298
                                                 -----------------------------------------------
Total tax expense                                $  1,155,470      $  1,309,006      $   920,492
                                                 ===============================================
</TABLE>

Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.


26
<PAGE>   29
                                       P H O E N I X   I N T E R N A T I O N A L


Notes to Consolidated Financial Statements


Significant components of our deferred income tax assets and liabilities at
December 31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                           December 31,        December 31,
                                                               1999                1998
-------------------------------------------------------------------------------------------
<S>                                                        <C>                 <C>
Deferred income tax liabilities:
  Tax over book depreciation                               $   (104,282)       $    (94,158)
  Capitalized software, net                                  (5,051,079)         (2,487,436)
  Unrealized gains (losses)                                     193,572            (128,000)
                                                           --------------------------------
      Total tax liabilities                                  (4,961,789)         (2,709,594)
Deferred income tax assets:
  Alternative minimum tax credit                                 50,593              50,593
  Research and development credit carryforwards               1,481,578             903,063
  Allowance for doubtful accounts                               248,800             149,123
  Net operating loss carryforwards                           10,513,485           2,488,980
  Other                                                         183,851              37,094
                                                           --------------------------------
  Total tax assets                                           12,478,307           3,628,853
                                                           --------------------------------
Subtotal                                                      7,516,518             919,259
Valuation allowance for deferred income tax assets           (7,516,518)                 --
                                                           --------------------------------
Net deferred income tax assets                             $         --        $    919,259
                                                           ================================
</TABLE>

The reconciliation of income tax computed at U.S. Federal statutory tax rates
to income tax expense is:

<TABLE>
<CAPTION>
                                           1999                1998                1997
-------------------------------------------------------------------------------------------
<S>                                    <C>                 <C>                 <C>
Tax at U.S. statutory rates            $ (4,936,698)       $  1,271,606        $  1,346,743
State taxes                                (580,788)            183,266             194,089
Foreign taxes                                32,264             197,485             241,377
Tax credits                                (578,515)           (409,319)            411,939
Restricted stock compensation                    --                  --           1,042,119
Other                                      (297,311)             65,968              93,892
Change in valuation allowance             7,516,518                  --          (2,409,667)
                                       ----------------------------------------------------
  Total tax expense                    $  1,155,470        $  1,309,006        $    920,492
                                       ====================================================
</TABLE>

Realization of deferred tax assets is dependent on generating sufficient
taxable income prior to expiration of any net operating loss carryforwards. As
a result of the operating loss in 1999, we reassessed the likelihood of
realizing the benefit of our deferred tax assets and, at December 31, 1999, our
net deferred tax assets were fully offset by a valuation allowance. We will
continue to assess the valuation allowance and to the extent it is determined
that such allowance is no longer required, the tax benefit of the remaining net
deferred tax assets will be recognized in the future. During 1997, the $2.4
million valuation allowance was eliminated as Phoenix determined that it was
"more likely than not" that the majority of the deferred tax assets would be
realized.

We had net operating loss carryforwards of approximately $27.7 million
available at December 31, 1999, that expire approximately $490,000 in 2010,
$1,060,000 in 2011, $2,940,000 in 2012, $1,930,000 in 2018, and $21,280,000 in
2019. These carryforwards are available to offset future taxable income for
federal income tax purposes. In addition, we have available research and
development tax credit carryforwards of $1.5 million that also expire in years
2008 through 2019. Whether we can utilize these carryforwards to reduce future
income taxes will depend on our ability to generate sufficient taxable income
prior to the expiration of the carryforwards.

8.  EMPLOYEE  BENEFITS

We maintain a 401(k) plan that covers substantially all U.S. employees. The
Company may, at its discretion, contribute by matching employee contributions.
Defined contributions are limited to the maximum amount deductible under the
Internal Revenue Code. In 1999, we made contributions totaling $122,000, and
did not make contributions to the 401(k) plan in 1997 or 1998.


                                                                             27
<PAGE>   30

P H O E N I X   I N T E R N A T I O N A L


Notes to Consolidated Financial Statements


We have a profit sharing plan with discretionary contributions covering
substantially all employees. We did not make contributions to the profit
sharing plan in 1997, 1998, or 1999.

We established an employee stock purchase plan, effective July 1, 1998, in
which substantially all employees may participate. Eligible employees may
purchase Phoenix common stock at a discount to market value at established
dates. We have reserved 150,000 shares of its common stock for issuance under
this plan. The plan is designed as a non-compensatory plan under Section 423 of
the Internal Revenue Code. Payroll deductions used to purchase Phoenix common
stock totaled $79,000 in 1999, compared with $75,000 in 1998.

9.  EMPLOYMENT AGREEMENTS

Phoenix has entered into employment agreements with our senior executives.
Certain agreements commit Phoenix to various obligations if the employee is
terminated without cause or if there is a change in the control of Phoenix. The
major obligations are for salaries and bonus, healthcare premiums, and the
vesting of previously granted stock options.

10. SEGMENTS, MAJOR CUSTOMERS AND EXPORT SALES

Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information, requires disclosure of certain
financial information for reportable operating segments based on our
organizational structure. We have no identifiable segments that meet Statement
of Financial Accounting Standards No. 131 criteria.

Major customers as defined by Phoenix are those that individually account for
10% or more of total revenues. There were no major customers in 1999. Sales to
one major customer in 1998 comprised 11% of revenues, and sales to another
major customer in 1997 comprised 11% of revenues.

Domestic and export sales, as a percentage of total revenues, were as follows:

<TABLE>
<CAPTION>
                                         Latin         Europe,
                          United       America &       Africa &        Pacific
                          States       Caribbean      Middle East        Rim
-------------------------------------------------------------------------------
<S>                       <C>          <C>            <C>              <C>
1999                        45%            20%            19%            16%
1998                        37%             6%            40%            17%
1997                        51%            17%            25%             7%
</TABLE>

11. CONTINGENCIES AND COMMITMENTS

Phoenix is subject to various claims and legal proceedings covering a variety
of matters arising in the ordinary course of its business activities. A lawsuit
was filed on November 23, 1999, against Phoenix and its CEO involving alleged
violations of federal securities laws and requesting class action status. The
suit covers purchases and sales of Phoenix common stock made during the period
from May 4, 1998, to April 15, 1999. Because we are in the early stages of this
litigation, we have not yet been able to determine what its effect will be, nor
can we estimate the cost or expense of defending this lawsuit or other possible
damages to Phoenix. We have therefore only made accruals for certain legal
expenses in connection with the lawsuit. We have referred this matter to our
insurance carrier and legal advisors and have instructed them to vigorously
defend against the allegations made in the lawsuit.

12. RELATED PARTY TRANSACTIONS

In 1997 and 1998, Phoenix purchased a total of 11% of the equity of Dyad
Corporation in several transactions for a total purchase price of $1.5 million.
In 1999, Dyad Corporation merged with and became a wholly-owned subsidiary of
Netzee, Inc. Pursuant to such merger, Phoenix received 70,976 shares of Netzee
common stock which is restricted stock. One person who served on Phoenix's
Board of Directors from 1996 until 1999 was a director of Dyad Corporation, and
is a director and the chief executive officer of Netzee.


28
<PAGE>   31

                                      P H O E N I X   I N T E R N A T I O N A L


Notes to Consolidated Financial Statements


In December 1998, Phoenix entered into a service agreement and a marketing
agent agreement with Towne Services, Inc. This marketing agent agreement allows
Phoenix exclusive marketing and distribution rights in various regions of the
world for Collections Works, one of Towne's software products. The agreement
provides for payment by Phoenix of $485,000 for this right. Phoenix's chief
executive officer is a director of Towne Services and one of our shareholders
and a former director is also a shareholder and director of Towne Services.

In September 1997, Phoenix entered into a software license and cooperative
marketing agreement with Servers On-Line. In October of 1999, we acquired a 54%
controlling interest in Servers On-Line, Inc., and changed the name of the
company to Phoenix International New York, Inc. Prior to such acquisition,
Phoenix recognized $169,000 in revenues during 1999 from this company, and
$181,500 in 1998. Certain officers of the acquired company are now officers of
Phoenix.

To encourage certain bank shareholders' initial investment in Phoenix, we
offered a discount, equal to the shareholders' initial investment in Phoenix,
to be applied toward license fees if and when each shareholder licensed the
Phoenix System for use in the normal course of its operations. Discounts
offered since inception total $896,250. Discounts of $41,250 were used in 1998
and no discounts were used in 1997 or 1999. Net of discounts used, license fee
revenue from these shareholders totaled $25,385 in 1999, $13,750 in 1998, and
$480,185 in 1997. Implementation, support, and other service revenues from
these shareholders totaled $14,441 in 1999, $121,875 in 1998, and $635,879 in
1997.

13. SUBSEQUENT EVENTS

In February 2000, London Bridge Software Holdings plc purchased 861,623 shares
of Phoenix common stock for $5,000,000. This acquisition made London Bridge a
9.16% equity owner in Phoenix as of the transaction date. In connection with
this purchase, Phoenix entered into an agreement with London Bridge to market
one of its products called "Vectus."

Phoenix's Board of Directors approved in February 2000 an amendment to increase
the total number of shares available for issuance under the October 1995
Employee Stock Option Plan to 2,100,000 shares, and an amendment to increase
the number of shares available for issuance under the 1996 Director Stock
Option Plan to total 500,000 shares. Each of these amendments will be subject
to approval of Phoenix's shareholders at the next annual shareholders meeting.


                                                                             29
<PAGE>   32

P H O E N I X    I N T E R N A T I O N A L


Notes to Consolidated Financial Statements


14. QUARTERLY FINANCIAL DATA (unaudited)

<TABLE>
<CAPTION>
                                                                      Three months ended
                                           ----------------------------------------------------------------------------
                                            March 31, 1999     June 30, 1999     September 30, 1999   December 31, 1999
-----------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                <C>               <C>                  <C>
1999
Revenues                                    $  5,534,755        $  5,736,256        $  2,938,436        $  5,441,755
Gross profit                                $  2,711,500        $  2,515,283        $   (432,877)       $  1,644,360
Operating loss                              $ (2,290,857)       $ (2,553,529)       $ (5,914,011)       $ (4,750,222)
Net loss (3)                                $ (1,308,092)       $ (1,473,054)       $ (3,702,690)       $ (9,191,333)
Net loss per share - Basic (1)              $      (0.15)       $      (0.17)       $      (0.43)       $      (1.08)
Net loss per share - Diluted(2)             $      (0.15)       $      (0.17)       $      (0.43)       $      (1.08)
Weighted average shares
  outstanding - basic                          8,504,949           8,514,802           8,526,768           8,526,772
Weighted average shares
  outstanding - diluted                        8,504,949           8,514,802           8,526,768           8,526,772

<CAPTION>
                                                                      Three months ended
                                           ----------------------------------------------------------------------------
                                            March 31, 1998     June 30, 1998     September 30, 1998   December 31, 1998
-----------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                <C>               <C>                  <C>
1998
Revenues                                    $  4,598,444        $  5,666,703        $  8,002,479        $  7,670,582
Gross profit                                $  2,831,554        $  3,732,554        $  5,574,276        $  5,749,438
Operating income (loss)                     $   (381,856)       $    361,327        $  1,251,261        $    785,673
Net income                                  $     35,124        $    497,665        $  1,116,285        $    781,937
Net income per share - Basic (1)            $       0.00        $       0.06        $       0.13        $       0.09
Net income per share - Diluted(2)           $       0.00        $       0.06        $       0.13        $       0.09
Weighted average shares
  outstanding - basic                          8,231,703           8,366,344           8,422,974           8,494,114
Weighted average shares
  outstanding - diluted                        8,725,621           8,928,034           8,874,710           8,934,755

<CAPTION>
                                                                      Three months ended
                                           ----------------------------------------------------------------------------
                                            March 31, 1997     June 30, 1997     September 30, 1997   December 31, 1997
-----------------------------------------------------------------------------------------------------------------------
<S>                                         <C>                <C>               <C>                  <C>
1997
Revenues                                    $  3,713,724        $  4,706,108        $  3,354,710        $  6,068,492
Gross profit                                $  2,662,354        $  3,247,352        $  1,906,184        $  4,545,555
Operating income (loss)                     $  1,111,610        $    856,953        $   (312,324)       $  1,423,813
Net income                                  $  1,013,296        $    763,674        $      9,971        $  1,253,575
Net income per share - Basic(1)             $       0.18        $       0.13        $         --        $       0.15
Net income per share - Diluted(2)           $       0.16        $       0.12        $         --        $       0.14
Weighted average shares
  outstanding - basic                          5,773,046           5,917,110           6,950,588           8,152,524
Weighted average shares
  outstanding - diluted                        6,429,960           6,568,083           7,647,260           8,672,229
</TABLE>


(1)      Due to rounding of quarterly calculations being different from
         rounding of year to date information, the sum of basic net income per
         share for the four quarters does not equal basic net income per share
         for the year.
(2)      Due to the calculation of weighted average shares outstanding for the
         year as the average of quarterly weighted average shares outstanding,
         the sum of diluted net income per share for the four quarters does not
         equal diluted net income per share for the year.
(3)      The net loss for the three months ended December 31, 1999, includes a
         significant fourth quarter tax adjustment to reverse benefits
         recognized in previous periods.

See accompanying notes to consolidated financial statements.


30
<PAGE>   33

                                      P H O E N I X   I N T E R N A T I O N A L


Report of Independent Auditors


Board of Directors and Shareholders
Phoenix International Ltd., Inc.


We have audited the accompanying consolidated balance sheets of Phoenix
International Ltd., Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ending December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Phoenix International Ltd., Inc. at December 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ending December 31, 1999, in conformity with accounting
principles generally accepted in the United States.


                                                      /s/ Ernst & Young LLP


Atlanta, Georgia
February 7, 2000,
  except for Note 13 as to
  which the date is February 15, 2000


                                                                             31
<PAGE>   34

P H O E N I X  I N T E R N A T I O N A L


<TABLE>
<CAPTION>
Officers and Directors


Board of  Directors                            Officers

<S>                                            <C>
Bahram Yusefzadeh(1)(3)                        Bahram Yusefzadeh
Chairman of the Board                          Chairman of the Board and
and Chief Executive Officer                    Chief Executive Officer

Raju M. Shivdasani                             Raju M. Shivdasani
President and Chief Operating Officer          President and Chief Operating Officer

Ruann F. Ernst (1)(3)                          Theodore C. Burns
President and Chief Executive Officer,         Senior Vice President and
Digital Island, Inc.                           Chief Financial Officer

Ronald E. Fenton(1)(3)                         Richard T. Powers
Chairman of the Board,                         Executive Vice President,
F&M Bank - Iowa Central                        U.S. Business

William C. Hess(2)                             Daniel P. Baker
President,                                     Senior Vice President,
Iowa Savings Bank                              Research and Development

J. Michael Murphy (2)(3)                       Harold C. Boughton
Division President,                            Senior Vice President,
Palex, Inc.                                    Corporate Marketing

O. Jay Tomson(2)                               C. Russell Pickering
Chairman and                                   Senior Vice President and
Chief Executive Officer,                       Corporate Counsel
First Citizens National Bank

                                               Ronald G. Welsh
                                               Senior Vice President,
                                               Worldwide Services
</TABLE>

(1)      Member of Compensation and Stock Option Committee Mr. Yusefzadeh is a
         non-voting member
(2)      Member of Audit Committee
(3)      Member of Executive Committee


32
<PAGE>   35

Corporate Information


Form 10-K Investor Contact

A copy of our Annual Report on Form 10-K for 1999 (without exhibits) is
available from us at no charge. Requests for the Annual Report on Form 10-K and
other investor contacts should be directed to Investor Relations, at our
corporate office.

Annual Shareholders' Meeting

The annual meeting of shareholders will be held on Friday, May 5, 2000, at 9:00
a.m. local time at our corporate office.

Common Stock and
Dividend Information

Our common stock trades on the Nasdaq Stock Market under the symbol PHXX. As of
March 15, 2000, Phoenix International Ltd., Inc. had approximately 2,029
beneficial holders of our common stock. Of that total, approximately 120 were
shareholders of record. To date, we have not paid cash dividends on our common
stock. We currently intend to retain earnings to support operations and finance
expansion and therefore do not anticipate paying cash dividends in the
foreseeable future.

The following table sets forth the high and low sales price information as
reported by Nasdaq during the last two fiscal years, as adjusted to reflect our
three-for-two stock split, effective May 18, 1998.

<TABLE>
<CAPTION>
Stock Price                                        High                  Low
-------------------------------------------------------------------------------
<S>                                              <C>                 <C>
1998

First Quarter                                    $  16.00            $  10.92

Second Quarter                                      20.83               14.75

Third Quarter                                       19.69               13.38

Fourth Quarter                                      18.81               14.25


<CAPTION>
Stock Price                                        High                  Low
-------------------------------------------------------------------------------
<S>                                              <C>                 <C>
1999

First Quarter                                    $  15.25            $   4.87

Second Quarter                                       8.50                4.62

Third Quarter                                        6.62                4.00

Fourth Quarter                                       4.53                3.50
</TABLE>

Corporate Office

Phoenix International Ltd., Inc.
500 International Parkway
Heathrow, FL 32746
407-548-5100
www.phoenixint.com

Registrar and Transfer Agent

American Stock Transfer &
Trust Company
40 Wall Street
New York, NY 10005

Independent Auditors

Ernst & Young LLP
Atlanta, GA

General Counsel

Nelson Mullins Riley &
Scarborough, L.L.P.
First Union Plaza, Suite 1400
999 Peachtree Street, N.E.
Atlanta, GA 30309