##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-K



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

Commission File Number: 0-27491



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DALEEN TECHNOLOGIES, INC.

(Exact name of registrant as specified in its
charter)


|                                                                                                    |  |                                                   
|--------------------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware(State or other Jurisdiction of
    incorporation or organization)                          |  | 65-0944514(I.R.S. Employer Identification
    No.)
|                                                                                                   
|902 Clint Moore Road, Suite 230
    Boca Raton, Florida(Address of principal executive
    offices) |  | 33487(Zip Code)                                   

Registrants telephone number, including
area code:

(561) 999-8000


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, par value $.01 per
share

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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
o

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

The aggregate market value of the common stock
held by non-affiliates of the Registrant, based upon the average
of the bid and ask quotations for the common stock on
June 30, 2003, as reported by the OTC Bulletin Board, was
approximately $2,436,475.

As of February 1, 2004, the Registrant had
outstanding 46,929,372 shares of common stock.

Documents incorporated by
reference:None.



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TABLE OF CONTENTS



|                                                          |                                                                                                                       |  |  |  |  |  |  | 
|--------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|FORWARD-LOOKING STATEMENTS                               
|PART I                                                   
|                                                          | Item 1. Business                                                                                                     
|                                                          | Item 2. Properties.                                                                                                  
|                                                          | Item 3. Legal Proceedings.                                                                                           
|                                                          | Item 4. Submission of Matters to a Vote of Security Holders.                                                         
|PART II                                                  
|                                                          | Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|                                                          | Item 6. Selected Financial Data.                                                                                     
|                                                          | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.                       
|RISK FACTORS                                             
|                                                          | Item 7A. Quantitative and Qualitative Disclosures About Market Risks.                                                
|                                                          | Item 8. Financial Statements and Supplementary Data.                                                                 
|                                                          | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.                        
|                                                          | Item 9A. Controls and Procedures.                                                                                    
|PART III                                                 
|                                                          | Item 10. Directors and Executive Officers of the Registrant.                                                         
|                                                          | Item 11. Executive Compensation.                                                                                     
|                                                          | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.             
|                                                          | Item 13. Certain Relationships and Related Transactions.                                                             
|                                                          | Item 14. Principal Accountant Fees and Services.                                                                     
|PART IV                                                  
|                                                          | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 10-K.                                          
|Exhibit List                                             
|SIGNATURES                                               
|CONSOLIDATED BALANCE SHEETS                              
|CONSOLIDATED STATEMENTS OF OPERATIONS                    
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS (DEFICIT) EQUITY
|CONSOLIDATED STATEMENTS OF CASH FLOWS                    
|SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS           
|LEASE AGREEMENT                                          
|EXPORT-IMPORT BANK LOAN & SECURITY AGREEMENT             
|BORROWER AGREEMENT                                       
|REVOLVING NOTE                                           
|CODE OF ETHICS                                           
|SUBSIDIARIES                                             
|INDEPENDENT AUDITOR'S CONSENT                            
|PRINCIPAL EXECUTIVE OFFICER CERTIFICATION                
|PRINCIPAL FINANCIAL OFFICER CERTIFICATION                
|PRINCIPAL EXECUTIVE OFFICER CERTIFICATION                
|PRINCIPAL FINANCIAL OFFICER CERTIFICATION                



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FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements
within the meaning of the Securities Exchange Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended by
the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are not historical facts but are the
intent, belief or current expectations, of our business and
industry, and the assumptions upon which these statements are
based. Words such as anticipates,
expects, intends, will,
could, would, should,
may, plans, believes,
seeks, estimates and variations of these
words and the negatives thereof and similar expressions are
intended to identify forward-looking statements. These
statements are not guarantees of future performance and are
subject to risks, uncertainties, and other factors, some of
which are beyond our control, are difficult to predict and could
cause actual results to differ materially from those expressed
or forecasted in the forward-looking statements. These risks and
uncertainties include those described in response to Item 7
under the headings Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this
Form 10-K. Forward-looking statements that were true at the
time made may ultimately prove to be incorrect or false. Readers
are cautioned to not place undue reliance on forward-looking
statements, which reflect our managements view only as of
the date of this report. We undertake no obligation to update or
revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events or changes
to future operating results.

You should be aware that some of these statements
are subject to known and unknown risks, uncertainties and other
factors, including those discussed in the section of the
Form 10-K in Item 7 under the heading Risk
Factors that could cause the actual results to differ
materially from those suggested by the forward-looking
statements.




PART I






|        |         
|------- | --------
|Item 1. | Business

Overview

Daleen Technologies, Inc.
(Daleen or the Company) is a global
provider of advanced billing and customer care, event
management, and revenue assurance software for convergent
communication service providers and other technology solutions
providers. Our solutions are designed using the latest open
Internet technologies to enable providers to enhance operational
efficiency while driving maximum revenue from their products and
services. Our products and services are used by communication
providers to support a variety of voice, data and Internet-based
services across wireless, wireline and satellite networks. Our
RevChain® billing and customer management and
AsuritiTM event management and revenue assurance
applications deliver proven interoperability with other legacy
billing systems and other downstream operational support systems
(OSS) applications, and have a high degree of flexibility
and scalability, making the software highly adaptable and ready
for the future. RevChain and Asuriti can be purchased as
licensed software applications or as part of a turn-key solution
through BillingCentral®, our carrier-class outsourcing
operation.

We were incorporated in Delaware in 1999, and
were previously incorporated in Illinois and Florida.

We became a leading provider of advanced billing
software to the emerging competitive telecommunications
companies in the United States between 1996 and 2000. Our
BillPlex® product was the first true convergent billing
software with the capability to rate and bill for a variety of
voice, data and Internet services, and consolidate charges onto
a single bill. As we grew in size and geography, we added new
customer care and management products to enhance our billing
applications, and formed alliances with other major telecom
technology providers to expand our presence into new geographic
regions and vertical markets.

We launched our current RevChain product platform
in February 2001, replacing the BillPlex client-server
applications with a family of more powerful web-enabled
applications that are built on an open Internet Integration
Architecture (IIATM). RevChain was designed to
provide the increased throughput and support that convergent
service providers need to rate and bill for high volumes of
wireline and wireless, voice, data, Internet, and digital
media services. The open architecture and modular design
facilitates integration

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with other billing and OSS systems, and
streamlines the migration process for customers moving from
BillPlex to RevChain.


The RevChain product family includes:



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| |  | RevChain Commerce  a convergent
    billing and customer care solution;                                                            
|
| |  | RevChain Interact  an Internet
    interface for customer service representatives;                                                 
|
| |  | RevChain Care  web-based customer
    account management and self-care with electronic bill
    presentment and payment (EBPP); and
|
| |  | RevChain mCommerce  customer account
    management and billing via the mobile device.                                             

On October 3, 2002 we formed a wholly-owned
subsidiary DSI, Inc. and a wholly-owned subsidiary of
DSI, Inc., Daleen Solutions, Inc. (Daleen
Solutions). These entities were formed for the purpose of
purchasing the assets and assuming certain liabilities of
Abiliti Solutions, Inc. (Abiliti) which was
consummated on December 20, 2002 (the Abiliti
Acquisition).

Our product portfolio expanded as a result of the
Abiliti Acquisition, and now includes Asuriti, an enhanced event
management and revenue assurance application developed and
previously offered by Abiliti, and a turn-key outsourcing
services solution for billing, event management and revenue
assurance through our BillingCentral® outsourcing
operation. Asuriti for Event Management provides a dynamic way
for communication providers dealing with multiple data feeds,
event formats, and service types to capture events from various
network elements, validate and enhance individual records
online, and distribute data in the appropriate format to
downstream systems. It uses a flexible, rules-driven
architecture to allow service providers to quickly, efficiently,
and cost-effectively support new service types and event data
formats without complex programming. In June 2003, we introduced
Asuriti for Revenue Assurance, a new application designed to
help detect and correct leaks, gaps and errors in a service
providers OSS that could delay or obstruct operational
processing and negatively impact both costs and revenues.
Asuriti for Revenue Assurance is based on the same rules-based
technology that powers Asuriti for Event Management. We also
acquired Abilitis NetworkStrategies® billing
application and RateITTMrating engine. Although not
actively marketed to new customers, we will continue to provide
services and support to existing customers.

In 2003 we completed the successful integration
between our RevChain and Asuriti products and incorporated
RevChain into BillingCentral as an outsourced billing solution.
This has given us a more comprehensive and flexible solution set
for addressing the event processing, rating, billing, and
revenue assurance needs of our customers.

We also offer professional services and product
support related to all of our products previously sold to our
customers.

On July 4, 2003 we formed a branch office in
Bogotá, Colombia, Daleen Technologies Surcursal Colombia.
This branch was formed for the purpose of doing business with
Empresa de Telecomunicaciones de Bogotá S.A. ESP
(ETB) located in Bogotá, Colombia.

Available Information

We file our Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on
Form 8-K and any amendments to those reports with the
Securities and Exchange Commission (SEC). These
filings are available to the public over the internet on the
SECs website at http://www.sec.gov and are
available free of charge on our website at
http://www.daleen.com as soon as reasonably practical
after such reports are filed with the SEC. You may also read and
copy any document we file with the SEC at the SECs Public
Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may call the SEC at 1-800-SEC-
0330 for further information on the operation of the Public
Reference Room.

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Recent Developments

Proposed Reverse
Stock Split

We filed a preliminary proxy statement on
January 28, 2004 in connection with a proposed one-for-500
reverse stock split of our issued and outstanding common stock
(the Reverse Split). If implemented, the Reverse
Split would enable us to terminate our obligations to file
annual, periodic reports and other filings with the SEC. If the
Reverse Split is implemented, stockholders holding fractional
shares of common stock after the Reverse Split would receive a
cash payment equal to $.30 per pre-split share of common
stock in lieu of the issuance of fractional shares. Stockholders
holding less than 500 shares of common stock before the
Reverse Split would be cashed out and would have no further
equity interest in the Company. With respect to shares of common
stock held in brokerage accounts, we would look through the
stockholders of record to the beneficial owners of such shares
for purposes of determining whether or not the Reverse Split
results in such beneficial owners holding fractional shares of
common stock. Payment also would be made to such beneficial
owners in lieu of the issuance of any such fractional shares.
The total estimated consideration (excluding fees and expenses)
that would be paid as a result of the Reverse Split is expected
to be approximately $225,000 and would be paid out of working
capital or a possible bridge loan as described below. The Board
of Directors has retained the discretion to determine whether or
not to implement the Reverse Split even after receipt of the
requisite stockholder approval.

Operating
Loan

In February 2004, we closed a revolving loan
facility (the Operating Loan) with Silicon Valley
Bank (SVB) and guaranteed by EXIM Bank. The term of
the Operating Loan is fifteen months. Total funding under the
Operating Loan is $2,700,000. We can borrow against the
Operating Loan based on estimated funding dates and may have
outstanding borrowings at any given time of up to $2,000,000.
The proceeds of the Operating Loan will be used for operating
costs associated with our contract with ETB. We have borrowed
$1,732,000 against this loan as of March 1, 2004. Interest
accrues at the rate of prime plus 2% (minimum 4%) per annum. SVB
will have a first priority security interest in all of our
assets until the Operating Loan is paid in full. The Operating
Loan contains customary representations and warranties and
covenants including maintaining a minimum tangible net worth
requirement of $4,000,000. We intend to repay the Operating Loan
solely from revenues received from ETB.

Bridge
Loan

We are exploring the possibility of entering into
a convertible bridge loan arrangement (Bridge Loan)
with certain of the current holders of our Series F
convertible preferred stock (Series F preferred
stock). Discussions regarding a possible Bridge Loan are
in the initial stages. It is unclear at this time whether such a
transaction will be consummated and the timing is unknown.

Industry Background

Our core billing, customer management, event
management and revenue assurance software continues to be
focused on the telecommunications industry. Far from its
regulated origins, the telecom industry has become a
multi-faceted open market of traditional, independent and
competitive local exchange and long distance carriers, competing
to offer customers a range of wireline and wireless voice,
data, Internet, and other high bandwidth digital services
that are now widely available through commonly-deployed
technologies.

The rapid explosion of new products and services
in recent years fueled competition for customers, causing
service providers to expand their networks and diversify product
and service offerings. While this allowed them to retain and
grow their customer bases, a new problem emerged. More often
than not, existing billing and operational support systems were
not able to support the new offerings, thus preventing them from
achieving their full revenue potential. When the economy
stalled, many of these providers found they faced huge revenue
gaps. With no new capital to fund needed operational
improvements, they were forced out of the market. Many of the
surviving entities subsequently joined forces with or were
acquired by competing organizations.

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We believe todays market is more
homogenous, differentiated by business strategy and size more
than service offerings. With similar product offerings, it seems
that service providers are attempting to differentiate
themselves by bundling together and cross-discounting innovative
combinations of communications services and providing superior
customer care. Facing pressure to improve profit margins,
service providers seem to be taking a more aggressive role in
understanding and managing the systems and processes involved in
capturing and driving revenue within their organizations.
Providers are more willing to tackle system upgrades and
migrations on their own rather than relying on their software
vendors or systems integrators. More than ever, we believe our
success is linked to having effective billing and customer
management, event management and revenue assurance solutions
that are easy to implement and manage and that work within a
providers systems infrastructure to make it easier for
them to track and manage customers and revenues, dynamically
change and grow service offerings, and automate and streamline
operational performance.

Issues Common to Our Targeted
Markets

In 2003, telecommunications companies continued
to battle back from the lingering effects of a severe market
downturn that started in 2001. While the fallout of companies
has diminished, those that survived have made significant
adjustments to control expenses in order to remain competitive.
Shifting their attention away from aggressive growth targets and
new market penetration, companies are focused on initiatives
that will allow them to increase revenues from their current
customer base while reducing or controlling operating costs.

To survive the past several years, providers were
forced to postpone previously planned technology upgrades and
new investments, stretching the capabilities of their
back-office systems. In order to introduce new offerings and
rate plans, and accept and handle new types and formats of event
data, providers have repeatedly added to or modified their
legacy systems. These businesses now find themselves maintaining
an extremely complex information systems environment consisting
of numerous proprietary systems that were often designed to work
as stand-alone applications. In addition, many of these systems
are based on older technology platforms that are more costly to
maintain and have only a limited interoperability with other
elements of the information system. These systems require
significant time, resources, and effort to modify or which makes
it difficult for service providers to respond quickly and
competitively with innovative marketing promotions and new
service offerings

Mergers and business combinations among service
providers have added to the complexity and inefficiency of
billing and OSS environments. As companies merge, the surviving
entity is often left with multiple disconnected systems that
share no common platform to connect one business group or system
to another, and fewer resources to achieve integration. With an
intense focus on bottom line results, we see providers searching
for ways to streamline and improve processes, eliminate
redundancies, and drive costs out of their operations. More and
more, these companies are starting to view technology as a tool
that can help improve their business operations, enhance their
competitive position and facilitate long-term survival. Yet
unlike previous technology spending, which was often based on an
estimated future potential, todays technology investments
must immediately deliver an equivalent or greater increase in
revenues or cost savings.

This increased focus on profitability, coupled
with executive attention to financial integrity, is causing
provider organizations to scrutinize operational systems to
ensure that they are capturing the full amount of revenue to
which they are entitled. According to various independent
studies, service providers are losing anywhere from 3% to 11% of
annual gross revenues because of gaps, leaks and undetected
errors in their operational processing. The root of the problem
is that revenue is generated by millions of events that travel
through a maze of systems within a service providers
network while along the way there are hundreds of chances for
mistakes and omissions that can cause revenue to leak out of the
system. As a providers network operating environment and
business model becomes more complex, the potential for leakage
increases. Providers are looking to their systems providers and
consulting experts for help in identifying the source of
leakage, quantifying lost revenues, and implementing a solution
that will prevent future losses. We believe automated solutions
like Asuriti, which are designed to work within the existing
systems infrastructure, are the most effective, efficient way to
achieve long-term sustainable results.

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Rather than investing in technology upgrades for
their existing systems, service providers are also beginning to
look at outsourcing as a cost-effective, low risk alternative to
running their own billing, OSS and revenue assurance operations.
We believe outsourcing offers a number of economic and
performance advantages that can help providers upgrade their
back office infrastructure or add additional functionalities
that will maximize their earnings potential, without costly
migrations or systems upgrades. In addition to the cost savings
from not having to staff, train, and maintain the hardware and
resources associated with running a data center, outsourcing can
help providers unify their organizations by providing a single
technology platform across their enterprise. Providers can
significantly decrease their operational costs, while also
taking advantage of the latest product technologies and using
the experience of telecom operations experts.

Regardless of their chosen delivery channel,
todays communication providers must have the ability to
create and implement new services quickly, manage them
efficiently and issue a single invoice for complex service
bundles, while providing exceptional service to customers. This
requires a more comprehensive solution than traditional billing
applications have previously offered. We believe our targeted
markets can benefit from a high performance solution that is
designed to meet the specific challenges faced in todays
market, including the ability to:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | Quickly and efficiently support multiple,
    convergent networks, data sources, and service types;   
|
| |  | Dynamically create, deploy and update new
    services and pricing programs;                          
|
| |  | Eliminate process redundancies and revenue leaks;                                                     
|
| |  | Enhance or extend the value of other enterprise
    systems; and                                      
|
| |  | Maximize efficiency through ease of
    implementation, system administration, and ongoing operations.

The Daleen Solution

For more than a decade, we have been developing
and delivering software solutions that allow telecom providers
to capture and manage the revenue from their product and service
offerings. As technologies started to converge, our billing and
customer management products led the way, taking advantage of
key Internet technologies to offer a single, open platform for
billing that could be integrated with other enterprise systems
to streamline operational processes and eliminate avoidable
redundancies. Our RevChain platform was designed to support
traditional and next generation technologies for convergent
providers seeking to offer multiple services. RevChain
applications are built on an advanced computing architecture
that leverages the latest industry standards and programming
tools for enhanced performance and efficiency. The open design
and use of standard technologies, such as HTTP, XML, and J2EE,
facilitate integration of our solutions into a providers
existing infrastructure, and give providers the flexibility to
offer new products and services quickly in response to dynamic
market conditions.

The Abiliti Acquisition, and the addition of the
Asuriti event management and revenue assurance products, further
enhanced our ability to meet both the revenue growth and
efficiency goals of organizations of all sizes. Asuriti provides
an end-to-end revenue assurance solution that starts with
capturing relevant data from across multiple networks,
evaluating and validating data for errors and inconsistencies,
and taking action to correct potential problems. Asuriti is
powered by a dynamic rules-driven architecture that utilizes
easy-to-alter business rules to allow service providers to
support new services and event data formats without complex
programming. When combined, RevChain and Asuriti have the
potential to create a powerful solution that gives providers the
tools to better manage the complexities of their back-office and
drive more revenue from new and existing customers, networks and
partners.

As a complement to our licensed software, the
BillingCentral offering extends our delivery capabilities by
giving customers the flexibility to purchase RevChain and
Asuriti as a turn-key outsourcing solution. BillingCentral
provides a high-value, high performance solution that is
delivered by billing and telecom experts in a carrier-class
environment.

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Today, we believe our products and comprehensive
outsourcing services are better aligned with the business,
operational, and economic goals of sub-Tier 1 and
Tier 1 providers, including the need to:



| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | Retain and grow their customer base by providing
    and delivering high quality and innovative services;
|
| |  | Adapt to changing economic conditions, reduced
    staffing levels, and constrained budgets;             
|
| |  | Capture and retain more revenues from each
    customer and partner;                                     
|
| |  | Streamline and improve the efficiency of
    back-office processes through automation; and               
|
| |  | Build a common platform to bridge the gap between
    existing systems, customers and business units.    

The Daleen Strategy

Our business plan in 2003 reflected the lingering
economic and regulatory uncertainty in telecommunications which
has caused providers to delay and/or reduce purchase decisions
over the last several years. During 2003 we saw increased
interest among the service provider community as budgets
increased and they once again started considering system
upgrades and new functionalities. However, the timing of review
and decision cycles on new sales remains protracted. Providers
are carefully evaluating their competitive options, while
working simultaneously within their organizations to obtain
buy-in from key decision-makers. A significant portion of our
efforts in 2003 were focused on the successful integration of
our products with those acquired from Abiliti, and bringing the
benefits of the Abiliti Acquisition to fruition. Taking
advantage of our expanded products and delivery channels, we
pursued opportunities to help current customers identify areas
for improvement in their billing and OSS environments by adding
to or upgrading their systems. Our development teams focused on
adding enhancements to our RevChain and Asuriti product lines
that are intended to allow our customers to continue to drive
efficiencies in their organizations. Following the course that
was set in 2002, we focused on achieving measured growth through
a combination of direct sales in the U.S. and opportunistic
growth abroad. This approach supported our financial goal of
reducing costs, while leveraging our highly developed product
capabilities to gain access into new geographies, markets, and
Tier 1 accounts. It also supported customer demand for
broader, pre-integrated solutions and allowed us to leverage the
strength of our product architecture and advanced billing and
OSS functionalities.

Our goal is to become a leading global provider
of billing and OSS applications in the telecommunications
industry through execution of a two-tiered strategy consisting
of organic growth and growth through aggregation (mergers and/or
acquisitions). We continue to pursue organic growth from our
existing customer base and through sales opportunities in our
core markets, while concurrently pursuing opportunities to
aggregate with synergistic billing and OSS companies.

Organic
Growth

Developing and maintaining long-term customer
relationships.We believe that now,
more than ever, providers are seeking to develop long-term
positive relationships with their vendors. In todays
environment, providers value experience, proven quality, and
cost-efficient implementation and operations. With reduced
budgets and staffing, they are less likely to risk bringing new
vendors into critical projects. This trend can lead to
additional product sales and outsourcing opportunities, as well
as recurring support and maintenance revenues. We continue to
focus on delivering exceptional levels of service that will
allow us to build and maintain strong long-term relationships
with our customers.

Aggressively targeting high potential
markets.Providers are increasingly
under pressure to produce revenue at a faster rate, while
holding down or reducing their operational costs. The ability to
increase revenue, improve margins, and provide high levels of
customer satisfaction is becoming even more crucial for success.
Our products are designed to support a broad array of telecom
services, including local and long distance voice, data, video,
wireless and Internet services, and digital media products,
while minimizing implementation and operations expenses. Our
primary strategy is to focus on the Integrated Communications
Provider (ICP) and wireline carrier market segments, where
we believe we have vast experience and strong customer

6



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satisfaction. By focusing our organic growth
activities on segments in which we enjoy a strong presence and
good reputation, we believe we can deliver incremental revenue
at attractive margins.


Expanding the core outsourcing
business.Outsourcing is becoming a
more viable option for service providers that are looking to
gain process efficiencies or add functional capabilities with
minimal cash outlay and disruption to their environment. As a
billing application service provider (BASP) we offer
tailored solutions that are designed to meet each clients
business needs. Our outsourced solutions are based on our
RevChain and Asuriti billing, event management and revenue
assurance products, which are hosted and managed by telecom
experts in our BillingCentral operations center. Our proven
automation tools and best practices are intended to
provide consistent service quality and cost savings for our
outsourcing clients. We also provide clients with web-based
access to BillingCentral so they have complete visibility into,
and oversight of, their operational processes. This allows our
customers to assert the level of control they desire, without
the staff or burden of doing the work.

Broadening our revenue
base.With the addition of Asuriti and
BillingCentral from the Abiliti Acquisition, we expanded our
portfolio of products and services and created additional sales
opportunities to current and new customers. In 2003, we
generated incremental revenues by offering RevChain and Asuriti
as individual or fully integrated licensed and outsourced
solutions. While our traditional billing products remain focused
in the wireline market, Asuriti has expanded potential as a
solution for wireless carriers. Our BillingCentral outsourcing
offering enhances our ability to support a full spectrum of
billing, event management and revenue assurance services in a
managed services environment, so that every customer scenario
can be supported. These solutions were created with the
scalability and flexibility to support all size customers,
including the largest Tier 1 service providers 
anywhere in the world  thereby creating a larger
potential target market.

Growth
Through Aggregations

Generally.We
believe the rate of growth that can be achieved through organic
growth is restricted by the current economic and financial
market conditions within telecommunications. We intend to
augment our growth through aggregation transactions where we
would combine our resources and customers with other billing and
OSS vendors serving the telecom marketplace. Our goal is to
increase our customer base and/or product offerings in a manner
that will enhance our core business strategies and allow us to
further grow our business. Aggregations may be accomplished
through mergers, acquisitions or other strategic transactions.
We believe it is necessary to obtain additional capital to
facilitate our aggregation strategy and we are actively seeking
such additional capital from current and new investors. If we
are successful in obtaining additional capital, it may result in
the issuance of additional equity securities at a price lower
than the price paid by our existing stockholders for the same
securities, as well as resulting in dilution to our existing
stockholders. Our aggregation strategy has certain risks, which
appear in Item 7 of this Form 10-K under the heading
Risk Factors  There is no assurance
that we can effectively implement our aggregation strategy and
even if we can, it might not be successful and could be dilutive
to our existing stockholders.

Acquire Customers.Because of the general economic conditions and the continuing
consolidation among providers, the number of potential customer
buying decisions has been limited. We will seek to increase our
number of customers as a part of our aggregation strategy. By
expanding our customer base, we plan to diversify the risks
related to our concentration of business with particular large
customers and narrow market segments. We also plan to cross sell
our current products and services to customers we acquire to
increase customer depth and loyalty.

Acquire Products and
Technology.The types and sizes of
investments in products and technology that were made in the
late 1990s are no longer feasible due to current market
conditions and restrained economic growth. Therefore, we seek to
acquire additional products and technologies through our
aggregation strategy. We seek to build a more complete product
and technology offering to complement our current billing, event
management and revenue assurance products and services.

Establish Broader
Distribution.By increasing the
breadth of our products and services, we intend to expand our
target market to companies seeking a more comprehensive product
and services solutions or

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companies in other industries. We also believe we
can benefit from acquiring distribution channels by taking
advantage of expertise in other geographic or market areas.


Realize Synergies While Increasing
Scale.By combining our management and
administration resources with those of other companies with whom
we aggregate, we expect to realize cost savings while increasing
our revenue potential. With each aggregation, we will strive to
combine business functions wherever possible to reduce
non-revenue generating costs.

Products and Services

We provide products and services to a variety of
service providers offering a full complement of convergent
voice, data and Internet services. As the level of new
technology spending has declined in recent years, we have
experienced an increased shift in our business from the
licensing of products to a greater dependence on the
professional and other services we provide.

The percentage of our total revenues derived from
licensing fees and professional and other services for the years
ended December 31, 2001, 2002 and 2003, was as follows:

|                                |  |                         |       |      |  |      |       |   |  |  |       |  
|------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                |  |                        
|                                |  | Year Ended December 31,
|                                |  |                        
|                                |  | 2001                    |       | 2002 |  | 2003
|                                |  |                         |       |      |  |     
|Professional services and other |  |                         | 71.3  | %    |  |      | 78.0  | % |  |  | 91.4  | %
|License fees                    |  |                         | 28.7  |      |  |      | 22.0  |   |  |  | 8.6   |  
|                                |  |                         |       |      |  |      |       |   |  |  |       |  
|                                |  |                         | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | %
|                                |  |                         |       |      |  |      |       |   |  |  |       |  

Further information about our products and
services appears below.



| |                          
| | -------------------------
| | Billing and Customer Care

RevChain
Commerce  RevChain
Commerce is a powerful billing and customer care
(BCC) system designed to allow service providers to handle
high volumes of convergent communications services. With the
ability to read, rate and track virtually any type of usage data
from any source over any network, it provides the flexibility
and support for rating and billing any combination of
traditional and next generation wireline and wireless, local and
long distance, voice, data, Internet and digital content
services. RevChains advanced design and open architecture
support rapid service creation and deployment, discounts and
pricing structures, and cross-service promotions, and allow
providers to configure both simple and complex services with
minimal resources and implementation time. RevChain Commerce
integrates with legacy billing, Customer Relationship Management
(CRM) and other enterprise applications to streamline
internal processes and improve data integrity between systems.

RevChain Commerce includes advanced features to
support account and service management, configurable rate and
discounting plans, real-time credit limits, automatic
prepayment, settlements, and management reports. Sophisticated
partner settlement features provide an automated process for
establishing and maintaining relationships in the provisioning
and delivery of collaborative services. RevChain Commerce
supports global operations with support for Unicode languages,
multiple currencies and currency conversion, customer-sensitive
invoice language and address localization and multi-national
tariff/taxation.

RevChain
Interact RevChain
Interact is a true web-based client interface that provides
direct access to the product catalog and customer database
within the RevChain Commerce application. It leverages the power
of the Internet to allow Customer Service Representatives
(CSRs) to achieve higher levels of efficiency while
delivering exceptional service. Using a standard Web browser,
RevChain Interact offers CSRs a centralized view into the
customer account and provides the functionality needed to manage
customer accounts including customer management
activities, balance management, provisioning of products and
services, dispute processing, and collections. The look, feel
and familiar web navigation techniques of our product make it
easy to use with minimal training. There is no client software
to install, so providers can deploy new CSRs quickly and
efficiently to support on-site and remote operations as well as
telecommuting environments. With extensive scaling capabilities
for large operations, RevChain Interact enhances operating

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efficiency by reducing the database connections,
server load, hardware and software requirements, and minimizing
the network bandwidth necessary to run the system.


RevChain
Care  RevChain Care
is an intuitive software product that allows service providers
to offer convenient customer self-care and EBPP over the
Internet. RevChain Care provides 24-hour access to accurate,
up-to-date information so customers can view their current and
historical billing and usage data, update personal account
information, make payments, and initiate disputes online at
their convenience. This application can be customized with
minimal effort to extend a service providers brand and
enhance other marketing efforts. RevChain Care is pre-integrated
with other RevChain products and designed for seamless
integration with CRM and other revenue-enhancing operation
support systems.

RevChain
mCommerce  RevChain
mCommerce extends billing, customer management and commerce
capabilities to customers over Web-accessible devices. Used in
conjunction with RevChain Commerce, this application allows
customers to view their account balances, modify personal
information, and make payments via a mobile device over secure
connections.



| |                                           
| | ------------------------------------------
| | Event Management and Revenue
    Assurance

Asuriti for Event
Management Asuriti for Event
Management is a flexible, enhanced event management solution
that is designed to allow service providers to eliminate
inefficiencies in operational processing and make better use of
the information that is flowing within their networks. Asuriti
provides a centralized audit and control point for monitoring
data from multiple sources and systems, allowing providers to
track the flow of events throughout the back office Asuriti has
the unique ability to capture relevant data from all types of
networks and systems, normalize the data, validate and edit
records against other databases and references, and distribute
them to multiple downstream systems. By transforming data into
common formats for viewing and reporting, Asuriti allows
providers to aggregate data across service types, conduct
comparative analyses, track trends in usage, and define and
distribute reports. The highly-configurable rules architecture
is designed to give providers the precision and flexibility to
quickly and efficiently respond to changes in event formats,
business strategy and market conditions, without the need for
expensive programming. The systems architecture allows
providers to easily scale up to large multi-processing arrays or
scale out to clusters of servers in a fraction of the time, cost
and effort required for other systems.

Asuriti for Revenue
Assurance Asuriti for
Revenue Assurance provides an automated process for monitoring
and reconciling the quality and accuracy of data moving between
systems in a providers OSS. Working in parallel to
existing billing and support systems, Asuriti helps providers
identify discrepancies and errors as they occur, thereby
eliminating potential revenue leaks before they happen. Whether
it is a file from a partner, internal switch usage, circuit
information, or provisioning records flowing between systems,
Asuriti has the ability to transform raw data into actionable
intelligence that can be used to maximize revenues and improve
operational efficiency. The systems rules-based
architecture is designed to allow even non-technical users to
construct dynamic business rules to validate, track, sort,
aggregate, analyze and enhance data. Asuriti is inherently
flexible enough to address a wide range of scenarios where
revenue leakage is likely in wireline and wireless markets.
Common examples include the ability to compare expected actual
charges against actuals to detect overbilling, to ensure that
services that are provisioned are billing at the appropriate
rates, and to calculate charges, costs and margins for specific
services, partners and routes to determine profitability. It can
be used to summarize profitability over time per customer,
report total revenue from a partner, channel or market segment,
and analyze revenue trends to identify problem areas with
service offerings. One of the systems key advantages is
its ability to take action once a prescribed condition is
detected, so the error can be corrected quickly before the
provider loses revenue.



| |                     
| | --------------------
| | Outsourced Solutions

BillingCentral, is a comprehensive outsourcing
solution that offers the power of our latest RevChain and
Asuriti software in a proven, carrier-class data center that is
staffed by billing and telecommunications experts. It provides a
high-value, cost-effective alternative to licensing that allows
providers to take advantage of advanced billing, event
management and revenue assurance technologies without a
significant up-front

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investment in the resources, hardware, training,
or other costs associated with running an internal billing and
OSS operation. BillingCentral services are designed to be
scalable across a large number of customers through the use of
our proprietary automation tools and a secure Internet site.


BillingCentral operates as a BASP, providing a
tailored solution for each customer that is comprised of our own
billing, event management and revenue assurance products and
hosted in our own data center. Customers are serviced by
dedicated equipment and provided with comprehensive solutions
that include interfaces to third-party applications, special
access arrangements and other services. Because of the turnkey
nature of our offering, our BillingCentral customers are able to
deal with us as a single source for application software,
hosting, billing operations, customization, and support.



| |                              
| | -----------------------------
| | Additional products supported

The following solutions were acquired in the
Abiliti Acquisition in December 2002. Although not actively
marketed to new customers, we continue to provide full support
to existing customers.

Rate IT Rate IT is a stand-alone rating
product that adds functionality to existing billing systems,
allowing service providers to meet their current billing
requirements, while avoiding the cost, time and complexity
involved in fully replacing a legacy billing system.

NetworkStrategies
NetworkStrategies is a stand-alone billing application designed
with high levels of flexibility and scalability to support the
complex billing requirements of telecom service providers. It is
used by customers in a licensed and outsourced capacity.



| |                                                                        
| | -----------------------------------------------------------------------
| | Professional Consulting Services,
    Maintenance and Technical Support

We offer a wide array of consulting, maintenance,
and technical support options designed to provide customers with
superior services and support, while also giving them the tools
and knowledge they need to independently run their day-to-day
operations. This includes the following services:

BillingCentral
Services.We provide end-to-end
support of products delivered via BillingCentral, including
back-office support, event collection and processing, data
center facilities, revenue assurance, reports, analysis and
reconciliation, invoice generation and delivery to the print
vendor.

Professional Consulting
Services.A variety of professional
consulting services are available to assist customers in the
implementation, modification, enhancement, and customization of
our products, including performing revenue assurance audits. We
generally provide these services to our customers via clearly
defined services agreements. Through a discovery process, we
work with customers to fully understand the customers
business and technical needs, ultimately resulting in the
development of business models and processes that utilize our
products to improve the performance of their operations, enhance
revenues and/or lower their operating costs.

Maintenance.We have
comprehensive maintenance and support programs that provide both
site license and BillingCentral customers with timely,
high-quality maintenance and support services for our products.
These services are generally provided via annual maintenance
agreements with customers. A maintenance agreement entitles a
customer to multiple levels of technical support for prompt and
professional response to issues during and after normal business
hours.

Operational Environment Tuning and Performance
Level Service.We provide technical
and product configuration support for operational issues and
testing environment support. The support center maintains a
close working relationship with customers, making available all
maintenance releases and assisting in planning and scheduling
the implementation of each release. An additional service, which
involves an on-site performance tune up to optimize the billing
operations environment, is also available to existing customers.



| |                                     
| | ------------------------------------
| | Third-party Software
    Fulfillment

When customers require it, we facilitate the
delivery of a complete solution by offering third-party software
products that enable customers applications. These include
platform products, such as the Windows

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2000® and UNIX® operating systems. Our
RevChain applications are enabled through BEAs WebLogic
Server product and use an Oracle® database. We also provide
complementary products that integrate with our RevChain
applications, such as GeoStanTM Address
Standardization Software from Group 1; Doc1 from Group 1 for
invoice rendering; and tools that support development and
reporting, such as Business Objects Crystal Reports.




| |         
| | --------
| | Training

We offer comprehensive training for all current
products, using a variety of media to provide customers with the
skills they need to most effectively use our software. Our
curriculum includes instructor-led sessions for which we offer a
full suite of technical and end-user training programs. A
learning consultant is assigned to each customer to tailor the
training of the customers staff during the life cycle of
the project. Target audiences include CSRs, billing
administrators and billing operators.



| |           
| | ----------
| | Technology

Our products take advantage of the most advanced
technologies to deliver maximum return on providers
technology investment. Our RevChain applications are built on a
unique open IIA framework that uses standard Internet
technologies, including HTTP, XML and universal J2EE support to
deliver flexibility and performance in supporting traditional
and next generation services. We built this architecture with
extensive scalability and flexibility to ensure that our
customers continue to distinguish themselves among competitors
and thrive in an economy that demands operational efficiency.
The IIA framework means fewer manual steps, fewer hours
correcting errors, and reduced costs.

IIA is more than a framework for seamless
integration between our RevChain applications. Through its
interoperability with CRM applications and legacy billing and
enterprise systems, it can enhance the performance of other
operational systems and extend the value of a providers
investment in legacy systems.

The Asuriti products were built exclusively on
Microsofts Windows 2000 and SQL Server 2000 platforms,
creating a highly optimized, and more easily supported code base
built around a specific operating system, and taking advantage
of the functionality built into the Microsoft platforms.

Customers

Our customers consist mainly of local and
inter-exchange carriers, Internet service providers, other
data services providers, broadband service providers, ICPs,
and wholesale network carriers. We have customers located in the
United States, Canada, Latin America/Caribbean, Asia-Pacific
region and Europe, including such companies as ETB, AAPT
Limited, Allegiance Telecom Company Worldwide
(Allegiance), SBC Long Distance (SBC),
Eschelon Telecom, Inc., Integra Telecom
Holdings, Inc., PAETEC Communications, Inc., Eureka
Broadband Corporation (Eureka Networks), Pac-West
Telecomm, Inc., and Cbeyond Communications LLC. In
addition, we have an original equipment manufacturer
(OEM)/Reseller relationship with Telcordia
Technologies, Inc. (Telcordia). For the year
ended December 31, 2003, three customers accounted for
64.7% of our total revenue. Allegiance accounted for 38.7%, ETB
accounted for 15.1% and SBC accounted for 10.9% of our total
revenue for the year ended December 31, 2003. See
Risk Factors  our business relies in part on a
limited number of customers and unfavorable developments in
relation to a major customer may adversely affect our revenues,
operating results and cash flows.

In May 2003, we signed the largest customer
contract in our history when we executed a 29 month license
and services agreement with ETB for our RevChain products. The
project is expected to provide more than $7.6 million in
new revenues. See Risk Factors  our business
relies in part on a limited number of customers and unfavorable
developments in relation to a major customer may adversely
affect our revenues, operating results and cash flows; and
Risk Factors  our expansion into select
international markets may not succeed as a result of legal,
business and economic risks specific to international
operations.

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Sales and Marketing

Sales.Our sales
strategy mainly consists of a direct selling approach
supplemented by strategic alliances to achieve greater reach
into geographic and vertical markets and targeted customer
segments. Through the efforts of our internal direct sales team,
we develop and manage relationships with providers and network
operators, using a consultative problem-solving sales process.
We work closely with these customers to define and determine how
their needs can be fulfilled with our products and services.

Certified system integration and delivery
partners play a key role in providing solutions and delivery for
our customers and extend the capabilities of our sales and
marketing organization. These partners enhance our direct sales
efforts along with our OEM/ASP/reseller partners, including
Telcordia, Scientific Applications International Corporation
(SAIC), and Danet, Inc. (Danet),
who license our RevChain and/or Asuriti software and offer it to
their customers.

Due to the sophisticated nature of our products
and services, the duration of a sales cycle can typically range
anywhere from one to two months to one year or longer.

Marketing.Our
marketing organization is focused on building corporate brand
awareness and establishing a competitive position for our
software products and services among our target customers.
Marketing programs include a combination of electronic and print
campaigns to establish awareness of our products and services,
as well as coordinated efforts to manage ongoing public and
media relations, plan and manage events, support our strategic
partner alliances, and maintain relationships with industry
analysts. We participate in targeted industry events that
showcase new technologies and solutions, and utilize speaking
opportunities and exhibits at trade shows and conferences to
demonstrate the value of our solutions in meeting customer needs.

Strategic Alliances

We have developed strategic alliances that expand
the coverage of our direct sales organization, provide
implementation and customization services for our products, and
complete our solutions offerings. Our strategy is to leverage
our current relationships and develop new alliances to help
achieve our sales and implementation targets. These alliances
enhance our ability to exploit new opportunities in our existing
markets, expand our addressable market, and drive new strategic
and product initiatives.

Our alliance program is based on three types of
contractual relationships:



| |   |                                              
| | - | ---------------------------------------------
| |  | strategic OEM/ASP/reseller partners;         
|
| |  | system integration and delivery partners; and
|
| |  | technology partners.                         

Strategic OEM/ASP/Reseller
Partners.Our strategic
OEM/ASP/reseller partners license and resell our solutions. Our
applications add value to our partners products, including
OSS, legacy systems and other Internet-based products. Our
strategic OEM/ASP/reseller partners include Telcordia, SAIC and
Danet.

System Integration and Delivery
Partners.We work with recognized
systems integrators to provide additional project implementation
support when a customer desires a systems integrator or
additional resources are needed to complete a project. Other
services provided by systems integration and delivery partners
include strategic, technological and management consulting. Our
system integration and delivery partners include
Telcordia, Intesacol (an affiliate of SAIC) and Danet.
These partners are certified by us and have the ability to
implement our solution in combination with those of other
industry leaders.

Technology Partners.We work with leading software, hardware, and network providers
that offer products and services that compliment ours. We engage
with technology partners on joint sales and marketing efforts,
as well as development work and projects to create seamless
best-of-breed solutions. Our technology partners
include:, Cisco Systems, Inc., Independent Technology
Systems, Ltd. (Intec), Oracle Corporation, BEA
Systems, Inc., MetaSolv Software, Inc.,
Vertex, Inc., and BillSoft, Inc. Our pre-integrated
RevChain applications offer our mutual customers flexibility and
enhanced integration capabilities thereby decreasing risk,
time-to-implementation, and costs. In addition, we have
developed working relationships with platform

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partners that create and market the hardware,
operating systems and database engines on which our technology
runs. They include Microsoft Corporation (network operating
system and database engine), Sun Microsystems, Inc.
(operating systems and server hardware) and Oracle Corporation
(database engine).


Research and Development

Our product development capabilities are
essential to our strategy of enhancing our core technology,
developing additional applications, incorporating that
technology and maintaining the competitiveness of our product
software. We have invested heavily in software development to
ensure that we have the product design skills and tools for
achieving our market leadership objective. We recognize that our
ability to create and extend our products, comes from investing
in talented software engineers, quality assurance testers and
billing and telecommunications specialists.

Our research and development expenses totaled
approximately $12.5 million for 2001, $4.0 million for
2002 and $6.5 million for 2003. We anticipate that our
research and development expenses for 2004 will be the same as
or less than the research and development expenses in 2003.
However, our research and development expenses may decrease or
increase significantly as a result of our aggregation strategy.
As of February 1, 2004, 57 employees were engaged in
research and development activities, 30 located in our corporate
headquarters in Boca Raton, Florida and 27 located in
St. Louis, Missouri.

Competition

The markets in which we compete are intensely
competitive, highly fragmented, and rapidly changing. Our
applications compete on the basis of product functionality,
performance, scalability, extensibility, ease of integration and
cost. We are also evaluated on our responsiveness to the needs
of customers, specific product features and functionalities, the
timeliness of product implementations, quality and reliability
of products, pricing strategies, project management capability,
financial condition and technical expertise.

Our main billing and customer management
competitors include:



| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | Amdocs Limited;                                                                                    
|
| |  | Convergys Corporation;                                                                             
|
| |  | Portal Software, Inc.;                                                                             
|
| |  | Saville, a business unit of ADC
    Telecommunications, Inc., formerly Saville Systems
    PLC; and
|
| |  | CSG Systems International, Inc.                                                                    

Our main event management competitors include:



| |   |                           
| | - | --------------------------
| |  | Intec Telecom Systems PLC;
|
| |  | Narus, Inc.; and          
|
| |  | Openet Telecom.           

Our main revenue assurance competitors include:



| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Connexn Technologies, Inc.;                                                                                                                                    
|
| |  | Vibrant Solutions;                                                                                                                                             
|
| |  | Lavastorm Technologies, Inc.; and                                                                                                                              
|
| |  | Consulting organizations, including
    PricewaterhouseCoopers (currently a part of IBM), The Management
    Network Group, Inc., Cap Gemini and Ernst & Young.

We also compete with the internal information
technology departments of large communications companies that
may elect to develop functionality such as that provided by our
products in-house rather than buying from outside suppliers.

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We believe that our ability to compete depends in
part on the performance of the competition, including the
development by others of software that is competitive with our
products and services, the price at which others offer
competitive software and services, the extent of
competitors responsiveness to customer needs, and the
ability of our competitors to hire, retain and motivate key
personnel.

We anticipate continued growth and competition in
our target markets and the entrance of new competitors into the
customer management and billing, event management, mediation,
and service activation software markets, as well as emerging
participants in the overall revenue assurance area. We expect
that the market for our products will remain intensely
competitive.

Intellectual Property

We regard significant portions of our software
products and related processes as proprietary and rely on a
combination of patent, copyright, trademark and trade secret
law, contractual provisions and nondisclosure agreements to
protect our intellectual property rights. We have been issued
patents for our dynamically configurable and extensible rating
engine, customizable electronic invoice with optional security,
billing system for distributing third party messages to form a
community of subscribers to negotiate a group purchase from the
third party, and data element characteristics. We are currently
pursuing two other patents for which applications are pending in
the United States. In addition, to protect our trademarks and
tradenames, we maintain 19 registered trademarks and have 11
trademark applications pending in the United States and we have
five registered trademarks and six trademark applications
pending in other countries.

When we license our products, we use signed
license agreements that limit access to and distribution of our
intellectual property and contain confidentiality terms
customary in the industry. Generally, we license our products in
object code only, a format that does not allow the user to
change the software source code. However, some of our license
agreements do require us to place the source code for our
products into escrow. These agreements generally provide that
these licensees would have a limited, non-exclusive right to use
the software source code if there is a bankruptcy proceeding by
or against us, if we cease to do business without a successor or
if we discontinue providing maintenance and support on our
products. We generally enter into employment or independent
contractor agreements that include nondisclosure obligations
with our employees and consultants to ensure and to protect our
intellectual property rights.

Employees

As of February 1, 2004, we had
128 full-time employees, of whom 31 were in product
implementation and support, 17 in sales and marketing, 57 in
research and product development, and 23 in administration. We
have never had a work stoppage and none of our employees are
represented under collective bargaining agreements. We consider
our relations with our employees to be good.






|        |            
|------- | -----------
|Item 2. | Properties.

Our headquarters is located in a professional
office building in Boca Raton, Florida where we leased
approximately 31,000 square feet through February 29,
2004. Effective March 1, 2004, we lease approximately
17,800 square feet under a new lease that expires on
February 28, 2009.

We lease two separate spaces with an aggregate of
approximately 35,000 square feet located at 400
Chesterfield Center, Suite 200, Chesterfield, Missouri
(Daleen Solutions corporate office and data center) and 14500
South Outer 40, Town and Country, Missouri (Daleen Solutions
additional office space). The lease for the Daleen Solutions
corporate office space expires June 30, 2004 and the
additional office lease expires November 30, 2004. We are
currently reviewing our options regarding the Missouri offices,
and we expect to decrease the square footage occupied in these
locations.

We also lease approximately 8,500 square
feet of office space in Atlanta, Georgia. We no longer occupy
this facility and the space is currently being subleased to a
third party sub-tenant for the duration of the lease term. The
Atlanta lease expires on August 31, 2004.

All leases we have entered into are on
commercially reasonable terms.

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|        |                   
|------- | ------------------
|Item 3. | Legal Proceedings.



| |                       
| | ----------------------
| | IPO-Related Litigation

On December 5, 2001, a class action
complaint was filed in the United States District Court for the
Southern District of New York. On April 22, 2002 an
amended complaint was filed by two plaintiffs purportedly on
behalf of persons purchasing the Companys common stock
between September 20, 1999 and December 6, 2000. The
complaint is styled as Angelo Fazari, on behalf of himself
and all others similarly situated, vs. Daleen
Technologies, Inc., BancBoston Robertson Stephens Inc.,
Hambrecht & Quist LLC, Salomon Smith Barney Inc., James
Daleen, David B. Corey and Richard A. Schell. The individual
defendants, Messrs. Corey, Schell and Daleen, have entered
into tolling agreements with the plaintiffs resulting in their
dismissal from the case without prejudice. The remaining
defendants include us and certain of the underwriters from the
Companys initial public offering (IPO). More
than 300 similar class action lawsuits filed in the Southern
District of New York against numerous companies and their
underwriters have been consolidated for pretrial purposes before
one judge under the caption In re Initial Public Offering
Securities Litigation.

The complaint includes allegations of violations
of (i) Section 11 of the Securities Act of 1933 by all
named defendants, (ii) Section 15 of the Securities
Act of 1933 by the individual defendants and
(iii) Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder by the
underwriter defendants. Specifically, the plaintiffs allege in
the complaint that, in connection with the IPO, the defendants
failed to disclose excessive commissions purportedly
solicited by and paid to the underwriter defendants in exchange
for allocating shares of the Companys common stock in the
IPO to the underwriter defendants preferred customers.
Plaintiffs further allege that the underwriter defendants had
agreements with preferred customers tying the allocation of
shares sold in the IPO to the preferred customers
agreements to make additional aftermarket purchases at
pre-determined prices. Plaintiffs further allege that the
underwriters used their analysts to issue favorable reports
about the Company to further inflate the Companys share
price following the IPO. Plaintiffs claim that the defendants
knew or should have known of the underwriters actions and
that the failure to disclose these alleged arrangements rendered
the prospectus included in the Companys registration
statement on Form S-1 filed with the SEC in September 1999
materially false and misleading. Plaintiffs seek unspecified
damages and other relief.

In September 2003, we approved the terms of a
proposed settlement involving the plaintiffs, the insurance
companies and numerous issuers, including us and the individual
defendants, that includes a waiver by the insurance companies of
any retention amounts under the policies. Court approval of the
settlement is required. Under the terms of the proposed
settlement, there would be no liability to be recorded by us
other than legal fees incurred in the initial defense of the
action, which are immaterial. There is no assurance that a
settlement with the plaintiffs will be finalized. In the event
that the settlement is not finalized and approved by the court,
we intend to defend vigorously against the plaintiffs
claims. We believe that we are entitled to indemnification by
the underwriters under the terms of the underwriting agreements.
We have notified the underwriters of the action, but the
underwriters have not yet agreed to indemnify the Company. The
lead underwriter, BancBoston Robertson Stephens Inc., has ceased
doing business and there is no assurance it will have the
financial resources to provide indemnification. Currently the
amount of a loss, if any, cannot be determined. In the event
that the court does not approve the settlement, we intend to
defend vigorously against the plaintiffs claims.



| |                           
| | --------------------------
| | Abiliti-Related Litigation

On August 1, 2003, a First Amended Petition,
styled as James E. Kientzy and David K. Wilson vs. Abiliti
Solutions, Inc., a corporation, and Daleen
Technologies, Inc., a corporation, and Daleen
Solutions, Inc., a corporation and wholly-owned subsidiary
of Daleen, was filed in the Circuit Court of the County of
St. Louis, State of Missouri. The First Amended Petition
added Daleen Technologies and Daleen Solutions as defendants in
the named action. The First Amended Petition contains certain
allegations against Abiliti related to the non-payment of
certain promissory notes in the aggregate principal amount of
$1.2 million. The promissory notes that are the subject of
the First Amended Petition are liabilities that were retained by
Abiliti

15



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##### Table of Contents



pursuant to the terms of the Abiliti Acquisition.
The plaintiffs allege that the purchase of substantially all of
the assets and certain liabilities of Abiliti constituted a de
facto merger and, as a result, Daleen Technologies and its
indirect wholly owned subsidiary, Daleen Solutions, are
responsible for payment of the promissory notes and
indemnification of the plaintiffs in connection with
Abilitis counterclaim against the plaintiffs. The First
Amended Petition also seeks to set aside the transfer of Abiliti
assets as a fraudulent transfer. In December 2003, the court
granted summary judgment to the plaintiffs against Abiliti n/k/a
Albacore Holdings, Inc. (Albacore) on the
promissory notes awarding a judgment in the amount of
$1,796,938.14. However, the judgment provides that it is not
subject to execution until such time as the senior debt (certain
promissory notes and series B preferred stock) is paid in full.
Albacore currently has insufficient assets and no operating
income with which to pay the senior debt. The trial on the
remaining claims in this matter has been set for July, 2004.
Daleen Solutions and Daleen Technologies believe that they are
entitled to indemnification by Albacore pursuant to the terms of
the purchase agreement relating to the Abiliti Acquisition. We
have provided notice to Albacore of the action and Albacore has
assumed the defense of the First Amended Petition on our behalf.
However, there can be no assurance that Albacore will have the
financial resources to defend and/or settle the claims, pay any
judgment ultimately obtained by plaintiffs, or continue to
provide indemnification in connection with this matter. Due to
the early stage of the proceeding, a loss and its effect on us,
if any, cannot be determined with respect to this litigation.


On October 14, 2003, Daleen, Daleen
Solutions and Albacore filed a declaratory judgment action
against Houlihan Lokey Howard & Zukin
Capital, Inc. and Houlihan Lokey Howard & Zukin
Financial Advisors, Inc. (Houlihan) seeking a
declaration that they are not liable to Houlihan for fees under
an engagement letter between Abiliti Solutions, Inc. and
Houlihan (a liability Daleen assumed in the acquisition of
Abiliti). Houlihan filed a counterclaim for fees in excess of
$800,000. The parties have agreed in principal to settle the
action and counterclaim and are preparing the settlement
documents. Daleen expects to pay Houlihan approximately $55,000.

On December 24, 2003, Daleen Solutions filed
a collection action against Data Integration Systems, Inc.
(DIS) seeking payment of license fees, services fees
and equipment in the amount of $694,600 (which includes
DIS obligation to make future payments under the
contract). On January 30, 2004, DIS filed a cross-complaint
against Daleen Solutions alleging damages of $1,500,000. Due to
the early stage of the proceeding, a loss and its effect on us,
if any, cannot be determined with respect to this litigation.



| |                   
| | ------------------
| | General litigation

On August 5, 2003, we reached a settlement
in satisfaction of an outstanding obligation with a customer
under a software license agreement. Under the terms of the
settlement, this customer satisfied their obligations by
agreeing to make payments in cash of $365,000 plus interest. We
received $250,000 on August 20, 2003, and $57,500 plus
interest on November 5, 2003 and received $57,500 plus
interest on February 6, 2004. In accordance with
SOP 97-2, the revenue related to the contractual agreement
with this customer is recognized on a cash basis. Therefore, we
recorded $307,500 as license revenue in the year ended
December 31, 2003.

We are involved in other lawsuits and claims
incidental to the ordinary course of our business. Management
does not believe the outcome of any of these other activities
would have a material adverse effect on our financial position
or results of operations.






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

No matters were submitted to a vote of security
holders during the fourth quarter of the year ended
December 31, 2003.

16



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##### Table of Contents






PART II






|        |                                                                                                                      
|------- | ---------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities.

Our common stock was traded on The Nasdaq Stock
Market under the symbol DALN from October 1,
1999 to July 12, 2002. From July 12, 2002 to
December 31, 2002 our common stock was traded on the Nasdaq
SmallCap Market under the symbol DALN. On
December 31, 2002, the Company was delisted by The Nasdaq
SmallCap Market, and is currently being traded on the Over The
Counter Bulletin Board (OTC) under the symbol
DALN. Prior to October 1, 1999 there was no
established market for our common stock. The closing sale price
of our common stock as reported by the OTC on February 1,
2004 was $0.09 per share. The price per share reflected in
the table below represents the range of low and high closing
sale prices and bid quotations, as applicable, for our common
stock as reported by The Nasdaq Stock Market, the Nasdaq
SmallCap Market or the OTC for the periods indicated:

|                   |  |            |      |           |  |   |      | 
|------------------ |  | ---------- | ---- | --------- |  | - | ---- | 
|2002               |  |            |      |          
|Quarter Ended      |  | High Price |      | Low Price
|                   |  |            |      |          
|March 31, 2002     |  | $          | 0.45 |           |  | $ | 0.17 | 
|June 30, 2002      |  | $          | 0.24 |           |  | $ | 0.13 | 
|September 30, 2002 |  | $          | 0.17 |           |  | $ | 0.11 | 
|December 31, 2002  |  | $          | 0.25 |           |  | $ | 0.08 | 

|                   |  |          |      |         |  |   |      | 
|------------------ |  | -------- | ---- | ------- |  | - | ---- | 
|2003               |  |          |      |        
|Quarter Ended      |  | High Bid |      | Low Bid
|                   |  |          |      |        
|March 31, 2003     |  | $        | 0.13 |         |  | $ | 0.06 | 
|June, 30, 2003     |  | $        | 0.17 |         |  | $ | 0.07 | 
|September 30, 2003 |  | $        | 0.27 |         |  | $ | 0.10 | 
|December 31, 2003  |  | $        | 0.40 |         |  | $ | 0.16 | 

Over-the counter quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may
not necessarily represent actual transactions.

The number of beneficial holders of our common
stock as of February 11, 2004, was approximately 3,199.

We have never paid cash dividends on our capital
stock. We currently intend to retain any earnings for use in the
business and do not anticipate paying any cash dividends in the
foreseeable future.

Issuance of Common Stock and Series F
Preferred Stock in the Abiliti Acquisition and 2002 Private
Placement

On December 20, 2002 Daleen Solutions
acquired substantially all of the assets and certain liabilities
of Abiliti. As consideration for the Abiliti Acquisition, we
issued to Abiliti 11,406,284 shares of our common stock,
115,681 shares of our Series F preferred stock and
warrants to purchase 5,666,069 additional shares of our common
stock at an exercise price of $0.906 per share. On
December 20, 2002, the shares and warrants issued to
Abiliti were transferred to certain creditors of Abiliti,
including Behrman Capital II L.P. and Strategic
Entrepreneur Fund II, L.P. (collectively, the Behrman
Funds). A portion of the securities are currently held in
escrow pending resolution of certain retained liabilities,
including 1,140,629 shares of common stock,
11,568 shares of Series F preferred stock (the common
stock and Series F preferred stock together referred to as
Escrowed Shares), and warrants to purchase 566,607
additional shares of our common stock at an exercise price of
$0.906 per share (Escrowed Warrants).

Concurrently with the consummation of the Abiliti
Acquisition, on December 20, 2002 we completed our 2002
private placement of 10,992,136 shares of our common stock,
115,681 shares of our Series F preferred stock,
warrants to purchase 5,666,069 additional shares of our common
stock at an exercise price of $0.906 per share, and
warrants to purchase 500,000 additional shares of our common
stock at an exercise price of $0.17 per share, for a total
consideration of $5.015 million in cash (the 2002
Private Placement). The

17



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##### Table of Contents



purchasers in the 2002 Private Placement were the
Behrman Funds, which are shareholders and creditors of Abiliti.
As of February 1, 2004, the Behrman Funds beneficially own
approximately 70.30% of our outstanding common stock assuming
the conversion of only their Series F preferred stock and
exercise of their warrants to acquire common stock, net of the
Escrowed Warrants.


The terms of the Series F preferred stock
issued in the Abiliti Acquisition and 2002 Private Placement are
identical to the previously outstanding Series F preferred
stock. Each share of Series F preferred stock is
convertible into 122.4503 shares of our common stock and is
entitled to vote with the common stock on all matters submitted
to a vote of our common stockholders on the basis of 100 votes
per share of Series F preferred stock.

The offering and sale of the Series F
preferred stock and warrants was exempt from registration under
the Securities Act of 1933, as amended, by virtue of
Rule 506 of Regulation D promulgated thereunder.



| |                
| | ---------------
| | Use of Proceeds

The gross proceeds from the 2002 Private
Placement were $5,015,000. We paid our investment advisor
$500,000 in cash plus warrants to purchase 250,000 shares
of our common stock at an exercise price of $0.17 and we paid
Behrman Brothers L.P., a party under common control with the
Behrman Funds, a $650,000 fee. These payments were made in
connection with the Abiliti Acquisition and 2002 Private
Placement. We are using the net proceeds for working capital and
general corporate purposes.

Terms of Series F Preferred
Stock

Number of Shares; Purchase
Price.Pursuant to the Abiliti
Acquisition and 2002 Private Placement, we issued and sold an
aggregate of 231,362 shares of Series F preferred
stock in addition to the 226,862 shares of Series F
preferred stock that were outstanding prior to the closing of
the Abiliti Acquisition and the 2002 Private Placement. The
total number of shares of Series F preferred stock
outstanding as of February 1, 2004 is 449,237 shares.
There are also warrants outstanding to purchase an aggregate of
109,068 shares of Series F preferred stock
(Series F Warrants) with an exercise price of
$166.41 per share of Series F preferred stock that are
exercisable at any time prior to June 7, 2006.

Conversion Price.Each share of Series F preferred stock is convertible at
any time at the option of the holder into shares of our common
stock. The number of shares of common stock issuable upon
conversion of a single share of Series F preferred stock is
determined by dividing the original price per share of the
Series F preferred stock, or $110.94, by the conversion
price in effect on the date of conversion. The current
conversion price of the Series F preferred stock is $0.9060
after giving effect to a one-time reset following our earnings
release for the quarter ended June 30, 2001. Based on the
current conversion price, each share of Series F preferred
stock, including the shares of Series F preferred stock
issuable upon exercise of the Series F Warrants, currently
are convertible into 122.4503 shares of common stock, or an
aggregate of approximately 66,517,144 shares of common
stock assuming the conversion into common stock of all of our
outstanding Series F preferred stock, and the exercise in
full of the Series F Warrants and conversion of the
Series F preferred stock issuable upon such exercise, net
of the Escrowed Warrants. As of February 1, 2004, a total
of 30,007 shares of Series F preferred stock have been
converted to common stock resulting in the issuance of
3,674,362 shares of common stock.

In the event we issue common stock or securities
convertible into common stock at a price per share less than the
conversion price of the Series F preferred stock, the
conversion price will be reduced to be equal to the price per
share of the securities sold. This adjustment provision is
subject to a number of exceptions, including the issuance of
stock or options to employees and the issuance of stock or
options in connection with acquisitions. The conversion price
will also be subject to adjustment as a result of stock splits
and stock dividends on our common stock.

The Series F preferred stock will
automatically convert into common stock at any time after
March 30, 2002, if the common stock trades on The Nasdaq
Stock Market or a national securities exchange at a price per
share of at least $3.3282 for ten trading days within any
twenty-day trading period. The Series F preferred

18



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##### Table of Contents



stock is not subject to automatic conversion if
our common stock is not then listed for trading on The Nasdaq
National Market or a national securities exchange.


Voting Rights.The
holders of the Series F preferred stock have voting rights
entitling them to vote together with the holders of our common
stock as a single class on all matters presented for a vote to
the common stockholders. The Series F preferred stock
entitles the holders thereof to vote with the common stock on
the basis of 100 votes for each share of Series F preferred
stock. Additionally, so long as at least 50% of the shares of
Series F preferred stock that are ever outstanding at any
one time remain outstanding, we are prevented from the following
activities unless we first obtain the approval of a majority of
the outstanding shares of Series F preferred stock:



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | i) authorize or issue any other class or
    series of preferred stock ranking senior to or pari passuwith the Series F preferred stock as to payment of
    amounts distributable upon our dissolution, liquidation or
    winding up or issue any additional shares of Series F
    preferred stock;
|
| | ii) reclassification of any capital stock into
    shares having preferences or priorities senior to or pari
    passuwith the Series F preferred stock;                                                                                                                                              
|
| | iii) amend, alter or repeal any rights of the
    Series F preferred stock; and                                                                                                                                                                                                                       
|
| | iv) pay dividends on any other class or series of
    capital stock.                                                                                                                                                                                                                                  

Dividends.Holders
of Series F preferred stock have the rights to the payment
of dividends only when and if dividends are declared on our
common stock. In the event we pay dividends on our common stock,
the holders of the Series F preferred stock are entitled to
dividends on an as-if-converted basis.

Liquidation
Preference.In the event of a
dissolution, liquidation or winding up of our operations, after
payment or provision for payment of debts, but before any
distribution to the holders of common stock or any other class
or series of our then outstanding capital stock ranking junior
to the Series F preferred stock, the holders of the
Series F preferred stock then outstanding are entitled to
receive a preferential amount of $110.94 per share (the
Preferential Amount), which is equal to the original
purchase price per share; provided however,that
(i) if the assets to be distributed to the holders of the
Series F preferred stock are insufficient to permit the
payment to such holders of the full Preferential Amount, then
all of our assets to be distributed will be distributed ratably
to the holders of the Series F preferred stock and
(ii) if the amount distributable on each share of common
stock upon liquidation, dissolution or winding up of our
operations (after taking into account all distributions that
would be necessary to satisfy the Preferential Amounts due to
holders of the Series F preferred stock) is greater than
the Preferential Amount payable on the Series F preferred
stock, we, in lieu of distributing the Preferential Amount to
the holders of Series F preferred stock, shall make a
distribution in an amount per share to the holders of
Series F preferred stock (on an as-if converted basis)
equal to the amount per share distributed to the holders of
common stock.

Redemption Rights; Rights on Sale of the
Company.Unless otherwise agreed by
the holders of at least a majority of the outstanding shares of
Series F preferred stock, voting or consenting as a
separate class, in the event of a Sale of the
Company we are required to redeem all of the issued and
outstanding shares of Series F preferred stock for a
redemption price equal to the Preferential Amount. A Sale
of the Company means: (i) the acquisition by another
entity by means of merger or consolidation resulting in the
exchange of at least 50% of the outstanding shares of our
capital stock for securities issued or other consideration paid
by the acquiring entity or any parent or subsidiary thereof
(except for a merger or consolidation after the consummation of
which our stockholders immediately prior to such merger or
consolidation own in excess of 50% of the voting securities of
the surviving corporation or its parent corporation); or
(ii) the sale or other disposition by us of substantially
all of our assets (other than a sale or transfer of assets to
one or more of our wholly-owned subsidiaries).

Registration Rights.We filed with the SEC a Registration Statement on Form S-3
for the purpose of registering the shares of common stock
issuable upon conversion of the Series F preferred stock
that covers the Series F preferred stock outstanding prior
to the Abiliti Acquisition and the 2002 Private Placement and
certain shares held by a other stockholders who exercised their
piggyback registration rights. The SEC

19



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##### Table of Contents



declared the Registration Statement effective on
September 25, 2001. With consent of the holders of the
Series F preferred stock, we filed Post-Effective Amendment
No. 1 to Form S-3 Registration Statement on
June 13, 2003, and thereby deregistered the stock. We also
granted to the holders of such Series F preferred stock
(i) the right to demand that we effect up to three
underwritten public offerings of the common stock underlying the
Series F preferred stock and Series F Warrants and
(ii) piggyback registration rights in the event
we subsequently file a registration statement for the sale of
capital stock.


We also entered into a registration rights
agreement with Abiliti, the Behrman Funds and Kaufman Bros., our
investment advisor in the Abiliti Acquisition and 2002 Private
Placement, pursuant to which we have agreed to file up to three
registration statements upon the demand of a majority of, and
covering, the following: (i) the common stock issued in the
Abiliti Acquisition and 2002 Private Placement; (ii) the
common stock issuable upon conversion of the Series F
preferred stock issued in the Abiliti Acquisition and 2002
Private Placement; and (iii) the common stock issuable upon
exercise of the common stock warrants issued in the Abiliti
Acquisition and 2002 Private Placement. In addition, we have
granted to the Behrman Funds piggyback rights
generally entitling them to require that we register their
shares of common stock, including the shares issuable upon
conversion of the Series F preferred stock and upon
exercise of the common stock warrants, when we are registering
our equity securities. The piggyback rights apply only to shares
of our common stock issued in the 2002 Private Placement and
shares issuable upon conversion or exercise of Series F
preferred stock and common stock warrants issued in the 2002
Private Placement.

Certain holders of Series F preferred
stock.The holders of the
Series F preferred stock issued in the Abiliti Acquisition
and 2002 Private Placement include Behrman Capital II L.P.
and an affiliated fund, Strategic Entrepreneur Fund II,
L.P. Mr. Dennis Sisco, a director of Daleen, is a Partner
of Behrman Capital, an investment firm that manages Behrman
Capital II, L.P.






|        |                         
|------- | ------------------------
|Item 6. | Selected Financial Data.

The selected financial data set forth below
should be read in conjunction with the consolidated financial
statements, including the notes thereto, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations included in
Item 7 of this Form 10-K. The following selected
financial data concerning Daleen for and as of the end of each
of the years in the five year period ended December 31,
2003, are derived from the audited consolidated financial
statements of Daleen. The selected financial data is qualified
in its entirety by the more detailed information and
consolidated financial statements, including the notes thereto,
included elsewhere in this report. The audited consolidated
financial statements of Daleen as of December 31, 2003 and
2002 and for each of the years in the three year period ended
December 31, 2003, and the report of KPMG LLP thereon, are
included elsewhere in this report.

20



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##### Table of Contents



SELECTED CONSOLIDATED FINANCIAL DATA

|                                                                             |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |        |        | 
|---------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------ | ------- | ------ | ------ | ---- | ------- | ------ | ------ | ---- | -------- | ------ | ------ |  | ------- | ----- | ------ |  | ------ | ------ | ------ | 
|                                                                             |                                                |                                     
|                                                                             |                                                | Years Ended December 31,            
|                                                                             |                                                |                                     
|                                                                             |                                                | 1999                                 |         | 2000   |        | 2001 |         | 2002   |        | 2003
|                                                                             |                                                |                                      |         |        |        |      |         |        |        |     
|                                                                             |                                                |                                     
|                                                                             |                                                | (in thousands except per share data)
|Revenue:                                                                     |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |       
|                                                                             | Professional services and other                |                                      | $       | 8,321  |        |      |         | 16,743 |        |      |          | 8,867  |        |  |         | 5,154 |        |  |        | 16,590 |       
|                                                                             | License fees                                   |                                      |         | 12,404 |        |      |         | 26,886 |        |      |          | 3,565  |        |  |         | 1,450 |        |  |        | 1,562  |       
|                                                                             |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |       
|                                                                             |                                                | Total revenue                        |         |        | 20,725 |      |         |        | 43,629 |      |          |        | 12,432 |  |         |       | 6,604  |  |        |        | 18,152 | 
|                                                                             |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |       
|Cost of revenue:                                                             |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |       
|                                                                             | Professional services and other                |                                      |         | 7,721  |        |      |         | 13,878 |        |      |          | 7,302  |        |  |         | 2,523 |        |  |        | 5,312  |       
|                                                                             | License fees                                   |                                      |         | 64     |        |      |         | 682    |        |      |          | 1,646  |        |  |         | 232   |        |  |        | 506    |       
|                                                                             |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |       
|                                                                             |                                                | Total cost of revenue                |         |        | 7,785  |      |         |        | 14,560 |      |          |        | 8,948  |  |         |       | 2,755  |  |        |        | 5,818  | 
|                                                                             |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |       
|Gross margin                                                                 |                                                |                                      | 12,940  |        |        |      | 29,069  |        |        |      | 3,484    |        |        |  | 3,849   |       |        |  | 12,334 |       
|Operating expenses:                                                          |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |       
|                                                                             | Sales and marketing                            |                                      |         | 4,342  |        |      |         | 14,680 |        |      |          | 10,895 |        |  |         | 3,738 |        |  |        | 3,315  |       
|                                                                             | Research and development                       |                                      |         | 9,348  |        |      |         | 27,215 |        |      |          | 12,502 |        |  |         | 3,863 |        |  |        | 6,521  |       
|                                                                             | Purchased in-process research and development  |                                      |         | 6,347  |        |      |         |       |        |      |          |       |        |  |         | 104   |        |  |        |       |       
|                                                                             | General and administrative                     |                                      |         | 8,965  |        |      |         | 18,210 |        |      |          | 13,820 |        |  |         | 5,817 |        |  |        | 5,829  |       
|                                                                             | Amortization of goodwill and other intangibles |                                      |         | 607    |        |      |         | 15,205 |        |      |          | 12,014 |        |  |         |      |        |  |        |       |       
|                                                                             | Impairment of long-lived assets                |                                      |         |       |        |      |         |       |        |      |          | 34,604 |        |  |         |      |        |  |        | 500    |       
|                                                                             | Restructuring charges                          |                                      |         |       |        |      |         |       |        |      |          | 11,763 |        |  |         | 745   |        |  |        |       |       
|                                                                             |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |       
|                                                                             |                                                | Total operating expenses             |         |        | 29,609 |      |         |        | 75,310 |      |          |        | 95,598 |  |         |       | 14,267 |  |        |        | 16,165 | 
|                                                                             |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |       
|Operating loss                                                               |                                                |                                      | (16,669 | )      |        |      | (46,241 | )      |        |      | (92,114  | )      |        |  | (10,418 | )     |        |  | (3,831 | )     
|Nonoperating income                                                          |                                                |                                      | 1,329   |        |        |      | 2,456   |        |        |      | 1,125    |        |        |  | 757     |       |        |  | 221    |       
|                                                                             |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |       
|Net loss                                                                     |                                                |                                      | (15,340 | )      |        |      | (43,785 | )      |        |      | (90,989  | )      |        |  | (9,661  | )     |        |  | (3,610 | )     
|Accretion of preferred stock                                                 |                                                |                                      | (122    | )      |        |      |        |        |        |      |         |        |        |  |        |       |        |  |       |       
|Preferred stock dividends arising from beneficial
    conversion features    |                                                |                                      |        |        |        |      |        |        |        |      | (28,512  | )      |        |  |        |       |        |  |       |       
|                                                                             |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |       
|Net loss applicable to common stockholders                                   |                                                | $                                    | (15,462 | )      |        |      | (43,785 | )      |        |      | (119,501 | )      |        |  | (9,661  | )     |        |  | (3,610 | )     
|                                                                             |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |       
|Net loss applicable to common stockholders per
    share  basic and diluted |                                                | $                                    | (1.06   | )      |        |      | (2.02   | )      |        |      | (5.47    | )      |        |  | (0.40   | )     |        |  | (0.08  | )     
|                                                                             |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |       
|Weighted average shares  basic and
    diluted                              |                                                |                                      | 14,548  |        |        |      | 21,671  |        |        |      | 21,836   |        |        |  | 23,919  |       |        |  | 45,980 |       
|                                                                             |                                                |                                      |         |        |        |      |         |        |        |      |          |        |        |  |         |       |        |  |        |       

|                                                                              |  |              |         |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|----------------------------------------------------------------------------- |  | ------------ | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                                              |  |             
|                                                                              |  | December 31,
|                                                                              |  |             
|                                                                              |  | 1999         |         | 2000 |  | 2001 |        | 2002 |  | 2003
|                                                                              |  |              |         |      |  |      |        |      |  |     
|Consolidated Balance Sheet Data:                                              |  |              |         |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Cash and cash equivalents                                                     |  | $            | 52,852  |      |  | $    | 22,268 |      |  | $    | 13,093 |  |  | $ | 6,589  |  |  | $ | 2,497  | 
|Total assets                                                                  |  |              | 133,881 |      |  |      | 99,462 |      |  |      | 21,193 |  |  |   | 18,789 |  |  |   | 13,026 | 
|Current portion of long-term debt and obligations
    under capital leases    |  |              |        |      |  |      | 129    |      |  |      |       |  |  |   | 164    |  |  |   | 26     | 
|Long-term debt and obligations under capital
    leases, less current portion |  |              |        |      |  |      | 607    |      |  |      |       |  |  |   | 26     |  |  |   |       | 
|Stockholders equity                                                          |  | $            | 119,457 |      |  |      | 77,501 |      |  |      | 14,262 |  |  |   | 13,707 |  |  |   | 10,095 | 

21



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|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations.

The following should be read in conjunction
with the accompanying consolidated financial statements and the
related notes thereto included elsewhere herein.

Overview

From our founding in 1989 and through 1996, we
operated as a software consulting company, performing contract
consulting and software development services in a contract
placement and staffing business. We sold the contract placement
and staffing business to a third party in 1996. Since 1996, we
have been a provider of software solutions and have evolved to
become a global provider of advanced billing and customer care,
event management and revenue assurance software for traditional
and next generation communication service providers and other
technology solutions providers. As we grew in size and
geography, we added new customer care and management products to
enhance our billing applications. We further expanded our
product offerings as a result of the Abiliti Acquisition in
December 2002, adding a proven event management software
platform and a carrier-class outsourcing operation. In June
2003, we launched a new revenue assurance product. Our expanded
product suite and flexible delivery channels allow us to serve a
broader range of customer needs in a variety of markets. In
addition to our products and applications, we offer professional
consulting services, training, maintenance, support and third
party software fulfillment, in each case related to the products
we develop.

Critical Accounting Policies and
Estimates

The discussion and analysis of our financial
condition and results of operations included herein are based
upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we
evaluate our estimates, including those related to our allowance
for doubtful accounts, investments, goodwill impairment, income
taxes, restructuring, long-term service contracts, contingencies
and litigation. We base our estimates on historical experience
and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. We discuss below the critical accounting policies that
affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements. Actual
results may differ from these estimates under different
assumptions or conditions. For further information on the
critical accounting policies, see Note 1 to our Notes to
Consolidated Financial Statements, included elsewhere in this
Form 10-K.



| |                    
| | -------------------
| | Revenue Recognition

Revenue related to outsourcing services consists
of (1) discovery work and (2) monthly processing fees
generated from the Companys provision of billing and event
management services. These two deliverables are considered
separate units of accounting because these elements can and have
been sold separately and they create stand alone value for the
customer. The revenue associated with discovery work is
recognized on a time and materials basis as the work is
performed. The monthly processing fees are recognized as the
related services are rendered and are billed monthly based on
transaction volume processed, percentage of revenue billed on
behalf of customers or monthly minimum charges per contractual
arrangements.

Revenue from site license fees is based on the
size of the customers authorized system, such as number of
authorized users and computer processors, revenue billed through
the system, or other factors. We receive license fees from our
customers upon signing of the license agreement. In some cases
we expect to receive additional license fees as our customers
grow and add additional subscribers, or increase their revenue
billed through the system. We also derive license fee revenue
from existing customers who purchase additional products from us
to increase the functionality of their current system. We expect
to receive recurring license fees from these activities in the
future.

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Revenue from license fees is recognized when
persuasive evidence of an arrangement exists, the software is
shipped, the fee is fixed and determinable and collectibility is
probable. An arrangement fee is generally not presumed to be
fixed or determinable if payment of a significant portion of the
license fee is not due until after expiration of the license or
due after the normal and customary terms usually given to our
customers. At times, we enter into extended payment terms with
certain customers if we believe it is a good business
opportunity. Revenue related to arrangements containing extended
payment terms where the fees are not considered fixed and
determinable is deferred until payments are due. Granting
extended payment terms results in a longer collection period for
accounts receivable and slower cash inflows from operations. If
collectibility is not considered probable, revenue is recognized
when the fee is collected.

Professional service fees are primarily
recognized separately from the license fee since the services
are not considered significant to the functionality of the
software and the software does not require significant
modification, production or customization. In instances when the
services performed in conjunction with certain contracts are
significant to the functionality of the software and the
software requires significant modification and customization at
the customer site, we recognize the total license and services
amount together. There are two types of service contracts that
are entered into with customers: fixed fee and time and
materials.

We recognize revenue on fixed fee contracts using
the percentage of completion method. The percentage of
completion method relies on estimates of total expected contract
revenue and costs. We follow this method since reasonably
dependable estimates of the revenue and costs can be made.
Recognized revenues and profits are subject to revisions as the
contract progresses to completion. Revisions in profit estimates
are charged to income in the period in which the facts that give
rise to the revision become known. We recognize revenue related
to professional services under a time and materials arrangement
as services are performed.

Revenue related to customer maintenance
agreements is deferred and recognized ratably on a straight-line
basis over the maintenance period. Maintenance is renewable
annually and we expect to receive annual maintenance fees from
these activities in the future.



| |                    
| | -------------------
| | Accounts Receivable

We maintain an allowance for doubtful accounts
for estimated losses resulting from the inability of our
customers to make required payments. We continuously monitor
collections and payments from our customers and the allowance
for doubtful accounts is based on historical experience and any
specific customer collection issues that we have identified. If
the financial condition of our customers were to continue to
deteriorate resulting in an impairment of their ability to make
payments, additional allowances may be required. Where an
allowance for doubtful accounts has been established with
respect to customer receivables, as payments are made on such
receivables or if the customer goes out of business with no
chance of collection, the allowances will decrease with a
corresponding adjustment to accounts receivable as deemed
appropriate.



| |                            
| | ---------------------------
| | Accounting for Income Taxes

We record a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not
to be realized. We believe that it is more likely than not that
the deferred tax assets will not be realized and therefore we
have established a valuation allowance for the entire deferred
tax assets, net of deferred tax liabilities. While we have
considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the
valuation allowance, in the event we were to determine that we
would be able to realize our deferred tax assets an adjustment
to the deferred tax asset would increase income in the period
such determination was made.



| |         
| | --------
| | Goodwill

In 2002, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 142
Goodwill and Other Intangible Assets.Goodwill is no longer amortized but tested for impairment at
least annually. At December 31, 2002 and 2003 the goodwill
balance was related to the Abiliti Acquisition.

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At December 31, 2003, we evaluated goodwill
for impairment and determined that goodwill was not impaired. In
performing this impairment assessment, management made judgments
regarding the anticipated future cash flows from the Abiliti
Acquisition. Different assumptions in this assessment could have
led to a different result, which could have had a material
effect on our reported earnings. The conditions that could
trigger an impairment write-down in the future include a
significant downward trend in our operating results or cash flow
of Daleen Solutions, a decrease in demand for BillingCentral
services, a change in the competitive environment and other
economic factors.

Results of Operations

In December 2002, we acquired substantially all
of the assets and assumed certain liabilities of Abiliti. The
Abiliti Acquisition created an additional revenue stream to our
business that helped position us to be a long-standing
competitor in the marketplace. In addition to licensing our
software, we now offer a comprehensive outsourcing solution
through our BillingCentral carrier-class data center. The
recurring revenue from BillingCentral is significant to our
ongoing operations. Additionally, as a result of the Abiliti
Acquisition, we expanded our product suite to include event
management and revenue assurance applications that compliment
our RevChain billing and customer management products. RevChain
and Asuriti are offered as licensed software and outsourced
solutions.

For the year ended December 31, 2002, the
results of operations includes ten days of operating results of
Daleen Solutions.

In 2003, we continued to be a competitor in the
billing and OSS market while managing our costs and use of cash
to the lowest levels in our history. We focused on achieving
growth by selling additional services and upgrades to our
installed base of customers and offering our total solutions
portfolio to new and existing customers. In May 2003, we signed
the largest customer contract in our history when we executed a
three-year license and services agreement with a customer in
Bogotá, Colombia (the ETB Contract).

We continued to focus on delivering our products
to existing customers through our direct sales force and sales
alliance partners. In 2004, we expect to continue to grow. We
believe that in the future our results of operations could be
adversely affected by various factors, including:



| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | difficulties in raising additional funds for
    working capital considerations;
|
| |  | lack of market acceptance of new products,
    upgrades and services;           
|
| |  | general economic or political condition in
    Colombia;                        
|
| |  | difficulties in implementing strategic alliances;                               
|
| |  | inability to retain key personnel;                                              
|
| |  | changes in accounting rules such as expensing of
    stock options;             
|
| |  | concerns of customers and prospective customers
    on our long term viability; 
|
| |  | continued decline in business from our three
    significant customers;         
|
| |  | downward trends in the telecommunications
    industry;                         
|
| |  | introduction of products and services by existing
    and new competitors; and  
|
| |  | the inability to terminate our public company
    status.                       



| |                      
| | ---------------------
| | Restructuring Charges

In 2001, the Board of Directors approved three
cost reduction plans (the 2001 Restructurings). We
recorded $11.4 million in restructuring charges in the year
ended December 31, 2001 related to the 2001 Restructurings.
These charges included the estimated costs related to workforce
reductions, downsizing and closing of facilities, asset
writedowns and other costs. The workforce reductions included
the termination of approximately 400 employees throughout our
Boca Raton, Florida; Atlanta, Georgia; and Toronto, Ontario,

24



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Canada facilities, and included employees from
substantially all of our employee groups. The downsizing and
closing of facilities included the consolidation of our North
American workforce into one Boca Raton, Florida office, the
closure of our Toronto and Atlanta facilities and rental
property lease termination charges of $1.4 million.


The asset writedowns were primarily related to
the disposition of duplicative furniture and equipment and
computer equipment from terminated employees, which was not
resalable. Other costs included costs incurred that no longer
provided a benefit to us such as recruiting fees and relocation
costs related to employment offers that were rescinded,
penalties for cancellation of a user conference and trade shows,
accounting and legal fees, penalties for cancellation of
software maintenance contracts in Atlanta and Toronto and other
miscellaneous expenses.

The 2001 Restructurings resulted in significant
savings in the amount of approximately $29.0 million in
2002 related to the cost of salaries and benefits for terminated
employees.

On May 13, 2002, our Board of Directors
approved the 2002 Restructuring and we announced a plan to
further reduce expenses on May 14, 2002. We recorded a
$745,000 restructuring charge in the year ended
December 31, 2002 related to the 2002 Restructuring. This
charge included the estimated costs related to workforce
reduction of 35 employees.



| |                    
| | -------------------
| | Inlogic Acquisition

In December 1999, we acquired all of the issued
and outstanding capital shares of Inlogic. In connection with
this acquisition we recorded goodwill in the amount of
$55.8 million. Goodwill was being amortized over a four
year useful life. Due to changes in economic conditions and our
past revenue performance, we assessed the recoverability of
goodwill in 2001 by determining whether the amortization of the
goodwill over the remaining life could be received through
undiscounted future operating cash flow. As a result, we wrote
off the remaining balance of goodwill in the year ended
December 31, 2001 which amounted to a reduction of goodwill
in the amount of approximately $31.2 million. This was
mainly due to the estimated shortfall of the cash flows,
discounted at a rate commensurate with the associated risks.



| |                                   
| | ----------------------------------
| | Sale of
    PartnerCommunity, Inc.

Our results of operations in 2002 and 2001
included PartnerCommunity, Inc.
(PartnerCommunity), a subsidiary. We sold this
subsidiary on June 24, 2002.

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##### Table of Contents





| |                  
| | -----------------
| | Operating Results

The following table sets forth our results of
operations expressed as a percentage of total revenue for the
periods indicated. These historical results are not necessarily
indicative of results to be expected for any future period.

DALEEN TECHNOLOGIES, INC.

Results of Operations

|                                     |                                                |                          |        |       |       |      |        |       |       |  |       |       |       | 
|------------------------------------ | ---------------------------------------------- | ------------------------ | ------ | ----- | ----- | ---- | ------ | ----- | ----- |  | ----- | ----- | ----- | 
|                                     |                                                |                         
|                                     |                                                | Years Ended December 31,
|                                     |                                                |                         
|                                     |                                                | 2001                     |        | 2002  |       | 2003
|                                     |                                                |                          |        |       |       |     
|As a Percentage of Total
    Revenue |                                                |                          |        |       |       |      |        |       |       |  |       |      
|Revenue:                             |                                                |                          |        |       |       |      |        |       |       |  |       |      
|                                     | Professional services and other                |                          |        | 71.3% |       |      |        | 78.0% |       |  |       | 91.4% |      
|                                     | License fees                                   |                          |        | 28.7  |       |      |        | 22.0  |       |  |       | 8.6   |      
|                                     |                                                |                          |        |       |       |      |        |       |       |  |       |      
|                                     |                                                | Total revenue            |        |       | 100.0 |      |        |       | 100.0 |  |       |       | 100.0 | 
|Cost of revenue:                     |                                                |                          |        |       |       |      |        |       |       |  |       |      
|                                     | Professional services and other                |                          |        | 58.7  |       |      |        | 38.2  |       |  |       | 29.3  |      
|                                     | License fees                                   |                          |        | 13.2  |       |      |        | 3.5   |       |  |       | 2.7   |      
|                                     |                                                |                          |        |       |       |      |        |       |       |  |       |      
|                                     |                                                | Total cost of revenue    |        |       | 71.9  |      |        |       | 41.7  |  |       |       | 32.0  | 
|                                     |                                                |                          |        |       |       |      |        |       |       |  |       |      
|Gross Margin                         |                                                |                          | 28.1   |       |       |      | 58.3   |       |       |  | 68.0  |      
|Operating expenses:                  |                                                |                          |        |       |       |      |        |       |       |  |       |      
|                                     | Sales and marketing                            |                          |        | 87.6  |       |      |        | 56.6  |       |  |       | 18.3  |      
|                                     | Research and development                       |                          |        | 100.6 |       |      |        | 60.1  |       |  |       | 35.9  |      
|                                     | General and administrative                     |                          |        | 111.2 |       |      |        | 88.1  |       |  |       | 32.1  |      
|                                     | Amortization of goodwill and other intangibles |                          |        | 96.6  |       |      |        |      |       |  |       |      |      
|                                     | Impairment of long-lived assets                |                          |        | 278.3 |       |      |        |      |       |  |       | 2.8   |      
|                                     | Restructuring charges                          |                          |        | 94.6  |       |      |        | 11.3  |       |  |       |      |      
|                                     |                                                |                          |        |       |       |      |        |       |       |  |       |      
|                                     |                                                | Total operating expenses |        |       | 768.9 |      |        |       | 216.1 |  |       |       | 89.1  | 
|                                     |                                                |                          |        |       |       |      |        |       |       |  |       |      
|Operating loss                       |                                                |                          | (740.8 | )     |       |      | (157.8 | )     |       |  | (21.1 | )    
|Nonoperating income                  |                                                |                          | 9.1    |       |       |      | 11.5   |       |       |  | 1.2   |      
|                                     |                                                |                          |        |       |       |      |        |       |       |  |       |      
|Net loss                             |                                                |                          | (731.7 | )%    |       |      | (146.3 | )%    |       |  | (19.9 | )%   
|                                     |                                                |                          |        |       |       |      |        |       |       |  |       |      



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2003 Compared
    to Year Ended December 31, 2002

Total Revenue.Total
revenue, which includes professional services and other revenue
and license revenue, increased $11.5 million, or 174.8%, to
$18.2 million in 2003 from $6.6 million in 2002. The
primary reasons for the increase in revenue is related to the
outsourcing services revenue stream related to the Abiliti
Acquisition and the new contracts that were signed in 2003,
including the ETB Contract.

Professional Services and
Other.Our professional services and
other consists of revenue from professional consulting services,
training, maintenance and support, and third-party software
fulfillment, all related to the software products we develop.
Consulting services are offered on a fixed fee basis or on a
time and materials basis. Third-party software fulfillment is
offered on a cost plus basis. In addition, these
revenues include the BillingCentral outsourcing operation.
Outsourced services are billed monthly and recognized as
services are rendered. Professional services and other revenue
increased $11.4 million, or 221.9%, in 2003 to
$16.6 million, compared to $5.2 million in 2002. The
increase was primarily related to revenue earned by our
outsourcing services and the professional services performed
under the ETB Contract. Professional services and other revenue
constituted 91.4% of total revenue in 2003, compared to 78.0% in
2002.

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##### Table of Contents



License Fees.Our
license fees are derived from licensing our software products.
License fees increased $111,000, or 7.7% in 2003 to
$1.6 million from $1.5 million in 2002. The increase
was primarily related to revenue recognized on a percentage of
completion basis under the ETB Contract and $307,500 of revenue
recognized from a customer in partial satisfaction of amounts to
be paid by this customer under the terms of a settlement
agreement with regard to amounts owed under a software license
agreement. License fees constituted 8.6% of total revenue in
2003, compared to 22.0% in the same period in 2002.

Cost of Revenue.Cost of revenue increased $3.0 million, or 111.1%, to
$5.8 million in 2003, from $2.8 million in the same
period in 2002. The cost of revenue includes both cost of
professional services and other and cost of license fees. These
components include the cost of direct labor, benefits,
subcontractor costs, overhead and materials associated with the
fulfillment and delivery of licensed products, amortization
expense related to prepaid third-party licenses and related
corporate overhead costs to provide professional services to our
customers. These costs increased due to (1) the increase in
labor costs related to the Abiliti Acquisition, (2) the
write-off of $202,000 of prepaid third-party software license
costs because the contract expired and these products were no
longer available to be sublicensed to customers, (3) the
recording of $145,000 related to a stamp tax that was incurred
upon execution of the ETB Contract, (4) an increase in
third party subcontracting costs for work performed under the
ETB Contract and (5) an increase in third party software
costs related to the increase in third party software revenue.
The total cost of revenue as a percentage of total revenue
decreased to 32.0% in 2003, compared to 41.7% in 2002. This
decrease in the cost of revenue as a percentage of total revenue
resulted from the increase in total revenue in 2003.

Cost of Professional Services and
Other.Cost of professional services
and other includes cost of direct labor, benefits,
subcontracting costs, third-party software and related corporate
overhead costs to provide professional services and training to
our customers. Cost of professional services and other increased
$2.8 million, or 110.5%, to $5.3 million in 2003, from
$2.5 million in 2002. These costs increased due to
(1) the increase in labor costs related to the Abiliti
Acquisition, (2) an increase in third party subcontracting
costs for work performed under the ETB Contract and (3) an
increase in third party software costs related to the increase
in third party software revenue. Cost of professional services
and other decreased to 29.3% of professional services and other
revenue in 2003 compared to 38.2% in 2002 due to our achieving
higher margins related to outsourcing services.

Cost of License
Fees.Cost of license fees includes
direct cost of labor, benefits and packaging material for
fulfillment and shipment of our software products and
amortization expense related to prepaid third-party licenses.
Cost of license fees increased $273,600, or 117.6% to $506,200,
in 2003, from $232,600 in 2002 due to the $202,000 write-off of
prepaid third-party software license costs and a $145,000 stamp
tax that was incurred upon execution of the ETB Contract. Cost
of license fees as a percentage of total license revenue
increased to 32.4% of license revenue in 2003, compared to 16.0%
for the same period in 2002 due to the corresponding increase in
license revenue.

Sales and Marketing.Sales and marketing expenses consist primarily of salaries,
commissions and bonuses earned by sales, marketing and partner
management personnel, travel and entertainment, trade show and
marketing program costs, promotional and related corporate
overhead costs. These expenses decreased $422,200, or 11.3%, to
$3.3 million in 2003, from $3.7 million in 2002. The
decrease in 2003 was a result of our cost reduction measures
taken in May 2002 with a corresponding decrease in travel and
entertainment costs and tradeshow costs. In addition, the
decrease resulted from the reduction in sales and marketing
activities due to the sale of PartnerCommunity in June 2002. As
a percentage of total revenue, these expenses decreased to 18.3%
in 2003 compared to 56.6% in 2002 due to the decrease in sales
and marketing expenses as well as the increase in total revenue.

Research and
Development.Research and development
expenses consist primarily of salaries and benefits for software
developers, product testing and benchmarking, management and
quality assurance personnel, subcontractor costs and related
corporate overhead costs. Our research and development expenses
increased $2.6 million, or 64.4% to $6.5 million in
2003, from $4.0 million in 2002. The increase was primarily
due to the increase in labor costs associated with the Abiliti
Acquisition. As a percentage of total revenue,

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these expenses decreased to 35.9% in 2003
compared to 60.1% for the same period in 2002 mainly due to the
increase in total revenue.


General and
Administrative.General and
administrative expenses consist primarily of salaries, benefits
and related costs for our executive, finance and accounting,
facilities, human resources and information systems personnel,
and related corporate overhead costs. Our general and
administrative expenses increased $14,000, or 0.2%, to
$5.83 million in 2003, from $5.82 million in 2002. The
increase was primarily due to the increase in labor costs
associated with the Abiliti Acquisition in addition to the
payment of $186,900 in compensation to our board of directors in
2003. The increase was offset by a decrease in our provision for
bad debt. In 2003 there was a net recovery of $72,000 due to the
receipt of a payment for pre-petition claims, which were fully
reserved from a customer who declared bankruptcy in 2000
compared to a charge of $373,000 in 2002. The charge for 2002
was due to certain customers significantly reducing or
liquidating their operations in 2002. As a percentage of total
revenue, general and administrative expenses decreased to 32.1%
in 2003 from 88.1% in 2002 due to the increase in total revenue.

Impairment of Long-Lived
Assets.Impairment charges increased
$500,000, or 100%, to $500,000 in 2003, from $0 in 2002.
Impairment charges consisted of the impairment of an investment
in a third-party technology company due to a decline in fair
value, which was other than temporary. This investment was fully
written off in June 2003

Restructuring
Charges.Restructuring charges
decreased $745,000, or 100%, to $0 in 2003 from $745,000 for
2002. Restructuring charges in 2002 was a result of the cost
reduction measures taken in May 2002. There were no cost
reduction measures taken in 2003.

Other Income.Other
income decreased $536,200, or 70.8%, to $221,200 in 2003 from
$757,400 in 2002. This was primarily attributable to recording a
gain of $391,000 associated with the sale of PartnerCommunity in
June 2002. In addition, investment earnings decreased due to the
decrease in cash and interest rates in 2003 compared to 2002.



| |                                                                          
| | -------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared
    to Year Ended December 31, 2001

Total Revenue.Total
revenue, which includes license fees and professional services
and other revenue, decreased $5.8 million, or 46.9%, to
$6.6 million in 2002 from $12.4 million in 2001. The
primary reason for the lower revenue is related to fewer license
contracts being signed in the year ended December 31, 2002
as compared to the same period in 2001. In addition, the reduced
number of contracts signed in 2002 reduced services revenue in
2002 as a result of fewer product implementations and the need
for less third-party software fulfillment.

License Fees.Our
license fees are derived from licensing our software products.
License fees decreased $2.1 million, or 59.3% in the year
ended December 31, 2002, to $1.5 million, from
$3.6 million for the same period in 2001. This decrease was
due to fewer license contracts being signed in the year ended
December 31, 2002 compared to the same period in 2001. The
primary reasons for this reduction include an overall reduction
in technology spending, market conditions in the industries in
which our customers operate, lengthening of the sales cycle and
postponement of customer licensing decisions. License fees
constituted 22.0% of total revenue in the year ended
December 31, 2002 compared to 28.7% in the same period in
2001.

Professional Services and
Other.Our professional services and
other consists of revenue from professional consulting services,
training, maintenance and support, and third party software
fulfillment all related to the software products we develop.
Consulting services are offered on a fixed fee basis and on a
time and material basis. Third-party software fulfillment is
offered on a cost plus basis. In addition, our
professional services and other revenue in 2002 includes ten
days of operating BillingCentral, our outsourcing solution,
acquired in the Abiliti Acquisition. Outsourced services are
billed and recognized as services are rendered. Professional
services and other revenue decreased $3.7 million, or
41.9%, to $5.2 million in the year ended December 31,
2002 from $8.9 million in the same period in 2001. The
decrease was due to less ongoing product implementations, fewer
maintenance contracts due to customer combinations and
insolvency, and less revenue associated with third party
software fulfillment offset by the revenue earned by our
outsourcing

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services for ten days in 2002. Professional
services and other revenue increased to 78.0% of total revenue
in the year ended December 31, 2002 compared to 71.3% in
the same period in 2001. The increase as a percentage of total
revenue is due to a reduction in license fee revenue in the year
ended December 31, 2002.


Cost of Revenue.Total cost of revenue decreased $6.2 million, or 69.2%, to
$2.8 million in the year ended December 31, 2002 from
$8.9 million in 2001. Total cost of revenue includes both
cost of license fees and cost of professional services and
other. These components include the cost of direct labor,
benefits, third party fees paid for product referrals, overhead
and materials associated with the fulfillment and delivery of
the license products, and related corporate overhead costs to
provide professional services to customers. In addition, the
costs in 2002 include ten days of costs associated with Abiliti
Acquisition. The total costs decreased due to a decrease in
total revenue and a decrease in amortization of prepaid third
party license fees. In the year ended December 31, 2001,
the Company wrote off $1.2 million of prepaid third party
software license costs because these products were no longer
integrated with our product. The decrease in costs were also the
result of our cost reduction measures taken in the 2001
Restructurings and the 2002 Restructuring. Total cost of revenue
as a percentage of total revenue decreased to 41.7% in 2002 from
71.9% in 2001.

Cost of License
Fees.Cost of license fees includes
direct cost of labor, benefits and packaging material for
fulfillment and shipment of our software products, third-party
software license payments and related documentation and
third-party referral fees associated with customer contracts.
Cost of license fees decreased to $232,000, or 85.9%, in the
year ended December 31, 2002 from $1.6 million in the
same period in 2001. The decrease was due to a decrease in
amortization expense related to prepaid third party licenses. In
the year ended December 31, 2001 the Company wrote down
$1.2 million of certain prepaid third party license costs
because these products were no longer integrated with our
product.

Cost of Professional Services and
Other.Cost of professional services
and other includes direct cost of labor, benefits, third party
software and related overhead costs to provide professional
services to customers. Cost of professional services and other
decreased $4.8 million, or 65.5%, to $2.5 million in
the year ended December 31, 2002 from $7.3 million in
the same period in 2001. These costs decreased as a result of
our cost reduction measures taken with the 2001 Restructurings
and the 2002 Restructuring. In addition, the revenue related to
the professional services and other has decreased. The decrease
in costs were slightly offset by an increase in labor costs for
ten days in 2002 related to the Abiliti Acquisition. Cost of
professional services and other decreased to 48.9% of
professional services and other revenue in 2002 compared to
82.3% in 2001.

Sales and Marketing.Sales and marketing expenses consist primarily of salaries,
benefits, commissions and bonuses earned by sales, marketing and
partner management personnel, travel and entertainment, trade
show and marketing program costs, promotional and related
corporate overhead costs. These expenses decreased
$7.1 million, or 65.7%, to $3.7 million in the year
ended December 31, 2002 from $10.9 million in the same
period in 2001. The decrease was a result of a decrease in our
trade show presence, decrease in sales commissions and bonuses
as well as the cost reduction measures taken with the 2001
Restructurings and the 2002 Restructuring. As a percentage of
total revenue, these expenses decreased to 56.6% in 2002 from
87.6% in 2001.

Research and
Development.Research and development
expenses consist primarily of salaries, benefits and bonuses for
software developers, product testing and benchmarking,
management and quality assurance personnel, subcontractor costs
and related corporate overhead costs. Our research and
development expenses decreased $8.5 million, or 68.3%, to
$4.0 million in the year ended December 31, 2002 from
$12.5 million in the same period in 2001. The overall
decrease was a result of the cost reduction measures associated
with the 2001 Restructurings and the 2002 Restructuring slightly
offset by the increased amount of labor related to the Abiliti
Acquisition. As a percentage of total revenue, these expenses
decreased to 60.1% in 2002 from 100.6% in 2001.

General and
Administrative.General and
administrative expenses consist primarily of salaries, benefits
and bonuses for executive, finance and accounting,
administrative, facilities, human resources and information
systems personnel. It also consists of non-cash stock
compensation expense, provision for bad debts and related
corporate overhead costs. Our general and administrative
expenses decreased $8.0 million, or 57.9%, to
$5.8 million in the year ended December 31, 2002 from
$13.8 million the same period in 2001. This decrease

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was attributed to the aggregate amount of
approximately $5.3 million non-cash charges recorded in the
year ended December 31, 2001, encompassing: (i) an
asset write-down of $1.0 million related to an investment;
(ii) the issuance of warrants to purchase common stock in
connection with legal settlement resulting in a charge of
approximately $495,000; (iii) a charge of $1.2 million
related to amortization of stock compensation expense due to
options issued in 1999 and 2000 with exercise prices below fair
market value compared to $22,400 in amortization of stock
compensation in the same period in 2002; (iv) an increase
in the allowance for non-recourse loans in the amount of
approximately $1.2 million due to a decline in our stock
price at December 31, 2001 and the impact of such declines
on the stock pledged as collateral; and (v) a
$1.7 million charge to our provision for bad debt for the
year ended December 31, 2001 compared to a $270,000 charge
for the same period in 2002. The provision in year 2001 was due
to the market conditions in the telecommunications industry and
certain customers significantly reducing or liquidating their
operations in 2001. The decrease in general and administrative
expenses was also a direct result of the cost reduction measures
associated with the 2001 Restructurings and the 2002
Restructuring offset by the increased amount of labor and
severance costs recorded related to the Abiliti Acquisition. The
severance costs amounted to approximately $800,000 and related
primarily to the resignation of our chief executive officer and
president. As a percentage of total revenue, general and
administrative expenses decreased to 88.1% in 2002 from 111.2%
in 2001.


Amortization of Goodwill and Other
Intangibles.Amortization expense
decreased $12.0 million, or 100%, to $0 in the year ended
December 31, 2002, from $12.0 million for the same
period in 2001. Goodwill and other intangibles was related to
the acquisition of Inlogic and was considered impaired and
written off during 2001. No amortization of goodwill and other
intangibles was recorded in 2002.

Impairment of Long-Lived
Assets.Impairment charges decreased
$34.6 million, or 100%, to $0 in the year ended
December 31, 2002, from $34.6 million for the same
period in 2001. Impairment charges in the year ended
December 31, 2001 consisted of (i) write-off of
employee workforce of $1.5 million; (ii) impairment of
property and equipment in the amount of $1.9 million; and
(iii) an impairment of goodwill of $31.2 million. Due
to various restructuring activities initiated by us, we
performed an evaluation of the recoverability of the employee
workforce acquired in the acquisition of Inlogic under
SFAS No. 121 in 2001. We determined that this asset was
impaired and in connection with this determination, we recorded
an impairment charge in the amount of approximately
$1.5 million. In addition, we determined that certain
property, leasehold improvements and equipment, which mainly
represented computer equipment and furniture from the Toronto
and Atlanta facilities, was impaired. We recorded an impairment
charge of approximately $1.9 million during the year ended
December 31, 2001 representing the difference between the
fair value and the carrying value of the assets. We recorded an
impairment charge to goodwill in the amount of approximately
$1.1 million in March 2001 related to certain gateway
products acquired from Inlogic on December 16, 1999 which
we do not plan to promote and license in the future. In
addition, due to economic conditions and our past revenue
performance, we performed an evaluation of the recoverability of
the goodwill under SFAS No. 121 over the remaining
useful life and determined that the undiscounted future
operating cash flows projected was less than the goodwill
balance at December 31, 2001. This resulted in an
additional writedown of goodwill in the amount of approximately
$30.1 million at December 31, 2001. An assessment of
the goodwill related to Abiliti was evaluated at
December 31, 2002 and no impairment was recorded in
accordance with SFAS No. 142.

Restructuring
Charges.Restructuring charges
incurred by us in the year ended December 31, 2001, related
to the 2001 Restructurings totaled $11.8 million. These
charges included $6.3 million of employee termination
benefits, $2.5 million of facility costs, $2.9 million
of asset writedowns, and $220,000 of other restructuring costs
which include penalties incurred for cancellations of trade
shows and marketing programs, recruiting fees and relocation
costs related to employment offers that were rescinded,
penalties incurred for

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cancellation of software maintenance contracts,
legal fees and other costs. The costs were from the following
financial statement captions:


|                                      |  |   |               | 
|------------------------------------- |  | - | ------------- | 
|Cost of sales  professional services |  | $ | 1.7 million   | 
|Research and development              |  | $ | 2.6 million   | 
|Sales and marketing                   |  | $ | 1.6 million   | 
|General and administrative            |  | $ | 6.0 million   | 
|                                      |  |   |               | 
|                                      |  | $ | 11.9  million | 
|                                      |  |   |               | 

Included in the above totals, is $110,000 related
to foreign currency translation exchange losses.

Seasonality

Historically, our operating results have varied
significantly from quarter to quarter due to operating under a
licensed software model. Fluctuations from quarter to quarter in
2003 were less severe because a significant portion of our
revenues are derived from the delivery of outsourced billing and
event management services. However, we will still experience
some variations in operating results from quarter to quarter
including delays in completing contract negotiations with large
license contracts without an offset by a corresponding reduction
in fixed costs. We have not experienced seasonal fluctuations.
For all these reasons, we believe that results of operations for
interim periods should not be relied upon as any indication of
the results to be expected in any future period.

Off-Balance Sheet Agreements

We had no off-balance sheet arrangements as of
and for the year ending December 31, 2003.

Liquidity and Capital Resources

The following table provides information relating
to our material contractual obligations at December 31,
2003.

|                        |       |                                      |       |           |  |           |       |           |  |         |     |     |  |  |     |     |  |  |    |    | 
|----------------------- | ----- | ------------------------------------ | ----- | --------- |  | --------- | ----- | --------- |  | ------- | --- | --- |  |  | --- | --- |  |  | -- | -- | 
|                        |       |                                     
|                        |       | Payment Due By Period (in thousands)
|                        |       |                                     
|                        |       |                                      |       | Less Than |  |           |       | More Than
|Contractual Obligations |       | Total                                |       | 1 Year    |  | 1-3 Years |       | 3-5 Years |  | 5 Years
|                        |       |                                      |       |           |  |           |       |           |  |        
|Capital leases          |       | $                                    | 27    |           |  |           | 27    |           |  |         |    |     |  |  |    |     |  |  |   |   
|Operating leases        |       |                                      | 2,139 |           |  |           | 1,011 |           |  |         | 536 |     |  |  | 544 |     |  |  | 48 |   
|Purchase obligations    |       |                                      | 70    |           |  |           | 70    |           |  |         |    |     |  |  |    |     |  |  |   |   
|                        |       |                                      |       |           |  |           |       |           |  |         |     |     |  |  |     |     |  |  |    |   
|                        | Total |                                      | $     | 2,246     |  |           |       | 1,118     |  |         |     | 536 |  |  |     | 544 |  |  |    | 48 | 
|                        |       |                                      |       |           |  |           |       |           |  |         |     |     |  |  |     |     |  |  |    |   

Net cash used in operating activities was
$4.0 million for the year ended December 31, 2003,
compared to $9.2 million for the year ended
December 31, 2002. The principal use of cash for both
periods was to fund our losses from operations.

Net cash used in financing activities was
$164,000 for the year ended December 31, 2003, compared to
$3.6 million provided by financing activities for the year
ended December 31, 2002. In 2003 the cash used was related
to payments made under capital leases. In 2002, the cash
provided was primarily related to the net proceeds received from
the 2002 Private Placement and Abiliti Acquisition.

Net cash used in investing activities was
$572,000 for the year ended December 31, 2003 compared to
$1.1 million for the year ended December 31, 2002. The
cash used in investing activities in 2002 was mainly related to
transaction costs related to the Abiliti Acquisition and capital
expenditures offset by cash received from the sale of
PartnerCommunity. The cash used in 2003 was primarily related to
the payment of the remainder of transaction costs in the Abiliti
Acquisition and capital expenditures.

We incurred net losses of approximately
$3.6 million for the year ended December 31, 2003, and
we had an accumulated deficit of $214.5 million at
December 31, 2003. Cash and cash equivalents and restricted
cash at December 31, 2003 were $3.1 million. As a
result of our business concentration risk, past recurring losses

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from operations and accumulated deficit, the
independent accountants report included in our
December 31, 2003 consolidated financial statements
contains an explanatory paragraph that states that our recurring
losses from operations and accumulated deficit raised
substantial doubt about our ability to continue as a going
concern.


In February 2004, we closed the Operating Loan
with SVB, guaranteed by EXIM Bank. The term of the Operating
Loan is fifteen months and total funding is $2,700,000. We can
borrow against the Operating Loan based on estimated funding
dates and may have outstanding borrowings at any given time of
up to $2,000,000. The proceeds of the Operating Loan will be
used for operating costs associated with our contract with ETB.
We have borrowed $1,732,000 against this loan as of
March 1, 2004. Interest accrues at the rate of prime plus
2% (minimum 4%) per annum. SVB will have a first priority
security interest in all of our assets until the Operating Loan
is paid in full. The Operating Loan contains customary
representations and warranties and covenants, including a
covenant requiring us to maintain a tangible net worth of
$4,000,000. We currently are in compliance with all covenants
under the Operating Loan. We intend to repay the Operating Loan
solely from revenues received from ETB.

We believe the cash and cash equivalents at
December 31, 2003, together with the Operating Loan
proceeds may be sufficient to fund operations for the
foreseeable future, assuming continued improvement in our
overall cost structure resulting from our cost reduction
activities, ongoing efforts aimed at controlling costs,
including without limitation, the cost savings expected to
result if we implement the Reverse Split and terminate our
public company status, and anticipated future revenues including
a continued significant, but declining customer relationship
with Allegiance, our largest customer in 2003.

We provide outsourcing services to Allegiance
pursuant to an agreement expiring on December 31, 2004.
Allegiance accounted for 38.7% of our total revenues for the
year ended December 31, 2003. There are no minimum revenues
from Allegiance under this agreement. Allegiance has informed us
that they are migrating data to another software system and
intend to discontinue use of our services gradually so that all
data will be migrated by June 2004. When Allegiance ceases doing
business with us, we may be required to reduce operations and/or
seek additional private equity financing or financing from other
sources including the possible Bridge Loan, or consider other
strategic alternatives, including a possible merger, sale of
assets, or other business combination or restructuring
transactions. There can be no assurances that additional
financing or strategic alternatives will be obtainable on terms
acceptable by us or that any additional financing would not be
substantially dilutive to existing stockholders. At such time as
Allegiance ceases doing business with us, we may need to obtain
additional financing or engage in one or more strategic
alternatives, or such events may have a material adverse effect
on our ability to continue to operate as a going concern. Our
audited consolidated financial statements included elsewhere in
this 10-K have been prepared assuming that we will continue as a
going concern, and do not include any adjustments that might
result from the outcome of this uncertainty. See Risk
Factors below.

We believe it is necessary to obtain additional
capital to facilitate our aggregation strategy and we are
actively seeking such additional capital from current and new
investors. If we are successful in obtaining additional capital,
it may result in the issuance of additional equity securities at
a price lower than the price paid by our existing stockholders
for the same securities, as well as resulting in dilution to our
existing stockholders. See Risk Factors below.

New Accounting Pronouncements

See Note 17 to our audited consolidated
financial statements incorporated by reference into Part II
to this Form 10-K for a discussion of certain new
accounting pronouncements.




RISK FACTORS

Our future operating results may vary
substantially from period to period. The price of our common
stock will fluctuate in the future, and an investment in our
common stock is subject to a variety of risks, including but not
limited to the specific risks identified below. In addition to
risk factors associated with our business and

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operations, risk factors relating to our
outstanding Series F preferred stock are set forth below
under the caption Risks Associated with our Series F
Preferred Stock. Inevitably, some investors in our
securities will experience gains while others will experience
losses depending on the prices at which they purchase and sell
securities. Prospective and existing investors are strongly
urged to carefully consider the various cautionary statements
and risks set forth in this report.


Risks Associated with our Business and
Operations



| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business relies in part on a limited
    number of customers and unfavorable developments in relation to
    a major customer may adversely affect our revenues, operating
    results and cash flows.

Three customers accounted for an aggregate of
64.7% of our total revenue for the year ended December 31,
2003, with Allegiance, accounting for 38.7%, ETB accounting for
15.1% and SBC accounting for 10.9% of our total revenue for the
year ended December 31, 2003. If an unfavorable development
occurs with respect to any significant customer it would likely
materially adversely impact our total revenues and financial
results. We provide outsourcing services to our largest
customer, Allegiance, pursuant to a contract expiring on
December 31, 2004. There are no minimum revenues from
Allegiance under this agreement. Allegiance has informed us that
they are migrating data to another software system and intend to
discontinue use of our services gradually so that all data will
be migrated by June 2004.

In addition, we entered into the ETB Contract
with ETB. ETB may terminate the ETB Contract at anytime for any
reason. If ETB terminates the ETB Contract for any reason, other
than our breach of the contract, ETB must pay the proportionate
fees for services performed and licenses provided prior to the
date of termination. The project is divided into phases and
invoicing is tied to performance milestones. The first
significant payment was made in the fourth quarter of 2003 and
payments will continue periodically throughout 2004 and 2005.
There can be no assurance that we will achieve anticipated
revenues or receive prompt payments from ETB throughout the
contract period.



| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Additional capital and/or strategic
    alternatives may be required for us to continue our operations
    and as a result, our independent public accountants have
    expressed doubts over our ability to continue as a going
    concern.

We incurred net losses of approximately
$3.6 million for the year ended December 31, 2003, and
we had an accumulated deficit of approximately
$214.5 million as of December 31, 2003. Our cash and
cash equivalents and restricted cash at December 31, 2003
were $3.1 million. Cash used in operations for the year
ended December 31, 2003 was $4.0 million. As a result
of our business concentration risk, our past recurring losses
from operations and our accumulated deficit, the independent
auditors report included in our December 31, 2003
consolidated financial statements contains an explanatory
paragraph that states that our recurring losses from operations
and accumulated deficit raised substantial doubt about our
ability to continue as a going concern.

We believe the cash and cash equivalents at
December 31, 2003, together with the Operating Loan
proceeds of $1,732,000 as of March 1, 2004, may be
sufficient to fund operations for the foreseeable future,
assuming continued improvement in our overall cost structure
resulting from our cost reduction activities, ongoing efforts
aimed at controlling costs including, without limitation, the
cost savings expected to result if we implement the Reverse
Split and terminate our public company status, and anticipated
future revenues including a continued significant, but
declining, customer relationship with Allegiance, our largest
customer in 2003.

We provide outsourcing services to Allegiance
pursuant to an agreement expiring on December 31, 2004.
Allegiance accounted for 38.7% of total revenue for the year
ended December 31, 2003. There are no minimum revenues from
Allegiance under this agreement. Allegiance has informed us that
they are migrating data to another software system and intend to
discontinue use of our services gradually so that all data will
be migrated by June 2004. When Allegiance ceases doing business
with us, we may be required to reduce operations and/or seek
additional private equity financing or financing from other
sources, including the possible Bridge Loan, or consider other
strategic alternatives, including a possible merger, sale of
assets, or

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other business combination or restructuring
transactions. There can be no assurances that additional
financing or strategic alternatives will be obtainable on terms
acceptable to us or that any additional financing would not be
substantially dilutive to existing stockholders. At such time as
Allegiance ceases doing business with us, we will need to obtain
additional financing or engage in one or more strategic
alternatives, or such events may have a material adverse effect
on our ability to continue to operate as a going concern. See
Risks Associated with our Series F Preferred
Stock  The holders of our Series F preferred
stock have rights that are senior to those of the holders of our
common stock in the event of the sale of our Company or in the
event of our liquidation, dissolution or winding up for a
discussion of the terms of the Series F preferred stock
applicable in the event of a business combination, liquidation
event or issuance of equity securities.




| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There is no assurance that we can
    effectively implement our aggregation strategy and even if we
    can, it might not be successful and could be dilutive to our
    existing stockholders.

We intend to augment our growth through targeted
aggregations, including but not limited to mergers, acquisitions
or other strategic transactions pursuant to which we would
combine some or all of our resources with other billing and OSS
companies. If we fail to properly evaluate and execute
aggregations, our business and prospects may be seriously
harmed. To successfully complete any particular aggregation
transaction, we must properly evaluate the technology;
accurately forecast the financial impact of the transaction,
including accounting charges and transaction expenses; integrate
and retain personnel; combine potentially different corporate
cultures; and effectively integrate products and services,
research and development, sales and marketing and support
operations. Pursuit of our aggregation strategy may distract
management from day-to-day operations and may be disruptive to
our ongoing business. Further, our ability to implement our
aggregation strategy may be limited by the availability of
suitable candidates and our ability to obtain sufficient
additional capital to pursue this strategy. There can be no
assurance that we will be able to identify suitable candidates
or have capital available to us to complete any aggregation
transactions, or that the terms of any such transaction or
additional capital will be acceptable to us.

Additionally, the terms of any aggregation
transaction or capital raising transaction may require us to
issue additional shares of our common stock or securities
convertible into our common stock, which would be dilutive to
our existing stockholders, and which could materially and
adversely affect the market price of our common stock, or an
aggregation may result in a change in the character of your
investment. Any aggregation transaction may result in additional
costs, expenses and other obligations, and could result in
additional ongoing capital needs, all of which could materially
and adversely affect our results of operations and financial
condition.



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | We have not achieved profitability in the
    past and may continue to incur net losses.

We incurred net losses of approximately
$3.6 million for the year ended December 31, 2003. As
of December 31, 2003 we had an accumulated deficit of
approximately $214.5 million. We have not achieved
profitability to date and may not do so in the foreseeable
future.

In order to achieve profitability, we may need to
further reduce our operations, seek additional financing and/or
pursue other strategic alternatives. There are no assurances
that we will achieve profitability in the future and, even if we
do, we may not be able to sustain or increase profitability on a
quarterly or annual basis.



| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we default on the Operating Loan, SVB
    may hold our accounts or take possession of the collateral,
    including without limitation our intellectual
    property.

We recently closed the Operating Loan with SVB
that permits us to have outstanding borrowings at any given time
up to $2,000,000. The Operating Loan is subject to
representations and warranties and covenants and includes
numerous events of default including maintaining a tangible net
worth requirement of $4,000,000. If we were to breach any of the
representations and warranties or covenants or in the event we
trigger an event of default, SVB may institute a hold on our
operating account and may seek to take possession of the
collateral, including without limitation our intellectual
property.

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| |                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Many of our customers and potential
    customers lack financial resources, and if they cannot secure
    adequate financing, we may lose or fail to obtain their
    business, which would adversely affect our revenues, operating
    results and cash flows.

Many of our customers and potential customers
lack significant financial resources or are experiencing
liquidity difficulties as a result of the tightening of the
financial markets and the prolonged weakness in the
U.S. economy in recent years. Further, this general
economic weakness has resulted in delays or reductions in
expenditures for information technology, which has, and may
continue to adversely affect demand for our products and
services.

The adverse conditions being experienced by
customers for our products could adversely affect their ability
to purchase additional products, renew maintenance and support
agreements, obtain outsourcing services from us or meet their
financial obligations to us in a timely manner. Also, our
business, operating results, and cash flows may be adversely
affected to the extent that any of our customers seeks
bankruptcy protection or cease operations, and by the
consolidation of companies within the technology sector. Any of
these factors may adversely affect our collections of accounts
receivable from our customers, and may affect the timing of our
revenue recognition where we provide financing to our customers.
See Risk Factors Our business relies in part on a
limited number of customers and unfavorable developments in
relation to a major customer may adversely affect our revenues,
operating results and cash flows.



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our expansion into select international
    markets may not succeed as a result of legal, business and
    economic risks specific to international
    operations.

Our expansion into select international markets
is subject to risks generally associated with international
operations and our future international operations might not
succeed for a number of reasons, including but not limited to
dependence on third-party systems integrators; difficulties in
staffing and managing foreign operations; language barriers;
difficulties in localizing products and supporting customers in
foreign countries; reduced protection for intellectual property
rights in some countries; greater difficulty in collecting
accounts receivable; local standards of contracting and doing
business, including performance bond requirements and penalty
clauses, and uncertainties inherent in transnational operations
such as export and import regulations and other local laws,
taxation issues, tariffs, trade barriers and fluctuations in
currency conversion rates. To the extent that we are unable to
successfully manage expansion of our business into these
international markets due to any of the foregoing factors, our
business could be adversely affected.



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our future success will depend in part upon
    our ability to continually enhance our product and service
    offerings to meet the changing needs of our customers, and if we
    are not able to do so, we will lose future business to our
    competitors.

We believe that our future success will depend to
a significant extent upon our ability to enhance our product and
service offerings to meet the requirements of our customers in a
rapidly developing and evolving market. Since 2001, we have
significantly reduced the amount of cash we utilize for research
and development. This reduction may make it more difficult to
enhance future product and service offerings. If we are unable
to anticipate or respond adequately to customer needs, our
business and financial performance will be adversely affected.



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Design defects or software errors in our
    products could adversely affect our business due to costly
    redesigns, production delays and customer
    dissatisfaction.

Design defects or software errors in our products
may result in costly redesigns, cause delays in product
introductions, or cause customer dissatisfaction, any of which
could seriously harm our business. Our software products are
highly complex and may, from time to time, contain design
defects or software errors that may be difficult to detect and
correct. Although we have license agreements with our customers
that contain provisions designed to limit our exposure to
potential claims and liabilities arising from customer problems,
these provisions may not effectively protect us against all
claims. In addition, claims and liabilities arising from
customer problems could significantly damage our reputation and
adversely affect our business and results of operations.

35



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| |                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we cannot continue to obtain or
    implement the third-party software that we incorporate into our
    products, we may have to delay our product development or
    redesign efforts, which could adversely affect our revenues and
    results of operations.

Our products involve integration with products
and systems developed by third parties. If any of these
third-party products should become unavailable for any reason,
fail under operation with our products, or fail to be supported
by their vendors, it would be necessary for us to redesign our
products. We might encounter difficulties in accomplishing any
necessary redesign in a cost-effective or timely manner. We also
could experience difficulties integrating our products with
other hardware and software. Furthermore, if new releases of
third-party products and systems occur before we develop
products compatible with these new releases, we could experience
a decline in demand for our products or services, which could
adversely affect our business and financial performance.



| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We permit certain third parties to sell and
    implement our products, and any failure by these parties to
    successfully implement or support our products may reflect
    negatively on our products.

Third parties such as systems integration firms
and OEM partners help us to market, sell, implement and support
our products. If these third parties discontinue their
relationship with us, or fail to adequately implement and
support our products, we may experience increased difficulty in
attracting and retaining customers, or incur unanticipated costs
and expenses necessary to satisfy customer needs, and it may
reflect negatively on our reputation in the marketplace for our
products.



| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face significant competition from
    companies that have greater resources than we do and the markets
    in which we compete are relatively new, intensely competitive,
    highly fragmented and rapidly changing.

The market for our products and services is
highly competitive. We directly compete with both independent
providers of products and services and in-house systems
developed by existing and potential clients. In addition, some
independent providers are entering into strategic alliances with
other independent providers, resulting in new competitors or
competitors with greater resources. Many of our current and
potential competitors have significantly greater financial,
marketing, technical, and other competitive resources, many with
significant and well-established international operations. In
addition, our competitors may be able to adapt more quickly than
we can to new or emerging technologies and changes in customer
needs, or to devote more resources to promoting and selling
their products. There can be no assurance that we will be able
to adapt to market demands or compete successfully with existing
and new competitors.



| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We may be unable to protect our proprietary
    technology, and our competitors may infringe on our technology,
    or develop competitive technology, any one of which could harm
    the value of our proprietary technology.

We regard a substantial portion of our software
product as proprietary and rely on a combination of patent,
copyright, trademark and trade secret laws, customer license
agreements and employee and third-party agreements to protect
our proprietary rights. There can be no assurance, however, that
these protections will prevent misappropriation of our
intellectual property, particularly in foreign countries where
intellectual property laws may not protect proprietary rights as
fully as the laws of the United States. If we have to resort to
legal proceedings to enforce our intellectual property rights,
the proceedings could be burdensome and expensive and the
outcome uncertain. Also, our competitors could independently
develop similar or superior technology without violating our
proprietary rights. Any misappropriation of our technology or
development of competing technology could seriously harm our
business and could materially and adversely affect our financial
performance.



| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | Claims by others that we infringe their
    proprietary technology could be costly and harm our
    business.

Third parties could claim that our products or
technology infringes on their proprietary rights. An
infringement claim against us could be costly even if the claim
is invalid, and could distract our management from the operation
of our business. Furthermore, a judgment against us could
require us to pay substantial damages and could also include an
injunction or other court order that could prevent us from
selling our products. If we faced a claim relating to
proprietary technology, we may need to incur additional costs and

36



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expenses to license such technology, or to
develop non-infringing technology in order to sell our affected
products, which could adversely affect our financial performance.




| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | Loss of our senior management or other key
    personnel would harm our business if we are unable to hire
    suitable replacements.

Our future success depends to a significant
extent on the continued services of our senior management and
other key personnel. If we lost the services of our key
employees and we were unable to hire suitable replacements, it
would harm our business. We have employment and non-compete
agreements with our executive officers. However, these
agreements do not obligate them to continue working for us. Our
success also depends in large part on our ability to motivate
and retain highly skilled information technology professionals,
software programmers, and sales and marketing professionals. Our
recent restructurings and cost reductions may create
uncertainties that could adversely affect our ability to retain
our employees. Significant turnover of our personnel could
hinder our ability to effectively serve our existing customers
and in competing for new business, either of which could
adversely affect our business and results of operations.



| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The delisting of our common stock from The
    Nasdaq SmallCap Market may have made trading more difficult and
    may result in further declines in the share price.

In December 2002, our common stock was delisted
from The Nasdaq SmallCap Market and subsequent to this event,
our common stock has been quoted on the OTC service. The OTC is
generally considered less desirable and less liquid than the
market for securities quoted on The Nasdaq SmallCap Market. This
may have made trading shares of our common stock more difficult
for investors, leading to increased volatility and potentially
further declines in the trading price of our common stock. It
may also make it more difficult for us to raise additional
capital, and we may incur additional costs under state blue sky
securities laws if we choose to issue additional equity
securities.



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | The price of our common stock has been, and
    will continue to be volatile, which increases the risk of an
    investment in our common stock.

The trading price of our common stock has been
volatile due in part to the volatility in the communications and
technology areas of the equity securities markets, and our
results of operations. We anticipate that the trading price for
our common stock will continue to experience volatility in the
future. Factors that may affect the fluctuation in the trading
price of our common stock may include but are not limited to:
quarter-to-quarter variations in our operating results; our
ability to raise additional capital and/or engage in strategic
alternatives; failure to meet market expectations of our
performance; announcements and technological innovations or new
products by us or our competitors; the projected level of
business activity or perceived growth (or the lack thereof) in
the market; increased price competition; and general conditions
in the Internet, technology and the telecommunications
industries.



| |                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If implemented, the Reverse Split would
    result in less public information being available to
    stockholders, the Company would lose the ability to raise
    capital in public securities markets and stockholders may
    experience reduced liquidity.

We recently filed a preliminary proxy statement
to effect the Reverse Split which, if implemented, would enable
us to go private. If the Reverse Split is
implemented and we go private, less public information will be
available on us since we would no longer be required to file
annual and periodic reports and make other filings with the SEC.
We would also lose our ability to raise capital in the public
securities markets. If we implement the Reverse Split, our
common stock may be quoted in the pink sheets, but
there can be no assurances that brokers will continue to quote
our common stock. As a result, the remaining stockholders may
experience reduced liquidity for their shares of common stock.



| |                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are the target of a securities class
    action lawsuit and the volatility of our stock price may lead to
    additional legal proceedings being brought against us which
    could result in substantial costs and divert management
    attention and resources.

In December 2001, a class action complaint was
filed and is pending in the United States District Court for the
Southern District of New York against us and certain of the
underwriters of our initial public offering.

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The complaint alleges that the defendants failed
to disclose excessive commissions paid to the
underwriters in exchange for allocating shares to preferred
customers, and that the underwriters had agreements with
preferred customers tying the allocation of shares to the
preferred customers agreements to make additional
aftermarket purchases at pre-determined prices. The complaint
alleges that the failure to disclose these alleged arrangements
made our prospectus materially false and misleading. Plaintiffs
seek unspecified damages and other relief.


We have approved the terms of a proposed
settlement involving the plaintiffs, the insurance companies and
numerous issuers, including us and the individual defendants,
that includes a waiver by the insurance companies of any
retention amounts under the policies. However, court approval of
the settlement will be required and there can be no assurance
that the settlement will be finalized. We intend to vigorously
defend against the plaintiffs claims if settlement
discussions are unsuccessful. Any such defense may result in
substantial costs and divert managements attention, which
may adversely affect our business and results of operations.
While we believe that we are entitled to be indemnified by the
underwriters under the terms of the underwriting agreement,
there can be no assurance that indemnification will be available
to us, or the amount of any such indemnification. Furthermore,
BancBoston Robertson Stephens Inc., the lead underwriter in our
initial public offering, has ceased doing business. See
Part II Item 1  Legal Proceedings in this
report for a more complete discussion concerning this litigation.

In addition, in the past, other types of
securities class action litigation have often been brought
against companies following periods of volatility in the market
price of its securities. We may in the future be the target of
similar litigation. While we are not aware of any other
complaints being filed against us, and we do not know of any
facts and circumstances that could give rise to such an action,
any securities litigation may result in substantial costs and
divert managements attention and resources, which may
seriously harm our business.



| |                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Claims related to the liabilities retained
    by Abiliti in the Abiliti Acquisition remain unresolved and if
    Abiliti exhausts its remaining assets, we may be forced to pay
    the costs of defending such claims, and settlement or judgment
    amounts, if any.

Certain claims related to the liabilities
retained by Abiliti in the Abiliti Acquisition remain
unresolved. Abiliti is obligated to indemnify us for all such
claims and is currently defending us in the action entitled
James E. Kientzy and David K. Wilson vs. Abiliti
Solutions, Inc., a corporation, and Daleen
Technologies, Inc., a corporation, and Daleen
Solutions, Inc., a corporation and wholly-owned subsidiary
of Daleenand the action entitled Tamara Cooper v.
Albacore Holdings, Inc. b/d/a Abiliti Solutions, Inc.,
Daleen Solutions, Inc. and Gordon Quick. Albacore has
notified its insurance carrier and made demand for defense of
the Cooper matter, but no response to such demand has been
received. Abiliti has no significant income and we believe there
are few remaining assets, if any. If Abiliti exhausts its
remaining assets, it will no longer have the financial resources
to provide indemnification and we may be forced to pay the costs
of defense and settlement or judgment amounts, if any.



| |                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Delaware law, our certificate of
    incorporation and our bylaws contain anti-takeover provisions
    that may delay, deter or prevent a change of
    control.

Certain provisions of Delaware law, our
certificate of incorporation and our bylaws contain provisions
that could delay, deter or prevent a change of control of
Daleen. Our certificate of incorporation and bylaws, among other
things, provide for a classified board of directors, restrict
the ability of stockholders to call stockholders meetings,
preclude stockholders from raising new business for
consideration at stockholder meetings unless the proponent has
provided us with timely advance notice of the new business, and
limit business that may be conducted at stockholder meetings to
those matters properly specified in notices delivered to us.
Moreover, we have not opted out of Section 203 of the
Delaware General Corporation Law, which generally prohibits
mergers, sales of material assets and some types of self-dealing
transactions between a corporation and a holder of 15% or more
of the corporations outstanding voting stock for a period
of three years following the date the stockholder became a 15%
holder. These provisions do not apply to the holders of our
Series F preferred stock.

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Risks Associated with our Series F
Preferred Stock



| |                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The holders of our Series F preferred
    stock have rights that are senior to those of the holders of our
    common stock in the event of the sale of our Company or in the
    event of our liquidation, dissolution or winding
    up.

The holders of the Series F preferred stock
will have a claim against our assets senior to the claim of the
holders of our common stock in the event of our liquidation,
dissolution or winding up. The aggregate amount of that senior
claim will be at least $110.94 per share of Series F
preferred stock (the Preferential Amount), or
approximately $49.8 million based on the number of shares
of Series F preferred stock outstanding at February 1,
2004.

Additionally, unless otherwise agreed by the
holders of at least a majority of the outstanding shares of
Series F preferred stock, in the event of a Sale of
the Company, we are required to redeem all of the issued
and outstanding shares of Series F preferred stock for the
Preferential Amount per share. A Sale of the Company
means, with certain limited exceptions: (i) the acquisition
by another entity by means of merger or consolidation resulting
in the exchange of at least 50% of the outstanding shares of our
capital stock for securities issued or other consideration paid
by the acquiring entity or any parent subsidiary thereof; or
(ii) the sale or other disposition by us of substantially
all of our assets. As a result, in the event of a Sale of the
Company, the holders of the Series F preferred stock will
be entitled to the first $49.8 million of the transaction
value based on the Series F preferred stock outstanding at
February 1, 2004.



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | The holders of our Series F preferred
    stock have significant voting rights that are senior to those of
    the holders of our common stock.

The holders of the Series F preferred stock
have voting rights entitling them to vote together with the
holders of our common stock as a single class and on the basis
of 100 votes per share of Series F preferred stock held by
such holder, subject to certain anti-dilution adjustments. As of
February 1, 2004, the voting power of the holders of the
currently outstanding shares of Series F preferred stock
constitutes approximately 49.0% of the entire voting class of
common stock, without giving effect to the shares of our common
stock currently owned by the holders of the Series F
preferred stock, or the exercise of warrants to acquire our
common stock and warrants to acquire our Series F preferred
stock (Series F Warrants) held by such holders,
or 55.39% if the warrant holders exercise their Series F
Warrants.

Additionally, certain holders of our
Series F preferred stock beneficially own a significant
number of shares of our outstanding common stock. When combined
with the shares of common stock that they beneficially own, the
holders of our outstanding shares of Series F preferred
stock control approximately 78.15% of the vote on any proposal
submitted to the holders of our common stock, or 89.83% of the
vote if the holders of the Series F preferred stock
exercise their Series F Warrants and their warrants to
purchase common stock. When considering both the Series F
preferred stock and shares of our common stock owned, the three
largest beneficial owners of our Series F preferred stock,
the Behrman Funds, HarbourVest Partners V  Direct
Fund L.P. and HarbourVest VI  Direct Fund L.P.
(collectively HarbourVest) and SAIC Venture Capital
Corporation control 47.89%, 13.97% and 9.81%, respectively, or
in the aggregate, approximately 71.67% of the voting power on
matters submitted to our common stockholders. This combined
voting power would generally give these stockholders the power
to control the outcome on most important corporate decisions,
including but not limited to the Reverse Split, election of
directors, mergers, acquisitions and other significant corporate
transactions and amendments to our certificate of incorporation,
if such beneficial owners act together or in common on any
particular matter.

In the event that we seek stockholder approval of
a transaction or action involving the Sale of the Company and/or
the liquidation, dissolution or winding up of the Company, or
other transaction, the holders of the Series F preferred
stock will control a majority of the vote and, as a result,
would control or significantly influence the outcome of a
proposal with respect to such a transaction or action, whether
or not the holders of our common stock support or oppose the
proposal.

In the event of conversion of the Series F
preferred stock, the holders are entitled to vote the number of
shares of common stock issued upon conversion. Each share of
outstanding Series F preferred stock is

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currently convertible into 122.4503 shares
of common stock, or an aggregate of approximately
55 million shares of common stock assuming the conversion
of all of the shares of Series F preferred stock
outstanding as of February 1, 2004.


Additionally, the holders of the Series F
preferred stock are entitled to vote as a separate class on
certain matters, including:



| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the authorization or issuance of any other class
    or series of preferred stock ranking senior to or equal with the
    Series F preferred stock as to payment of amounts
    distributable upon our dissolution, liquidation or winding up;
|
| |  | the issuance of any additional shares of
    Series F preferred stock;                                                                                                                                                                        
|
| |  | the reclassification of any capital stock into
    shares having preferences or priorities senior to or equal with
    the Series F preferred stock;                                                                                          
|
| |  | the amendment, alteration, or repeal of any
    rights of the Series F preferred stock; and                                                                                                                                                   
|
| |  | the payment of dividends on any other class or
    series of our capital stock, including the payment of dividends
    on our common stock.                                                                                                   



| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Series F preferred stock provides
    for anti-dilution adjustments to the Series F preferred
    stock conversion price, which could result in a reduction of the
    conversion price.

Subject to certain exceptions, the conversion
price of the Series F preferred stock will be reduced each
time, if any, that we issue common stock, convertible preferred
stock, options, warrants or other rights to acquire common stock
at a price per share of common stock that is less than the
conversion price of the Series F preferred stock then in
effect. A reduction in the conversion price of the Series F
preferred stock will increase the number of shares of common
stock issuable upon conversion of the Series F preferred
stock.



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | The Series F preferred stock is
    automatically convertible only in limited circumstances and, as
    a result could be outstanding indefinitely.

The Series F preferred stock will convert
automatically into common stock only if the closing price of our
common stock on The Nasdaq National Market or a national
securities exchange is at least $3.3282 per share for ten
out of any 20 trading day period. Otherwise, the shares of
Series F preferred stock are convertible only at the option
of the holder. Further, the Series F preferred stock is not
subject to automatic conversion if our common stock is not then
listed for trading on The Nasdaq National Market or a national
securities exchange. Each Series F Warrant is exercisable
for Series F preferred stock in whole or in part at any
time during a five-year exercise period at the sole discretion
of the Series F Warrant holder and will not be convertible
or callable at our election. As a result of these provisions,
the Series F preferred stock may remain outstanding
indefinitely.






|         |                                                                 
|-------- | ----------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risks.

Our financial instruments consist of cash that is
invested in institutional money market accounts. We do not use
derivative financial instruments in our operations or
investments and do not have significant operations or
investments that are subject to fluctuations in commodities
prices or foreign currency exchange rates.






|        |                                                 
|------- | ------------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data.

Our financial statements are submitted as a
separate section of this Report, beginning on page F-1 and are
incorporated herein.

40



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|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial
    Disclosure.

None.






|         |                         
|-------- | ------------------------
|Item 9A. | Controls and Procedures.

Our management, under the supervision and with
the participation of our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), performed an evaluation of the
effectiveness of our disclosure controls and procedures as of
the end of the period covered by this annual report on
Form 10-K. Based on that evaluation, the CEO and CFO
concluded that our disclosure controls and procedures for
financial reporting were effective as of the end of such period.

There were no changes in our internal control
over financial reporting identified in connection with the
evaluation of such internal control that occurred during our
last fiscal year that have materially affected, or are
reasonably likely to affect, our internal control over financial
reporting.




PART III






|         |                                                        
|-------- | -------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant.

Executive Officers of the
Registrant.

The names, ages at December 31, 2003, and
current positions of our executive officers are listed below.
Unless otherwise stated, each executive officer has held their
position for at least the last five years. All officers are
elected for one year terms or until their respective successors
are chosen. There are no family relationships among the
executive officers. If there is any agreement or understanding
between an officer and any other person pursuant to which the
officer was elected, the agreement or understanding is stated
below.

Gordon Quick,55,
has served as President and Chief Executive Officer of Daleen
since December 20, 2002. Mr. Quick was appointed to
such positions in conjunction with the closing of the Abiliti
Acquisition and the 2002 Private Placement. Prior to joining
Daleen and beginning in August 1999, Mr. Quick served as
the president and chief executive officer of Abiliti. Prior to
that, Mr. Quick served as the chief operating officer of
HighwayMaster Corporation from January 1995 until April 1999.

Jeanne Prayther,37,
has served as Chief Financial Officer of Daleen since August
2001. She previously served as Daleens vice president of
finance and accounting from June 2000 until August 2001. Prior
to joining Daleen, Ms. Prayther worked at KPMG LLP, a
public accounting firm, for 12 years in the assurance
practice, most recently in a senior manager position.

David McTarnaghan,41, has served as Senior Vice President of Global Sales since
joining Daleen in 1998. Mr. McTarnaghan became an executive
officer in June 2002. Mr. McTarnaghan has over
17 years of experience in information technology and
telecommunications sales most recently serving as general
manager at Fujitsu Business Communications Systems from 1991 to
1998.

Our Board of Directors currently consists of
James Daleen, Dennis G. Sisco, John S. McCarthy, Ofer
Nemirovsky, Daniel J. Foreman, Stephen J. Getsy, and Gordon
Quick.

James Daleen,age 44,our founder, has served as chairman of the
board of the Company since our inception in 1989. Since
September, 2003, Mr. Daleen has served as the President and
Chief Executive Officer of Affinity Express, Inc. He served
as chief executive officer of the Company from 1989 until
December 2002, and served as president of the Company from
January 2002 to December 2002.

Dennis G. Sisco,age 57, has served as a director
of the Company since December 2002. Mr. Sisco has served as
a Partner of Behrman Capital, an investment firm that manages
Behrman Capital II L.P., since January 1998. Mr. Sisco
is also a director of Gartner, Inc. and Mercator
Software, Inc.

41



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John S. McCarthy,age 55, has served as a director
of the Company since December 2002. Mr. McCarthy has been
the Managing General Partner of Gateway Associates, L.P., a
venture capital firm, since its inception in 1984.
Mr. McCarthy is also a director of
Netsolve, Incorporated.

Ofer Nemirovsky,age 46, has served as a director
of the Company since September 1997. Mr. Nemirovsky has
been a managing director and member of HarbourVest Partners, LLC
since January 1997. HarbourVest Partners, LLC was formed by the
management team of Hancock Venture Partners, of which
Mr. Nemirovsky had served in various capacities, including
managing director and vice president, since 1986.

Daniel J. Foreman,age 45, has served as a director
of the Company since July 1998. Mr. Foreman has served as a
managing director of ABN AMRO, Inc., an investment firm,
since October 1997.

Stephen J. Getsy,age 59, has served as a director of the Company since
October 1997. Mr. Getsy has been the president and chief
executive officer of On-Line Ventures, Inc., a business
consulting and investment company, since November 1993.

Gordon Quick,55,
has served as President and Chief Executive Officer of Daleen
since December 20, 2002. Mr. Quick was appointed to
such positions in conjunction with the closing of the Abiliti
Acquisition and the 2002 Private Placement. Prior to joining
Daleen and beginning in August 1999, Mr. Quick served as
the president and chief executive officer of Abiliti. Prior to
that, Mr. Quick served as the chief operating officer of
HighwayMaster Corporation from January 1995 until April 1999.

Section 16(a) Beneficial Ownership
Reporting Compliance.

Section 16(a) of the Securities Exchange Act
of 1934, as amended and regulations of the SEC thereunder
require our directors, executive officers and persons who own
more than 10% of our common stock, as well as certain affiliates
of such persons, to file reports with the SEC with respect to
their ownership of common stock. Directors, executive officers
and persons owning more than 10% of our common stock are
required by SEC regulations to furnish us with copies of such
reports received by it and written representations that no other
reports were required of those persons. We believe that during
fiscal 2003 all filings requirements applicable to our directors
and executive officers were complied with. We are not aware of
any other persons other than directors and executive officers
and their affiliates who own more than 10% of our common stock.



| |                
| | ---------------
| | Audit Committee

The Audit Committee of the Board of Directors is
comprised solely of non-employee directors, each of whom is
independent as defined under the current Nasdaq National Market
listing standards. We believe it is reasonable to follow such
standards even though our common stock is not currently listed
on the Nasdaq Market. None of the members of the Audit Committee
has any relationship to the Company and its management that may
interfere with the Audit Committees independence from us
and our management. The Board of Directors has determined that
the Audit Committee has an audit committee financial expert,
Steve Getsy. Mr. Getsy is independent and for the following
reasons is an audit committee financial expert:. Mr. Getsy
has thirty years of business management experience, including
without limitation, twenty years of experience in supervising
financial personnel and over ten years of experience in
evaluating investment opportunities. Mr. Getsy has
(i) an understanding of generally accepted accounting
principles and financial statements, (ii) the ability to
assess the general application of such principles in connection
with the accounting for estimates, accruals and reserves,
(iii) experience analyzing and evaluating financial
statements, (iv) an understanding of internal control over
financial reporting, and (v) an understanding of audit
committee functions.



| |               
| | --------------
| | Code of Ethics

The Company has a code of ethics that applies to
all of the Companys principal executive and financial
officers. A copy of this code is filed as an exhibit to this
annual report on Form 10-K. The Company will provide to any
person, without charge, upon request, a copy of the code of
ethics. Requests should be

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addressed to Jeanne Prayther, Daleen
Technologies, Inc., 902 Clint Moore Road, Suite 230,
Boca Raton, Florida 33487, telephone number 561-999-8000.







|         |                        
|-------- | -----------------------
|Item 11. | Executive Compensation.

Summary Compensation
Table.The following table presents
the total compensation paid for the three years ended
December 31, 2003, for the persons serving as our chief
executive officer during 2003, and our two other executive
officers who were serving as executive officers at the end of
the fiscal year (collectively, the Named Executive
Officers).

|                            |                                        |                     |      |              |  |            |         |                 |     |         |   |                 |  |  |   |   |  |  |         |         |  |  |       |       |    
|--------------------------- | -------------------------------------- | ------------------- | ---- | ------------ |  | ---------- | ------- | --------------- | --- | ------- | - | --------------- |  |  | - | - |  |  | ------- | ------- |  |  | ----- | ----- | ---
|                            |                                        |                     |      | Long Term    |  |           
|                            |                                        | Annual Compensation |      | Compensation |  |           
|                            |                                        |                     |      |              |  |           
|                            |                                        |                     |      | Number of    |  |           
|                            |                                        |                     |      | Other        |  | Securities |         | All            
|                            |                                        |                     |      | Annual       |  | Underlying |         | Other          
|Name and Principal Position |                                        | Year                |      | Salary       |  | Bonus      |         | Compensation(1) |     | Options |   | Compensation(2)
|                            |                                        |                     |      |              |  |            |         |                 |     |         |   |                
|Gordon Quick(3)             |                                        |                     | 2003 |              |  |            | 350,000 |                 |     |         |  |                 |  |  |  |   |  |  |        |         |  |  | 823   | (4)  
|                            | President and Chief Executive Officer  |                     |      | 2002         |  |            |         |                |     |         |   |                |  |  |   |  |  |  |         |        |  |  |       |      |    
|                            |                                        |                     | 2001 |              |  |            |        |                 |     |         |  |                 |  |  |  |   |  |  |        |         |  |  |      |      
|                           
|Jeanne Prayther             |                                        |                     | 2003 |              |  |            | 175,500 |                 |     |         |  |                 |  |  |  |   |  |  |        |         |  |  | 960   | (5)  
|                            | Chief Financial Officer and Secretary  |                     |      | 2002         |  |            |         | 175,500         |     |         |   | 75,000          |  |  |   |  |  |  |         |        |  |  |       | 2,332 | (5)
|                            | (formally Vice President of Accounting |                     |      | 2001         |  |            |         | 151,625         |     |         |   |                |  |  |   |  |  |  |         | 174,017 |  |  |       | 3,063 | (5)
|                            | and Finance)                           |                     |      |              |  |            |         |                 |     |         |   |                 |  |  |   |   |  |  |         |         |  |  |       |       |    
|                           
|David McTarnaghan           |                                        |                     | 2003 |              |  |            | 235,540 | (6)             |     |         |  |                 |  |  |  |   |  |  |        |         |  |  | 958   | (7)  
|                            | Senior Vice President of Global Sales  |                     |      | 2002         |  |            |         | 193,350         | (6) |         |   | 50,000          |  |  |   |  |  |  |         |        |  |  |       | 3,449 | (7)
|                            |                                        |                     | 2001 |              |  |            | 218,822 | (6)             |     |         |  |                 |  |  |  |   |  |  | 215,063 |         |  |  | 3,786 | (7)  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In accordance with the rules of the SEC, other
    compensation received in the form of perquisites and personal
    benefits has been omitted because such perquisites and other
    personal benefits constituted less than the lesser of $50,000 or
    10% of the total annual salary and bonus for the Named Executive
    Officers for such year.                                                                                                                           
|(2) | All Other Compensation for each of the Named
    Executive Officers includes, the dollar value of insurance
    premiums paid by the Company with respect to term life insurance
    and long term disability as well as 401(k) plan matching
    contributions. There is no arrangement or understanding that any
    Named Executive Officer has or will receive or be allocated an
    interest in any cash surrender value under any such policies.                           
|(3) | Mr. Quick commenced employment with the
    Company on December 20, 2002.                                                                                                                                                                                                                                                                                                                                                                                                         
|(4) | All other compensation for Mr. Quick in 2003
    includes payment of $823 related to term life insurance premiums
    and long term disability premiums.                                                                                                                                                                                                                                                                                                                          
|(5) | All other compensation for Ms. Prayther in
    2001 included payment of $2,952 in 401(k) plan matching
    contributions and $111 related to term life insurance premiums;
    in 2002 included payment of $2,221 in 401(k) plan matching
    contributions and $111 in life insurance premiums; and in 2003
    included payment of $547 in 401(k) plan matching contributions
    and payment of $413 in life insurance and long term disability
    premiums.                  
|(6) | Salary for Mr. McTarnaghan includes payment
    of discretionary sales commissions of $38,822 in 2001, $18,350
    in 2002 and $60,540 in 2003.                                                                                                                                                                                                                                                                                                                                   
|(7) | All other compensation for Mr. McTarnaghan
    in 2001 included payment of $3,675 in 401(k) Plan matching
    contributions and $111 related to term life insurance premiums;
    in 2002 included payment of $3,338 in 401(k) Plan matching
    contributions and $111 related to term life insurance premiums;
    and in 2003 included payment of $547 in 401(k) Plan matching
    contributions and $412 related to term life insurance and long
    term disability premiums.

Option Grants in Last Fiscal Year

There were no individual grants of stock options
during the year ended December 31, 2003 to any of the Named
Executive Officers.

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Aggregated Option Exercises in Last Fiscal
Year and Year-End Option Values

The following table summarizes the number of
shares and value realized by each of the Named Executive
Officers upon the exercise of options and the value of the
outstanding options held by the Named Executive Officers at
December 31, 2003:

|                  |  |          |   |             |  |                       |   |                       |  |             |         |               |  |  |         |  |  |  |   |  |  |  |   | 
|----------------- |  | -------- | - | ----------- |  | --------------------- | - | --------------------- |  | ----------- | ------- | ------------- |  |  | ------- |  |  |  | - |  |  |  | - | 
|                  |  |          |   |             |  |                       |   |                      
|                  |  |          |   |             |  | Number of             |   | Value of             
|                  |  |          |   |             |  | Securities Underlying |   | Unexercised          
|                  |  | Shares   |   |             |  | Unexercised Options   |   | In-the-Money Options 
|                  |  | Acquired |   |             |  | at Fiscal Year-End    |   | at Fiscal Year-End(2)
|                  |  | on       |   | Value       |  |                       |   |                      
|Name              |  | Exercise |   | Realized(1) |  | Exercisable           |   | Unexercisable         |  | Exercisable |         | Unexercisable
|                  |  |          |   |             |  |                       |   |                       |  |             |         |              
|Gordon Quick(3)   |  |          | 0 |             |  |                       | 0 |                       |  |             | 0       |               |  |  | 0       |  |  |  | 0 |  |  |  | 0 | 
|Jeanne Prayther   |  |          | 0 |             |  |                       | 0 |                       |  |             | 170,555 |               |  |  | 58,471  |  |  |  | 0 |  |  |  | 0 | 
|David McTarnaghan |  |          | 0 |             |  |                       | 0 |                       |  |             | 252,550 |               |  |  | 168,513 |  |  |  | 0 |  |  |  | 0 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts disclosed in this column do not reflect
    amounts actually received by the Named Executive Officers but
    are calculated based on the difference between the fair market
    value on the date of exercise of the options and the exercise
    price of the options. The Named Executive Officers will receive
    cash only if and when they sell the common stock issued upon
    exercise of the options, and the amount of cash received by such
    individuals is dependent on the price of our common stock at the
    time of such sale.
|(2) | Based on the fair market value of our common
    stock as of December 31, 2003 of $0.23 per share as
    reported on the OTC less the exercise price payable upon
    exercise of such options.                                                                                                                                                                                                                                                                                                                                                             
|(3) | Mr. Quick commenced employment on
    December 20, 2002 and had no options outstanding as of
    December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                         

Employment Agreements

We entered into a three-year employment agreement
with Gordon Quick, our president and chief executive officer, on
December 20, 2002. Upon expiration of the initial
three-year term in December 2005, the agreement automatically
renews for additional terms of one year each unless either party
notifies the other of its intent to terminate the employment
agreement at least 90 days prior to the end of any term.
Mr. Quick will perform his duties primarily from
St. Louis, Missouri, provided, however, that after
nine months from the date of the agreement, our Board of
Directors may require him to relocate to our principal executive
offices in Boca Raton, Florida. To date, the Board of Directors
has not requested such relocation. In such event, we will
reimburse Mr. Quick for his relocation expenses including
the tax effects of any such reimbursement. The employment
agreement provides for an annual base salary of $350,000
increased at the discretion of our Board of Directors or
Compensation Committee. Mr. Quick may also receive
discretionary bonuses as our Board of Directors or Compensation
Committee may determine under any incentive compensation or
other bonus plans as may be established for senior executives of
the Company. Mr. Quick shall have an annual target bonus
opportunity of not less than 50% of his then-current base
salary, subject to individual performance goals or other
measures provided in a plan or as established by the Board of
Directors. Mr. Quick is entitled to long term disability
insurance and life insurance at no cost to him. Mr. Quick
is also entitled to participate in and receive benefits under
all of our employee benefit plans, programs and arrangements
available to senior executives.

Mr. Quick is also a participant under our
Long-Term Incentive Compensation Plan (LTIP). Subject to the
vesting provisions described below, Mr. Quicks
participation percentage has been established at 38% of the
total payout pool under the LTIP. His participation percentage
in the LTIP vested 25% at grant and the balance will vest
ratably on the last day of each of the first 36 months
ending after the effective date of his employment agreement.

In the event of the termination of
Mr. Quicks employment without cause or if he
terminates for good reason, he will be entitled to
(i) payment of 1/12th of his annual base salary then in
effect on a monthly basis for a period of 24 months,
(ii) payment of his pro rata bonus, if earned and payable
when bonuses are paid to our other officers, and (iii) his
participation percentage in the LTIP will continue to vest for
one year following termination. If his termination is related to
a change in control he will be entitled to
(i) a lump sum

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payment of two times his then-annual base salary
plus his pro rata average bonus, and (ii) his
participation percentage in the LTIP will fully vest. In either
case, (i) Mr. Quicks welfare benefits will
continue for 18 months following the month of termination,
subject to discontinuation of such welfare benefits to the
extent Mr. Quick receives substantially similar benefits
from a subsequent employer, (ii) Mr. Quicks
stock options will remain exercisable for one year after
termination, and (iii) at our option, we may cash out
Mr. Quicks vested interest in the LTIP based upon the
value of the Company as of the date of termination as determined
by independent appraisal, or we may elect to have Mr. Quick
retain his interest in the LTIP and pay out amounts, if any,
pursuant to the LTIP on the same basis as it would have been
paid had Mr. Quicks employment with us not terminated.


We entered into an employment agreement with
Jeanne Prayther on June 9, 2000, which was amended on
August 22, 2001 when Ms. Prayther became our chief
financial officer and secretary. The agreement was further
amended effective December 20, 2002.
Ms. Praythers base salary for 2001 was $149,500, was
increased to $175,500 on November 19, 2001, was $175,500 in
2002, and is $175,500 in 2003. Ms. Prayther may also
receive an annual bonus targeted at up to 35% of her base
salary. The employment agreement also provides for option grants
under our stock option plans as determined by our Compensation
Committee. In the event of termination of her employment by the
Company without cause or as a result of breach by us, unless
other employment with us or a subsidiary is offered or she
voluntarily resigns, Ms. Prayther is entitled to a
severance payment equal to twelve months salary and may include
a pro rata bonus. She is also eligible to receive certain
severance benefits in the event of disability including six
months base salary and in some circumstances a pro rata bonus.
We also entered into a retention bonus agreement with
Ms. Prayther dated August 22, 2001. Ms. Prayther
received a retention bonus of $37,500 on each of two retention
dates (February 22, 2002 and August 22, 2002). There
is no retention bonus agreement currently in effect.
Ms. Prayther is eligible to participate in the LTIP,
subject to the discretion of the Compensation Committee.

We entered into an employment agreement with
David McTarnaghan on July 22, 1998, as amended on such
date, and as further amended effective December 20, 2002.
Mr. McTarnaghans base salary was $175,000 in 2001,
was $175,000 in 2002, and was $175,000 in 2003.
Mr. McTarnaghan, as the senior vice president of global
sales, is also eligible for sales commissions based on his
individual performance and the performance of the Company as a
whole. The objectives and commissions are determined from time
to time by the chief executive officer and commissions are
approved by a committee appointed to administer sales
commissions. The employment agreement also provides for option
grants under our stock option plans as determined by our
Compensation Committee. In the event of termination of his
employment by the Company without cause or as a result of breach
by us, unless other employment with the Company or a subsidiary
is offered or he voluntarily resigns, Mr. McTarnaghan is
entitled to a severance payment equal to twelve months salary
and may include a pro rata bonus. He is also eligible to receive
certain severance benefits in the event of disability including
six months base salary and in some circumstances a pro rata
bonus. We also entered into a retention bonus agreement with
Mr. McTarnaghan dated September 4, 2001.
Mr. McTarnaghan received a retention bonus of $25,000 on
each of two retention dates (March 4, 2002 and
September 4, 2002). There is no retention bonus agreement
currently in effect. Mr. McTarnaghan is eligible to
participate in the LTIP, subject to the discretion of the
Compensation Committee.

The employment agreements of our executive
officers contain invention assignment and confidentiality
provisions as well as non-compete provisions. Under the
invention assignment and confidentiality provisions, these
individuals have assigned to us all of their copyrights, trade
secrets and patent rights that relate to our business. Under the
non-compete provisions, each of these individuals has agreed not
to compete, directly or indirectly, with us in the
telecommunications billing industry during the term of their
employment and for six months after termination of employment or
for eighteen months in the case of Mr. Quick. Each also has
agreed not to solicit our customers or employees, directly or
indirectly, during the period of employment and for one year
following termination of employment or for eighteen months in
the case of Mr. Quick.

Stock Option and Other Compensation
Plans

Long Term Incentive Compensation Plan
(LTIP).We established the LTIP in
December 2002. Under the terms of the LTIP, a payout pool, equal
to 15% of our enterprise value in excess of
$20 million, up to

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$100 million, plus 10% of the
enterprise value that exceeds $100 million,
shall be created for distribution to participants in the LTIP
upon a payout event. The LTIP participants include
Gordon Quick, our President and Chief Executive Officer, whose
participation percentage has been established at 38% of the
payout pool, James Daleen, our Chairman and former president and
chief executive officer, whose participation percentage has been
established at 7.5% of the payout pool, and certain management
team members, including Jeanne Prayther and David McTarnaghan,
and other employees and consultants as may be designated prior
to any payout event by our Board of Directors or the
Compensation Committee. The payout pool will be distributed to
the participants upon the occurrence of certain payout
events, which shall include: (i) the sale of all or
substantially all of our assets to a third party; (ii) our
merger or consolidation with another company, whereby our
stockholders receive cash or other securities for our capital
stock and our stockholders immediately prior to the merger or
consolidation own less than 50% of the combined voting power of
the surviving company; (iii) the sale of 60% or more of the
capital stock of our company to a single person or group; or
(iv) our liquidation, dissolution or winding up. Payments
may be in cash or the same consideration received by our
stockholders in the payout event, provided, however, if all or
part of the payout is other than in cash or immediately tradable
securities, we must use reasonable efforts to make appropriate
arrangements to ensure that the participants have sufficient
cash as part of the payout under the LTIP to pay taxes incurred
with respect to such payments or, if sufficient cash is not
available for distribution as part of the payout, we must use
reasonable efforts to distribute as part of the payout publicly
traded stock that has been registered under the Securities Act
sufficient to pay such taxes. Any cash payments under the Plan
will be made from our general assets, and no portion of our
assets will be segregated or separately identifiable as a source
of payment under the LTIP.


Payments will be reduced by the value of certain
options to purchase our common stock held by the participant,
provided, however, that options granted after the effective date
of the LTIP will be considered for this valuation only if our
Board of Directors designates them for such treatment at the
time they are granted. The value will be based on the fair
market value of our common stock, less the exercise price of the
vested options held by the participant.

Our board of directors may, in its sole and
complete discretion, amend or terminate the LTIP at any time and
for any reason that it deems necessary or appropriate. However,
the termination or amendment of the LTIP shall not adversely
affect any participants rights previously granted under
the LTIP unless approved by participants holding in the
aggregate more than one-half of the total participation
percentages then outstanding. Our board of directors may elect
to replace the LTIP in its entirety with a new equity-based
compensation plan, provided, however, that any such new
plan shall be substantially equivalent to or more favorable than
this plan for the participants from a financial and tax
standpoint.

2001 Broad-Based Stock Incentive
Plan.We established the 2001
Broad-Based Stock Incentive Plan (2001 Broad-Based
Plan) to promote our interests by providing employees and
key persons the opportunity to purchase shares of common stock
and to receive compensation based upon appreciation in the value
of those shares. Under the 2001 Broad-Based Plan, the Company
may grant incentive stock options, non-qualified stock options,
restricted stock and stock appreciation rights. The 2001
Broad-Based Plan, as approved by the Board of Directors, must
issue more than a majority of the eligible options under the
2001 Broad-Based Plan to employees other than our directors and
officers. We have reserved 2,000,000 shares of common stock
for issuance under the 2001 Broad-Based Plan. As of
December 31, 2003, options to purchase an aggregate of
1,070,875 shares of common stock were outstanding under the
2001 Broad-Based Plan and no shares of common stock have been
issued upon exercise of options under the 2001 Broad-Based Plan.
The vesting period for the options granted under the 2001
Broad-Based Plan is at the discretion of the Board of Directors;
provided, however, that unless otherwise specified in a stock
incentive agreement, each option shall vest ratably over a
four-year period on each of the anniversary dates following the
grant. If we sell 80% or more of our capital stock or assets, or
if we agree to convert 80% or more of the outstanding shares of
our capital stock into another security or the right to receive
securities or property, and, within 12 months following
such change of control, a participant is terminated
for any reason other than for cause or if a
participant is terminated as a result of constructive discharge,
then the vesting schedule of each option grant for such
participant will accelerate by two years. The vesting period for
the options issued under the 2001 Broad-Based

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Plan as of December 31, 2003 range from two
to four years. An employees rights, if any, upon
termination of employment are as set forth in the applicable
stock incentive agreement; provided, however, in no event may an
incentive stock option provide for exercise of the option later
than 90 days following a termination of employment or later
than one year following a termination of employment due to
disability. The 2001 Broad-Based Plan may be terminated at any
time by the Board, and may be amended from time to time by the
Board; provided, however, shareholder approval is required for
certain amendments including to increase the shares reserved
under the Plan to an amount greater than 2,000,000 shares
(subject to certain adjustments to reflect certain changes in
the Companys capital structure) and to decrease the
minimum exercise price of stock incentives awarded under the
2001 Broad-Based Plan.


Amended & Restated 1999 Stock
Incentive Plan.We established the
Amended & Restated 1999 Stock Incentive Plan
(1999 Plan) to promote our interests by providing
employees and key persons the opportunity to purchase shares of
our common stock and receive compensation based upon
appreciation in the value of those shares. Under the 1999 Plan,
the Company may grant incentive stock options, non-qualified
stock options, restricted stock awards and stock appreciation
rights. As of December 31, 2003, there were
13,466,944 shares reserved for issuance, options to
purchase an aggregate of 3,035,802 shares of common stock
were outstanding, and 181,937 shares of common stock had
been issued upon the exercise of options granted under the 1999
Plan. The 1999 Plan provides for an automatic annual increase in
the number of shares reserved under the Plan by an additional
5,000,000 shares on each January 1; provided, however, in
no event shall the number of shares reserved under the 1999 Plan
exceed 20% of the fully-diluted shares of the
Companys common stock, as determined on the immediately
preceding December 31. Options granted under the 1999 Plan
shall be exercisable in whole or in part at such time or times
as the Board may determine as set forth in the related
agreement, subject to the terms and conditions of the 1999 Plan.
An employees rights, if any, upon termination of
employment are as set forth in the applicable stock incentive
agreement; provided, however, in no event may an option which is
an incentive stock option provide for the exercise of the option
later than 90 days following the termination of employment
or later than one year following a termination of employment on
account of disability. If we sell 80% or more of our capital
stock or assets, or if we agree to convert 80% or more of the
outstanding shares of our capital stock into another security or
the right to receive securities or property, and within
12 months following such change in control, a
participant is terminated for any reason other than for
cause or if a participant is terminated as a result
of constructive discharge, then the vesting schedule
of each option grant for such participant will accelerate by two
years. The 1999 Plan may be terminated at any time by the Board,
and may be amended from time to time by the Board; provided,
however, shareholder approval is required for certain amendments
including the increase in the number of shares reserved under
the 1999 Plan (subject to certain adjustments to reflect certain
changes in the Companys capital structure) and to decrease
the minimum exercise price of stock incentives awarded under the
1999 Plan.

Prior Stock Option
Plans.We adopted six other stock
option plans between 1994 and 1998. Some of these plans provided
for incentive stock options within the meaning of
Subsection 422 of the Internal Revenue Code while others
provided for non-qualified stock options.

Our eight stock option plans are as follows: the
1994 Employee Non-Qualified Stock Option Plan (the 1994
Plan), the 1995 Qualified Employee Incentive Stock Option
Plan (the 1995 Plan), the 1996 Employee
Non-Qualified Stock Option Plan (the 1996 Plan), the
1997 Employee Incentive Stock Option Plan (the 1997
Plan), the 1998 Non-Qualified Employee Stock Option Plan
(the 1998 Plan), the 1998 Qualified Employee
Incentive Stock Option Plan (the 1998 ISO Plan), the
1999 Plan, and the 2001 Broad-Based Plan. Each plan provides
that the exercise price of the options granted will be issued at
no less than the

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fair market value of the underlying common stock
at the date of grant. A summary of our active stock option plans
as of December 31, 2003 is presented below:


|                      |  |              |            |                |  |                  |                                               |  |  |  |                     | 
|--------------------- |  | ------------ | ---------- | -------------- |  | ---------------- | --------------------------------------------- |  |  |  | ------------------- | 
|                      |  | Shares       |            |                |  |                 
|                      |  | Authorized   |            |                |  |                 
|                      |  | for Issuance |            |                |  | Contractual Life
|                      |  | Under Plan   |            | Vesting Period |  | of Options      
|                      |  |              |            |                |  |                 
|1998 ISO Plan*        |  |              | 7,100      |                |  |                  | 25% each year for first four years from grant |  |  |  | 5 years from grant  | 
|1999 Plan             |  |              | 13,466,944 |                |  |                  | Discretion of the Board of Directors          |  |  |  | 10 years from grant | 
|2001 Broad-Based Plan |  |              | 2,000,000  |                |  |                  | Discretion of the Board of Directors          |  |  |  | 10 years from grant | 






| |   |                                                                         
| | - | ------------------------------------------------------------------------
| | * | The Company is no longer authorized to grant
    awards under this Plan.

|    |                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The administrative committee of the 1999 Plan and
    of the 2001 Broad-Based Plan is permitted to establish
    alternative vesting schedules.        
|(2) | The options issued under the 2001 Broad-Based
    Plan through December 31, 2003 have a vesting period of two
    to four years from the date of grant.

As of December 31, 2003, options to purchase
an aggregate of 4,113,777 shares of common stock were
outstanding under all the plans at a weighted average exercise
price of $3.24 per share and 1,148,116 shares of
common stock have been issued upon exercise of options granted
under these plans.

The 1999 Plan authorizes us to automatically
adjust the number of shares of common stock available for
issuance on the first day of each fiscal year up to an annual
increase of 5,000,000 shares subject to a maximum of 20% of
the fully diluted shares outstanding at the time. The number of
shares authorized under the 1999 Plan was increased to
18,466,944 shares on January 1, 2004.

Limitation of Liability and Indemnification of
Officers and Directors

Our certificate of incorporation provides that
the liability of our directors for monetary damages shall be
eliminated to the fullest extent permissible under Delaware law
and that we shall indemnify our directors, officers, employees
and agents to the fullest extent permitted under Delaware law.
Our certificate of incorporation provides that our directors
will not be personally liable to the Company or any stockholder
for monetary damages for breach of fiduciary duty as a director,
except if the director:



| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | is liable under Section 174 of the Delaware
    General Corporation Law;                                                                                                                                        
|
| |  | has breached the directors duty of loyalty
    to the Company or our stockholders;                                                                                                                             
|
| |  | has acted in a manner involving intentional
    misconduct or a knowing violation of law or, in failing to act,
    has acted in a manner involving intentional misconduct or a
    knowing violation of law; or
|
| |  | has derived an improper personal benefit.                                                                                                                                                                       

If Delaware law is amended to provide for further
limitations on the personal liability of directors of
corporations for breach of duty of care or other duty as a
director, then the personal liability of the directors will be
so further limited to the greatest extent permitted by Delaware
law.

We entered into indemnification agreements with
each of our executive officers and directors containing
provisions that require us to indemnify these individuals to the
fullest extent authorized or permitted by our certificate of
incorporation and bylaws and the Delaware General Corporation
Law against liabilities that may arise by reason of their status
or service as officers and directors, other than liabilities
arising from willful misconduct of a culpable nature, and to
advance expenses incurred as a result of any proceedings against
them for which they could be indemnified.

We maintain a directors and officers
liability insurance policy.

Compensation Committee Interlocks and Insider
Participation

The following non-employee directors were the
members of the Compensation Committee of the Board of Directors
through December 2003: Mr. Foreman, the chairman, and
Messrs. Sisco and Nemirovsky. None

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of the members of the Compensation Committee is
an executive officer of the Company. No member of the
Compensation Committee is or ever has been an employee of the
Company and no executive officer of the Company has served as a
director or board member of a compensation committee of another
company of which any member of the Committee is an executive
officer.







|         |                                                                                                        
|-------- | -------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters.

The following table sets forth the amount and
percent of shares of common stock and Series F preferred
stock as a class that, as of February 1, 2004, are deemed
under the rules of the SEC to be beneficially owned
by (i) any person or group (as that term is
used in the Securities Exchange Act of 1934, as amended) known
to us as of that date to be a beneficial owner of
more than 5% of the outstanding shares of our common stock,
(ii) each of our named executive officers and directors,
and (iii) all of our directors and executive officers as a
group. Unless otherwise indicated, the holders of all shares
shown in the table have sole voting and investment power with
respect to such shares. As of February 1, 2004, there were
46,929,372 shares of common stock and 449,237 shares
of Series F preferred stock issued and outstanding. The
following information is based upon information provided to us
or filed with the Commission by the stockholders:

|                                                                |  |                    |            |                    |  |        |       |             |  |  |         |      |  |  |       |  
|--------------------------------------------------------------- |  | ------------------ | ---------- | ------------------ |  | ------ | ----- | ----------- |  |  | ------- | ---- |  |  | ----- | -
|                                                                |  |                    |            |                    |  |       
|                                                                |  |                    |            | Series F          
|                                                                |  | Common Stock       |            | Preferred Stock   
|                                                                |  | Beneficially Owned |            | Beneficially Owned
|                                                                |  |                    |            |                   
|                                                                |  | Number             |            | Percentage         |  | Number |       |            
|                                                                |  | of                 |            | of                 |  | of     |       | Percentage 
|Name of Beneficial Owner(1)                                     |  | Shares             |            | Class(2)           |  | Shares |       | of Class(3)
|                                                                |  |                    |            |                    |  |        |       |            
|Behrman Capital II L.P.(4)                                      |  |                    | 59,093,619 | (5)                |  |        | 69.78 | %           |  |  | 220,596 |      |  |  | 49.10 | %
|Strategic Entrepreneur Fund II, L.P.(4)                         |  |                    | 793,767    | (6)                |  |        | 1.67  | %           |  |  | 2,992   |      |  |  | *     |  
|HarbourVest Partners V  Direct Fund
    L.P.(7)                |  |                    | 3,818,063  |                    |  |        | 8.14  | %           |  |  |        |      |  |  |      |  
|HarbourVest Partners VI  Direct Fund
    L.P.(7)               |  |                    | 15,452,616 | (8)                |  |        | 24.77 | %           |  |  | 126,195 | (9)  |  |  | 28.07 | %
|SAIC Venture Capital Corporation(10)                            |  |                    | 13,836,046 | (11)               |  |        | 23.64 | %           |  |  | 94,646  | (12) |  |  | 19.87 | %
|St. Paul Venture Capital IV, L.L.C.(13)                         |  |                    | 795,566    |                    |  |        | 1.70  | %           |  |  |        |      |  |  |      |  
|St. Paul Venture Capital Affiliates Fund I,
    L.L.C.(13)      |  |                    | 22,497     |                    |  |        | *     |             |  |  |        |      |  |  |      |  
|St. Paul Venture Capital VI, LLC(13)                            |  |                    | 3,090,523  | (14)               |  |        | 6.18  | %           |  |  | 25,239  | (15) |  |  | 5.53  | %
|ABS Ventures IV, L.P.(16)                                       |  |                    | 3,180,967  | (17)               |  |        | 6.43  | %           |  |  | 20,633  | (18) |  |  | 4.53  | %
|ABX Fund, L.P.(16)                                              |  |                    | 564,006    | (19)               |  |        | 1.19  | %           |  |  | 4,606   | (20) |  |  | 1.02  | %
|NorthBay Opportunities, L.P. (21)                               |  |                    | 2,317,862  | (22)               |  |        | 4.77  | %           |  |  | 13,304  | (23) |  |  | 2.93  | %
|NorthBay International Opportunities, Ltd. (21)                 |  |                    | 772,662    | (24)               |  |        | 1.63  | %           |  |  | 4,435   | (25) |  |  | *     |  
|James Daleen                                                    |  |                    | 574,398    | (26)               |  |        | 1.21  | %           |  |  |        |      |  |  |      |  
|Gordon Quick (27)                                               |  |                    |           |                    |  |        |      |             |  |  |        |      |  |  |      |  
|Jeanne Prayther                                                 |  |                    | 175,111    | (28)               |  |        | *     |             |  |  |        |      |  |  |      |  
|David McTarnaghan                                               |  |                    | 262,230    | (29)               |  |        | *     |             |  |  |        |      |  |  |      |  
|Ofer Nemirovsky                                                 |  |                    | 19,270,679 | (30)               |  |        | 30.89 | %           |  |  | 126,195 | (31) |  |  | 28.07 | %
|Daniel J. Foreman                                               |  |                    | 886,677    | (32)               |  |        | 1.89  | %           |  |  |        |      |  |  |      |  
|Dennis Sisco (33)                                               |  |                    |           |                    |  |        |      |             |  |  |        |      |  |  |      |  
|Stephen J. Getsy                                                |  |                    | 154,723    | (34)               |  |        | *     |             |  |  |        |      |  |  |      |  
|John S. McCarthy                                                |  |                    | 452,283    | (35)               |  |        | *     |             |  |  | 1,675   | (36) |  |  | *     |  
|All directors and executive officers as a group
    (9 persons) |  |                    | 21,776,101 | (37)               |  |        | 33.64 | %           |  |  | 127,870 | (38) |  |  | 28.46 | %






| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| | * | Less than 1% of the outstanding common stock or
    Series F preferred stock.

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Except as set forth herein, the street address of
    each named beneficial owner is c/o Daleen
    Technologies, Inc., 902 Clint Moore Road, Suite 230,
    Boca Raton, Florida 33487.                                                                                                                                                                                                                                                                                                                                                         
| | (2) | For purposes of calculating the percentage
    beneficially owned, the number of shares of common stock deemed
    outstanding includes (i) 46,929,372 shares of common
    stock outstanding as of February 1, 2004, (ii) shares
    of common stock issuable by us pursuant to options or warrants
    held by the respective person or group which may be exercised
    within 60 days following February 1, 2004
    (Presently Exercisable Options), and
    (iii) shares of common stock issuable by us upon conversion
    of shares of

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | Series F preferred stock held by the
    respective person or group, including shares of Series F
    preferred stock issuable upon exercise of warrants
    (Series F warrants) held by such person or
    group. The common stock warrants, shares of Series F
    preferred stock, Series F warrants and the Presently
    Exercisable Options are considered to be outstanding and to be
    beneficially owned by the person or group holding such warrant
    and options for the purpose of computing the percentage
    ownership of such person or group but are not treated as
    outstanding for the purpose of computing the percentage
    ownership of any other person or group based on a conversion
    rate at February 1, 2004 of 122.4503 shares of common
    stock for each share of Series F preferred stock converted.
    The number of shares of common stock deemed outstanding includes
    (i) warrants to purchase 10,757,939 shares of common
    stock at an exercise price of $0.9060 per share,
    (ii) warrants to purchase 500,000 shares of common
    stock at an exercise price of $0.17 per share and
    (iii) warrants to purchase 250,000 shares of common
    stock at an exercise price of $0.17 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (3) | For purposes of calculating the percentage
    beneficially owned, the number of shares of Series F
    preferred stock deemed outstanding includes
    (i) 449,237 shares of Series F preferred stock
    outstanding on February 1, 2004, and (ii) shares of
    Series F preferred stock issuable by us upon exercise of
    Series F warrants held by the respective person or group.
    The shares of Series F preferred stock issuable upon
    exercise of Series F warrants are considered to be
    outstanding and to be beneficially owned by the person or group
    holding such warrant for the purpose of computing the percentage
    ownership of such person or group but are not treated as
    outstanding for the purpose of computing the percentage
    ownership of any other person or group.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (4) | Based solely on information filed with the SEC on
    Schedule 13D (Amend. No. 1) (the Behrman
    13D) on December 20, 2002, Behrman Brothers, L.L.C.
    (Behrman Brothers), the general partner of Behrman
    Capital II L.P. (Behrman Capital) and
    Messrs. Grant G. Behrman and William M. Matthes, managing
    members of Behrman Brothers, may be deemed to share beneficial
    ownership with Behrman Capital, with respect to the
    Companys securities registered in the name of Behrman
    Capital. Mr. Behrman, the general partner of Strategic
    Entrepreneur Fund II, L.P. (SEF) and
    Mr. Matthes may be deemed to share beneficial ownership
    with SEF, with respect to the Companys securities
    registered in the name of SEF. Amounts reported for Behrman
    Capital and SEF are based on the Behrman 13D, except that such
    amounts include (i) 1,125,370 shares of common stock
    and 11,413 shares of our Series F preferred stock
    convertible into 1,397,525 shares of common stock
    registered in the name of Behrman Capital, and
    (ii) 15,259 shares of common stock and 155 shares
    of our Series F preferred stock convertible into
    18,980 shares of common stock registered in the name of
    SEF, which are presently entitled to be voted even though
    currently held in escrow, and include warrants registered in the
    name of: (i) Behrman Capital, to purchase
    (A) 493,311 shares of common stock at an exercise
    price $0.17 per share and (B) 10,245,808 shares
    of common stock at an exercise price of $.9060 per share
    and (ii) SEF, to purchase (A) 6,689 shares of
    common stock at an exercise price of $0.17 per share and
    (B) 131,328 shares of common stock at an exercise
    price of $0.9060 per share, net of warrants held in escrow.
    The address of each of the reporting persons is 126 East 56th
    Street, 27th Floor, New York, NY 10022.
| | (5) | The shares include 27,012,046 shares of
    common stock issuable upon the conversion of 220,596 shares
    of Series F preferred stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | (6) | The shares include 366,371 shares of common
    stock issuable upon the conversion of 2,992 shares of
    Series F preferred stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (7) | Based solely on information filed with the SEC on
    Schedule 13D (Amend. No. 3) (the HarbourVest
    13D) on January 3, 2003, HarbourVest Partners, LLC
    (HarbourVest) is the sole managing member of HVP
    V  Direct Associates LLC (Associates V)
    and HVP VI  Direct Associates LLC (Associates
    VI), the sole general partners of HarbourVest Partners
    V  Direct Fund L.P. (Fund V) and
    HarbourVest Partners VI  Direct Fund L.P.
    (Fund VI), respectively, and Messrs. D.
    Brooks Zug and Edward W. Kane are the managing members of
    HarbourVest. HarbourVest, as the sole managing member of
    Associates V and Associates VI, and Messrs. Zug and Kane,
    as the managing members of HarbourVest, may each be deemed to
    beneficially own all of the Companys securities registered
    in the name of Fund V and Fund VI. Messrs. Kane
    and Zug disclaim beneficial ownership of such securities, except
    to the extent of their pecuniary interest therein.
    Associates V, as the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | sole general partner of Fund V, and
    Fund V as the record owner, may each be deemed to
    beneficially own all of the Companys securities registered
    in the name of Fund V, and Associates VI, as the sole
    general partner of Fund VI, and Fund VI as the record
    owner, may each be deemed to beneficially own all of the
    Companys securities registered in the name of
    Fund VI. The address of each of the reporting persons is
    One Financial Center, 44th Floor, Boston, MA 02111.
| | (8) | Based on the HarbourVest 13D, the shares include
    (i) 11,037,548 shares of common stock issuable upon
    the conversion of 90,139 shares of Series F preferred
    stock and (ii) 4,415,068 shares of common stock
    issuable upon conversion of 36,056 shares of Series F
    preferred stock that may be acquired by Fund VI upon
    exercise of Series F warrants.                                                                                                                                      
| | (9) | Based on the HarbourVest 13D, the shares include
    36,056 shares of Series F preferred stock issuable
    upon exercise of Series F warrants held by Fund VI.                                                                                                                                                                                                                                                                                                                                                   

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Based solely on information filed with the SEC on
    schedule 13D (Amend. No. 2) (the SVCC 13D) on
    February 7, 2003, SAIC Venture Capital Corporation
    (SVCC) is a wholly-owned subsidiary of Science
    Applications International Corporation (SAIC). SVCC
    and SAIC may each be deemed to beneficially own all of the
    Companys securities registered in the name of SVCC. The
    address of SVCC is 3993 Howard Hughes Parkway, Suite 570,
    Las Vegas, NV 89109 and the address of SAIC is 10260 Campus
    Point Drive, San Diego, CA 92121.                                                                                                                                                                                                                                                                            
|(11) | Based on the SVCC 13D, the shares include
    (i) 8,278,130 shares of common stock issuable upon
    conversion of 67,604 shares of Series F preferred
    stock and (ii) 3,311,301 shares of common stock
    issuable upon conversion 27,042 shares of Series F
    preferred stock that may be acquired by SVCC upon exercise of
    Series F warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(12) | Based on the SVCC 13D, the shares include
    27,042 shares of Series F preferred stock issuable
    upon exercise of Series F warrants held by SVCC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(13) | Based solely on information filed with the SEC on
    Schedule 13G (Amend. No. 1) (the St. Paul
    13G) on January 23, 2002, St. Paul Fire and Marine
    Insurance Company (SPFM) owns 99% of St. Paul
    Venture Capital IV, LLC (SPVC IV) and St. Paul
    Venture Capital VI, LLC (SPVC VI). SPFM is a
    wholly-owned subsidiary of The St. Paul Companies, Inc.
    (The St. Paul). The St. Paul owns 79% of St. Paul
    Venture Capital, Inc., the manager of St. Paul Venture
    Capital Affiliates Fund I, LLC (Affiliates).
    The St. Paul may be deemed to beneficially own the shares held
    by SPVC IV, SPVC VI and Affiliates and SPFM may be deemed to
    beneficially own the shares held by SPVC IV and SPVC VI. The
    address of each of the reporting persons is 385 Washington St.,
    St. Paul, MN 55102.
|(14) | Based on the St. Paul 13G, the shares include
    (i) 2,207,534 shares of common stock issuable upon the
    conversion of 18,028 shares of Series F preferred
    stock and (ii) 882,989 shares of common stock issuable
    upon conversion of 7,211 shares of Series F preferred
    stock that may be acquired by SPVC VI upon exercise of
    Series F warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(15) | Based on the St. Paul 13G, the shares include
    7,211 shares of Series F preferred stock issuable upon
    exercise of Series F warrants held by SPVC VI.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|(16) | ABS Ventures IV, L.P. (ABS) and ABX
    Fund, L.P. (ABX) may be deemed to be under common
    control. Bruns Grayson and Philip Bleche are the managing
    members of the respective general partner to each ABS and ABX
    and control the investment and voting power of each of ABS and
    ABX. The street address of the named beneficial owners is 1
    South Street Suite 2150 Baltimore, MD 21202-3220.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(17) | The shares include (i) 1,804,763 shares
    of common stock issuable upon conversion of 14,738 shares
    of Series F preferred stock and
    (ii) 721,845 shares of common stock issuable upon
    conversion of 5,895 shares of Series F preferred stock
    that may be acquired by ABS upon exercise of Series F
    warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(18) | The shares include 5,895 shares of
    Series F preferred stock issuable upon exercise of
    Series F warrants held by ABS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|(19) | The shares include (i) 402,861 shares
    of common stock issuable upon the conversion of
    3,290 shares of Series F preferred stock and
    (ii) 161,145 shares of common stock issuable upon
    conversion of 1,316 shares of Series F preferred stock
    that may be acquired by ABX upon exercise of Series F
    warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|(20) | The shares include 1,316 shares of
    Series F preferred stock issuable upon exercise of
    Series F warrants held by ABX.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(21) | The sole general partner of NorthBay
    Opportunities, L.P., a Delaware limited partnership, is BayStar
    Management, LLC. The Investment Manager of NorthBay
    International Opportunities, Ltd., a British Virgin Islands
    corporation, is BayStar International Management, LLC. Both
    BayStar Management, LLC and Baystar International Management,
    LLC are owned equally by NorthBay Partners, LLC a Wisconsin
    limited liability company and MarinView Capital, LLC, a Delaware
    limited liability company. Michael Roth and Brian Stark share
    the investment and voting power of NorthBay Opportunities, L.P.
    and NorthBay International Opportunities Ltd. The street address
    of the named beneficial owner is 1500 W. Market Street,
    Suite 200, Mequon, WI 53092.                                                                                                                                            
|(22) | The shares include (i) 966,868 shares
    of common stock issuable upon the conversion of
    7,896 shares of Series F preferred stock and
    (ii) 662,211 shares of common stock issuable upon
    conversion of 5,408 shares of Series F preferred stock
    that may be acquired by NorthBay Opportunities, L.P. upon
    exercise of Series F warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(23) | The shares include 5,408 shares of
    Series F preferred stock issuable upon exercise of
    Series F warrants held by NorthBay Opportunities, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(24) | The shares include (i) 322,289 shares
    of common stock issuable upon the conversion of
    2,632 shares of Series F preferred stock and
    (ii) 220,778 shares of common stock issuable upon
    conversion of 1,803 shares of Series F preferred stock
    that may be acquired by NorthBay International Opportunities,
    Ltd. upon exercise of Series F warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(25) | The shares include 1,803 shares of
    Series F preferred stock issuable upon exercise of
    Series F warrants held by NorthBay International
    Opportunities, Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(26) | Based on information filed with the SEC on
    Schedule 13D (Amend No. 2) on June 13, 2003, the
    shares include 524,374 shares issuable upon exercise of
    Presently Exercisable Options, 48,220 shares held by the
    James Daleen Irrevocable Trust and 1,804 shares held by
    Mr. Daleens wife. Mr. Daleen disclaims
    beneficial ownership of the shares held by the trust and his
    wife.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(27) | Mr. Quick commenced employment with the
    Company on December 20, 2002 and beneficially owned no
    shares as of December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(28) | The shares include 174,411 shares issuable
    upon exercise of Presently Exercisable Options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(29) | The shares include 260,230 shares issuable
    upon exercise of Presently Exercisable Options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(30) | The shares include (i) 3,818,063 shares
    of common stock held by HarbourVest Partners V 
    Direct Fund L.P. (Fund V),
    (ii) 11,037,548 shares of common stock issuable upon
    the conversion of 90,139 shares of Series F preferred
    stock held by HarbourVest Partners VI  Direct Fund
    L.P., (Fund VI) and
    (iii) 4,415,068 shares of common stock issuable upon
    conversion of 36,056 shares of Series F preferred
    stock that may be acquired upon exercise of Series F
    warrants held by Fund VI. Mr. Nemirovsky is a managing
    director of HarbourVest Partners LLC and a member of HVP
    V  Direct Associates LLC and HVP VI 
    Direct Associates LLC, the general partners of Fund V and
    Fund VI, respectively, and therefore may be deemed to share
    beneficial ownership of the common stock held by Fund V and
    Fund VI. Mr. Nemirovsky disclaims beneficial ownership
    of these shares.
|(31) | The shares include (i) 90,139 shares of
    Series F preferred stock held by Fund VI and
    (ii) 36,056 shares of Series F preferred stock
    issuable upon exercise of Series F warrants held by
    Fund VI. Mr. Nemirovsky disclaims beneficial ownership
    of these shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(32) | The shares include 620,669 shares of common
    stock held by ABN AMRO Inc., 224,614 shares of common stock
    held by I Eagle Trust and 41,394 shares of common
    stock held by Burnham Capital, LLC. I Eagle Trust and Burnham
    Capital, LLC are affiliates of ABN AMRO Inc. Mr. Foreman, a
    director of the Company, is a managing director of ABN AMRO Inc.
    and therefore may be considered to share beneficial ownership of
    these shares. Mr. Foreman disclaims ownership of these
    shares.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(33) | Mr. Sisco is a partner of Behrman Capital,
    an investment firm that manages Behrman Capital II L.P.
    Mr. Sisco does not have beneficial ownership in the
    Companys securities held by Behrman Capital II L.P.
    or Strategic Entrepreneur Fund II, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|(34) | The shares include 70,973 shares of common
    stock held by the Stephen Getsy Living Trust. Also includes
    83,750 shares of common stock issuable upon exercise of
    Presently Exercisable Options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(35) | The shares include (i) 143,461 shares
    of common stock held by Gateway Partners, L.P.
    (Gateway), (ii) 21,683 shares of common
    stock held by Mr. McCarthy, (iii) 178,165 shares
    of common stock issuable upon the conversion of
    1,455 shares of Series F preferred stock held by
    Gateway,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | (iv) 26,939 shares of common stock
    issuable upon the conversion of 220 shares of Series F
    preferred stock held by Mr. McCarthy, (v) warrants to
    purchase an aggregate of 71,264 shares held by Gateway, and
    (vi ) warrants to purchase an aggregate of 10,771 shares
    held by Mr. McCarthy. The warrants have an exercise price
    of $0.9060 per share. Mr. McCarthy is a managing
    general partner of Gateway and may be deemed to share beneficial
    ownership of common stock held by Gateway. . Mr. McCarthy
    disclaims beneficial ownership of the shares held by Gateway.                                                                                  
|(36) | The shares include (i) 1,455 shares of
    Series F preferred stock held by Gateway and
    (ii) 220 shares of Series F preferred stock held
    by Mr. McCarthy. Mr. McCarthy disclaims beneficial
    ownership of the shares held by Gateway.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|(37) | The shares include
    (i) 11,242,652 shares of common stock issuable upon
    the conversion of 315,402 shares of Series F preferred
    stock, (ii) 4,415,068 shares of common stock issuable
    upon the conversion of 36,056 shares of Series F
    preferred stock that may be acquired upon exercise of
    Series F Warrants, (iii) 1,042,765 shares
    issuable upon exercise of Presently Exercisable Options and
    (iv) warrants to purchase an aggregate of
    82,035 shares of common stock. Amount includes an aggregate
    of 20,600,270 shares for which beneficial ownership is
    disclaimed. See the footnotes above for further explanation of
    these securities.
|(38) | The shares include 36,056 shares of
    Series F preferred stock that may be acquired upon exercise
    of Series F warrants. Amount includes an aggregate of
    127,650 shares for which beneficial ownership has been
    disclaimed (see footnotes 31 and 35).                                                                                                                                                                                                                                                                                                                                                                                                                            

Compensation of Directors

On October 25, 2002, our board of directors
adopted a policy with respect to the compensation of each of our
directors who is not an officer, employee or consultant (a
qualified director). Each qualified director
receives for his services an annual retainer of $25,000, plus
$1,500 for each committee for which he serves as chairman. We
pay the annual retainer on a quarterly basis. Each qualified
director receives $1,200 for attendance at each regular meeting
of the board of directors and $1,000 for attendance at each
special meeting of the board of directors (if the special
meeting lasts one hour or more). Additionally, each qualified
director receives $500 for each committee meeting attended, or
$750 for the chairman of the committee; provided, however, that
we do not pay fees for attendance at committee meetings that
occur on the same day as a meeting of the board of directors. We
reimburse each qualified director for reasonable out-of-pocket
expenses incurred in attending meetings of the Board of
Directors and any of its committees. In addition, our qualified
directors received an initial one-time grant of options in 2003
to purchase 250,000 shares of common stock. Each year
thereafter they are entitled to an annual grant of 25,000
options.

On April 21, 2003, we issued options to
purchase 250,000 shares of common stock to each qualified
director at an exercise price of $0.09 per share except for
Mr. Daleen. Mr. Daleen became a qualified director
upon the expiration of a Consultant Agreement on July 1,
2003 and on July 24, 2003, we issued Mr. Daleen
250,000 options at an exercise price of $0.22 per share.
All options were issued at the fair market value on the date of
grant. The options vest 33% per year commencing one year
from issuance.

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| |                                                                  
| | -----------------------------------------------------------------
| | Equity compensation plan information as of
    December 31, 2003:

|                                                                 |  |                     |           |                     |  |                        |      |  |  |  |            | 
|---------------------------------------------------------------- |  | ------------------- | --------- | ------------------- |  | ---------------------- | ---- |  |  |  | ---------- | 
|                                                                 |  |                     |           |                     |  | (c)                   
|                                                                 |  | (a)                 |           |                     |  | Number of securities  
|                                                                 |  | Number of           |           |                     |  | remaining for future  
|                                                                 |  | securities to be    |           | (b)                 |  | issuance under equity 
|                                                                 |  | issued upon         |           | Weighted-average    |  | compensation plans    
|                                                                 |  | exercise of         |           | exercise price of   |  | (excluding securities 
|Plan Category                                                    |  | outstanding options |           | outstanding options |  | reflected in column(a)
|                                                                 |  |                     |           |                     |  |                       
|Equity compensation plans approved by security
    holders       |  |                     | 4,113,777 |                     |  | $                      | 3.24 |  |  |  | 11,353,167 | 
|                                                                
|Equity compensation plans not approved by
    securities holders |  |                     |          |                     |  |                        |     |  |  |  |           | 






|         |                                                    
|-------- | ---------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions.

Transactions with Companies Associated with
SAIC

Mr. Roper, who resigned as a member of our
Board of Directors in March 2002, is a corporate executive vice
president of SAIC. SAIC Venture Capital Corporation, a
wholly-owned subsidiary of SAIC, is a significant stockholder of
the Company. Mr. Roper is the chairman of the board of SAIC
Venture Capital Corporation. We derived $66,800 in 2003 in
revenue from SAIC pursuant to a license and services agreement
between SAIC and the Company. In addition, SAIC owns 48.84% of
Danet, 100% of the voting stock of Telcordia and 60% of
Intesacol. Danet is both our customer and a subcontractor of our
products. Revenue related to Danet for the year ended
December 31, 2003 was less than one percent of total
revenue. We paid $283,000 to Danet in 2003 in its capacity as a
subcontractor for assistance with product development services.
We have a strategic alliance relationship and an OEM license
agreement and services agreement with Telcordia. Revenue related
to Telcordia in 2003 was $3,590. Intesacol became our
subcontractor in 2003 to perform services under the ETB
Contract. In the year ended December 31, 2003, we paid
$216,302 to Intesacol for professional services.

Transaction with Companies Associated with
Chairman of the Board

Mr. Daleen, Chairman of the Board, is chief
executive officer of Affinity Express, Inc.
(Affinity). We derived $18,000 in revenue in 2003
from Affinity pursuant to a services agreement between Affinity
and the Company.

Loans to Executives

In January 2001, we loaned Mr. Daleen
$1,237,823, our then chairman and chief executive officer, and
his wholly-owned limited partnership (the Makers).
The loan bore interest at a rate of 8.75% per annum. The
principal was payable in full January 31, 2006 with
interest payable annually on January 31st. The loan was secured
by 901,945 shares of the Companys common stock, and
was non-recourse to the Makers except to the extent of
901,945 shares held as collateral. On January 31,
2002, an interest payment of $119,871 was due and payable. The
interest payment was not made and as a result the loan was in
default. Pursuant to the terms of the loan, we gave notice of
default. On September 11, 2002, the Makers surrendered our
common stock held as collateral for the loan to us and the loan
was deemed satisfied.

Other Transactions

On December 20, 2002, Mr. Daleen
resigned as president and chief executive officer effective
December 31, 2002. We entered into a severance and release
agreement with Mr. Daleen effective on December 31,
2002. Under the terms of the severance and release agreement,
Mr. Daleen was paid severance on December 31, 2002, in
an amount equal to twelve months of his then-current annual base
salary. Mr. Daleen is also entitled to an additional
payment amount equal to twelve months of his base salary on the
separation date to be paid in equal monthly installments over a
period of 24 months with payments beginning January 1,
2004. In addition, Mr. Daleen will be entitled to an
additional lump sum payment of $328,900 as

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set forth in the agreement, including generally
upon: (i) our liquidation, dissolution or winding up,
(ii) a sale of all or substantially all of our assets and
liabilities, or (iii) a merger or consolidation involving
us, if such event occurs on or before December 31, 2007 and
results in a distribution of assets on the shares of our capital
stock or consideration to the holders of our capital stock
valued at a minimum of $10 million. During the severance
period, Mr. Daleen will not directly or indirectly engage
in any conduct in direct competition with the business of the
Company.


Mr. Daleen provided consulting services to
us in 2003 pursuant to a six-month consulting agreement for
which he was compensated $13,500 per month.

Mr. Daleen continues to be eligible to
participate in the LTIP. His participation percentage is 7.5% of
the payout pool under the LTIP.






|         |                                            
|-------- | -------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services.

Audit Fees and Non-Audit Fees

The following table presents fees billed and
accrued for professional services rendered by KPMG LLP for the
audit of our financial statements for 2003 and 2002,
respectively and fees billed and accrued for other services
rendered by KPMG LLP.

|                                       |  |      |         |      |  |   |         | 
|-------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                       |  | 2003 |         | 2002
|                                       |  |      |         |     
|Audit fees (filing of 10-K and 10-Qs) |  | $    | 188,000 |      |  | $ | 171,500 | 
|Audit Related Fees(1)                 |  |      |        |      |  |   | 32,300  | 
|Tax Fees(2)                            |  |      | 32,360  |      |  |   | 54,800  | 
|All Other Fees                         |  |      |        |      |  |   |        | 
|                                       |  |      |         |      |  |   |         | 
|                                       |  | $    | 220,360 |      |  | $ | 258,600 | 






|    |                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Audit-Related Fees were charged for acquisition
    related services in 2002 in connection with the Abiliti
    Acquisition                              
|(2) | Tax fees in 2002 and 2003 consisted of services
    for U.S federal, state and local tax returns, international tax
    planning, advice and compliance .

The Audit Committee has considered whether the
independent auditors provision of tax services to us is
compatible with the auditors independence. Additionally,
the Audit Committee approved all the audit and non-audit
services, and related fees provided to us by the independent
auditors prior to the services being performed.

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PART IV






|         |                                                                       
|-------- | ----------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 10-K.

(a) The following documents are filed as
part of this report:



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | 1. Financial Statements                                                                                                        
|
| | The financial statements are submitted as a
    separate section of this report, beginning on page F-1.                        
|
| | 2. Financial Statement Schedule                                                                                                
|
| | Schedule II Valuation and Qualifying
    Accounts.Submitted as a separate
    section of the financial statements on page F-34.
|
| | 3. Exhibits.                                                                                                                   
|
| | The following exhibits are filed as part of, or
    are incorporated by reference into, this report on
    Form 10-K:          




Exhibit List

|        |         |  |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | ------- |  |  | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |  |  |            
|Number  |         |  |  | Description
|        |         |  |  |            
|        | 3.1(a) |  |  |            |  | Certificate of Incorporation of Daleen
    Technologies, Inc. (Incorporated by reference to
    Exhibit 3.1 to the Companys Amendment No. 1 to
    Registration Statement on Form S-1 (File
    No. 333-82487) filed on August 18, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       
|        | 3.1(b) |  |  |            |  | Certificate of Amendment to Certificate of
    Incorporation of Daleen Technologies, Inc. (Incorporated by
    reference to Exhibit 10.2 to the Companys
    Form 8-K (File No. 0-27491) filed on
    June 15, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       
|        | 3.1(c) |  |  |            |  | Certificate of Amendment of Certificate of
    Incorporation of Daleen Technologies, Inc. (Incorporated by
    reference to Exhibit 3.1(c) to the Companys
    Form 10-K (File No. 0-27491) filed on March 28,
    2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       
|        | 3.2(a) |  |  |            |  | Bylaws of Daleen Technologies, Inc.
    (Incorporated by reference to Exhibit 3.2 to the
    Companys Amendment No. 1 to Registration Statement on
    Form S-1 (File No. 333-82487) filed on August 18,
    1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       
|        | 3.2(b) |  |  |            |  | Amendment to Bylaws of Daleen
    Technologies, Inc. (Incorporated by reference to
    Exhibit 3.2(b) to the Companys Form 10-K (File
    No. 0-27491) filed on March 28, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       
|        | 4.1    |  |  |            |  | See Exhibits 3.1(a), 3.1(b), 3.1(c), 3.2(a)
    and 3.2(b) for provisions of the certificate of incorporation,
    as amended, and bylaws, as amended, of Daleen
    Technologies, Inc. defining rights of the holders of common
    stock and preferred stock of Daleen Technologies, Inc.
    (Incorporated by reference to Exhibit 4.1 to the
    Companys Amendment No. 1 to Registration Statement on
    Form S-1 (File No. 333-82487) filed on August 18,
    1999, incorporated by reference to Exhibit 10.2 to the
    Companys Form 8-K (File No. 0-27491) filed on
    June 15, 2001), and (Incorporated by reference to
    Exhibit 3.1(c) and 3.2(b) to the Companys
    Form 10-K (File No. 0-27491) filed on March 28,
    2003).
|       
|        | 4.2    |  |  |            |  | Specimen stock certificate (Incorporated by
    reference to Exhibit 4.2 to the Companys Amendment
    No. 1 to Registration Statement on Form S-1 (File
    No. 333-82487) filed on August 18, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       
|        | *10.1  |  |  |            |  | Form of Indemnification Agreement (Incorporated
    by reference to Exhibit 10.10 to the Companys
    Registration Statement on Form S-1 (File
    No. 333-82487) filed on July 8, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       
|        | *10.2  |  |  |            |  | Daleen Technologies, Inc. Amended and
    Restated Stock Incentive Plan (Incorporated by reference to
    Exhibit 10.11 to the Companys Registration Statement
    on Form S-1 (File No. 333-82487) filed on July 8,
    1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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|        |         |  |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                         
|------- | ------- |  |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |  |  |            
|Number  |         |  |  | Description
|        |         |  |  |            
|       
|        | *10.3  |  |  |            |  | Daleen Technologies, Inc. 1998 Incentive
    Stock Option Plan (Incorporated by reference to
    Exhibit 10.12 to the Companys Registration Statement
    on Form S-1 (File No. 333-82487) filed on July 8,
    1999).                                                                                                                                                                 
|       
|        | *10.4  |  |  |            |  | Daleen Technologies, Inc. 1997 Incentive
    Stock Option Plan (Incorporated by reference to
    Exhibit 10.13 to the Companys Registration Statement
    on Form S-1 (File No. 333-82487) filed on July 8,
    1999).                                                                                                                                                                 
|       
|        | *10.5  |  |  |            |  | Daleen Technologies, Inc. 1995 Incentive
    Stock Option Plan (Incorporated by reference to
    Exhibit 10.14 to the Companys Registration Statement
    on Form S-1 (File No. 333-82487) filed on July 8,
    1999).                                                                                                                                                                 
|       
|        | *10.6  |  |  |            |  | Daleen Technologies, Inc. 1998 Employee
    Non-Qualified Stock Option Plan (Incorporated by reference to
    Exhibit 10.15 to the Companys Registration Statement
    on Form S-1 (File No. 333-82487) filed on July 8,
    1999).                                                                                                                                                    
|       
|        | *10.7  |  |  |            |  | Daleen Technologies, Inc. 1996 Employee
    Non-Qualified Stock Option Plan (Incorporated by reference to
    Exhibit 10.16 to the Companys Registration Statement
    on Form S-1 (File No. 333-82487) filed on July 8,
    1999).                                                                                                                                                    
|       
|        | *10.8  |  |  |            |  | Daleen Technologies, Inc. 1994 Employee
    Non-Qualified Stock Option Plan (Incorporated by reference to
    Exhibit 10.17 to the Companys Registration Statement
    on Form S-1 (File No. 333-82487) filed on July 8,
    1999).                                                                                                                                                    
|       
|        | 10.9   |  |  |            |  | Lease Agreement, dated August 4, 1992, by
    Innovative Selective Software, Inc., and
    Crow-Childress-Donner, Limited (Incorporated by reference to
    Exhibit 10.18 to the Companys Registration Statement
    on Form S-1 (File No. 333-82487) filed on
    September 30, 1999).                                                                                                
|       
|        | 10.10  |  |  |            |  | First Amendment to Lease Agreement, dated
    December 29, 1994, by Daleen Technologies Inc, successor to
    Innovative Selective Software, Inc., and Regent Holding
    Corporation, successor to Crow-Childress-Donner (Incorporated by
    reference to Exhibit 10.19 to the Companys
    Registration Statement on Form S-1 (File
    No. 333-82487) filed on September 30, 1999).
|       
|        | 10.11  |  |  |            |  | Lease Agreement, dated August 27, 1998, by
    Daleen Technologies, Inc. and Regent Holding Corporation
    (Incorporated by reference to Exhibit 10.20 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-82487) filed on September 30, 1999).                                                                                                                  
|       
|        | 10.12  |  |  |            |  | First Amendment to Lease, dated December 2,
    1998, between Daleen Technologies, Inc. and Regent Holding
    Corporation (Incorporated by reference to Exhibit 10.21 to
    the Companys Registration Statement on Form S-1 (File
    No. 333-82487) filed on September 30, 1999).                                                                                                   
|       
|        | 10.13  |  |  |            |  | Second Amendment to Lease, dated January 16,
    1999, between Daleen Technologies, Inc. and Regent Holding
    Corporation (Incorporated by reference to Exhibit 10.22 to
    the Companys Registration Statement on Form S-1 (File
    No. 333-82487) filed on September 30, 1999).                                                                                                  
|       
|        | *10.14 |  |  |            |  | Employment Agreement, dated April 7, 1997,
    between Frank Dickinson and Daleen Technologies, Inc.
    (Incorporated by reference to Exhibit 10.26 to the
    Companys Amendment No. 1 to Registration Statement on
    Form S-1 (File No. 333-82487) filed on August 18,
    1999).                                                                                                 
|       
|        | *10.15 |  |  |            |  | Employment Agreement, dated July 22, 1998,
    between David McTarnaghan and Daleen Technologies, Inc.
    (Incorporated by reference to Exhibit 10.27 to the
    Companys Amendment No. 1 to Registration Statement on
    Form S-1 (File No. 333-82487) filed on August 18,
    1999).                                                                                               
|       
|        | 10.16  |  |  |            |  | Registration Rights Agreement dated
    December 16, 1999, between the Company and the shareholders
    of Inlogic Software Inc. (Incorporated by reference to
    Exhibit 10.5 to the Companys Form 8-K (File
    No. 333-82487) filed on December 30, 1999).                                                                                                                         
|       
|        | 10.17  |  |  |            |  | Office Lease Agreement dated May 5, 2000,
    between Daleen Technologies, Inc., Daleen Canada
    Corporation and The Atrium on Bay Inc. (Incorporated by
    reference to Exhibit 10.1 to the Companys Quarterly
    Report on Form 10-Q (File No. 0-27491) filed on
    August 14, 2000).                                                                                           

57



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|        |         |  |  |             |  |                                                                                                                                                                                                                                                                                                                 
|------- | ------- |  |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |  |  |            
|Number  |         |  |  | Description
|        |         |  |  |            
|       
|        | 10.18  |  |  |            |  | Second Amendment to Lease, dated May 31,
    2000, between Daleen Technologies, Inc. and Regent Holding
    Corporation. (Incorporated by reference to Exhibit 10.2 to
    the Companys Quarterly Report on Form 10-Q (File
    No. 0-27491) filed on August 14, 2000).                                        
|       
|        | 10.19  |  |  |            |  | Third Amendment to Lease, dated May 31,
    2000, between Daleen Technologies, Inc. and Regent Holding
    Corporation. (Incorporated by reference to Exhibit 10.3 to
    the Companys Quarterly Report on Form 10-Q (File
    No. 0-27491) filed on August 14, 2000).                                         
|       
|        | *10.20 |  |  |            |  | Daleen Technologies, Inc. Amended &
    Restated 1999 Stock Incentive Plan (Incorporated by reference to
    Exhibit 10.37 to the Companys Form 10-K405 (File
    No. 0-27491) filed on April 5, 2001).                                                                                                        
|       
|        | 10.21  |  |  |            |  | Securities Purchase Agreement dated
    March 30, 2001 by and between Daleen
    Technologies, Inc. and the Escrow Purchasers named therein
    (Incorporated by reference to Exhibit 10.45 to the
    Companys Form 10-K405 (File No. 0-27491) filed on
    April 5, 2001).                                   
|       
|        | 10.22  |  |  |            |  | Form of Warrant Agreement by and between Daleen
    Technologies, Inc. and the Escrow Purchasers name therein
    (Incorporated by reference to Exhibit 10.47 to the
    Companys Form 10-K405 (File No. 0-27491) filed
    on April 5, 2001).                                                                 
|       
|        | 10.23  |  |  |            |  | Registration Rights Agreement dated
    March 30, 2001 by and between Daleen
    Technologies, Inc. and the Escrow Purchasers named therein
    (Incorporated by reference to Exhibit 10.48 to the
    Companys Form 10-K405 (File No. 0-27491) filed on
    April 5, 2001).                                   
|       
|        | *10.24 |  |  |            |  | Employment Agreement, dated May 31, 2000, by
    and between Daleen Technologies, Inc. and Jeanne T.
    Prayther (Incorporated by reference to Exhibit 10.4 to the
    Companys Quarterly Report on Form 10-Q (File
    No. 0-27491) filed on November 14, 2001).                                             
|       
|        | *10.25 |  |  |            |  | Amendment, dated August 22, 2001, to
    Employment Agreement dated May 31, 2000 by and between
    Daleen Technologies, Inc. and Jeanne T. Prayther
    (Incorporated by reference to Exhibit 10.5 to the
    Companys Quarterly Report on Form 10-Q (File
    No. 0-27491) filed on November 14, 2001).      
|       
|        | *10.26 |  |  |            |  | Amendment, dated July 18, 2001, to the
    Daleen Technologies, Inc. Amended and Restated 1999 Stock
    Incentive Plan (Incorporated by reference to Exhibit 10.8
    to the Companys Quarterly Report on Form 10-Q (File
    No. 0-27491) filed on November 14, 2001).                                       
|       
|        | *10.27 |  |  |            |  | Daleen Technologies, Inc. 2001 Broad-Based
    Stock Incentive Plan (Incorporated by reference to
    Exhibit 10.9 to the Companys Quarterly Report on
    Form 10-Q (File No. 0-27491) filed on
    November 14, 2001).                                                                                       
|       
|        | 10.28  |  |  |            |  | Partial Lease Termination Agreement dated
    effective December 31, 2001 by and between Daleen
    Technologies, Inc. and Boss Lakeside Three, LLC
    (Incorporated by reference to Exhibit 10.52 to the
    Companys Form 10-K (File No. 0-27491) filed on
    April 1, 2002).                              
|       
|        | *10.29 |  |  |            |  | Amendment dated September 4, 2001 to
    employment agreement dated July 22, 1998 by and between
    David McTarnaghan and Daleen Technologies, Inc.
    (Incorporated by reference to Exhibit 10.1 to the
    Companys Form 10-Q (File No. 0-27491) filed on
    May 14, 2002).                               
|       
|        | 10.30  |  |  |            |  | Sublease Agreement dated January 31, 2002
    between Daleen Canada Corporation and EDS Canada, Inc.
    (Incorporated by reference to Exhibit 10.3 to the
    Companys Form 10-Q (File No. 0-27491) filed on
    May 15, 2002).                                                                               
|       
|        | 10.31  |  |  |            |  | Abiliti Acquisition Agreement, dated
    October 7, 2002, by and between Daleen
    Technologies, Inc., Daleen Solutions, Inc. and Abiliti
    Solutions, Inc. (Incorporated by reference to
    Exhibit 99.1 to the Companys Current Report on
    Form 8-K (File No. 0-27491) filed on October 11,
    2002).
|       
|        | 10.32  |  |  |            |  | Investment Agreement, dated October 7, 2002,
    by and between Daleen Technologies, Inc. and the investors
    named therein (Incorporated by reference to Exhibit 99.2 to
    the Companys Current Report on Form 8-K (File
    No. 0-27491) filed on October 11, 2002).                                     
|       
|        | 10.33  |  |  |            |  | Registration Rights Agreement, dated
    October 7, 2002, by and between Daleen
    Technologies, Inc. and the holders named therein
    (Incorporated by reference to Exhibit 99.3 to the
    Companys Current Report on Form 8-K (File
    No. 0-27491) filed on October 11, 2002).                          

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|        |         |  |  |             |  |                                                                                                                                                                                                                                                                                                                                                                      
|------- | ------- |  |  | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |  |  |            
|Number  |         |  |  | Description
|        |         |  |  |            
|       
|        | 10.34  |  |  |            |  | Form of Indemnity Escrow Agreement between Daleen
    Technologies, Inc., Abiliti Solutions, Inc. and
    SunTrust Bank (Incorporated by reference to Exhibit 99.4 to
    the Companys Current Report on Form 8-K (File No.
    0-27491) filed on October 11, 2002).                                                                                                
|       
|        | 10.35  |  |  |            |  | Form of Voting Agreement between Daleen
    Technologies, Inc. and certain shareholders of Abiliti
    Solutions, Inc. (Incorporated by reference to
    Exhibit 99.5 to the Companys Current Report on
    Form 8-K (File No. 0-27491) filed on October 11, 2002).                                                                                                 
|       
|        | *10.36 |  |  |            |  | Amended and Restated Employment Agreement Between
    Daleen Technologies, Inc. and James R. Daleen dated
    September 20, 2002 (Incorporated by reference to
    Exhibit 10.1 to the Companys Form 10-Q (File
    No. 0-27491) filed on November 14, 2002).                                                                                                       
|       
|        | 10.37  |  |  |            |  | Independent Consultant Agreement with James
    Daleen, effective upon termination of Employment Agreement dated
    October 11, 2002 (Incorporated by reference to
    Exhibit 10.2 to the Companys Form 10-Q (File
    No. 0-27491) filed on November 14, 2002).                                                                                                  
|       
|        | *10.38 |  |  |            |  | Amendment to Employment Agreement for Jeanne
    Prayther dated October 7, 2002 (Incorporated by reference
    to Exhibit 10.3 to the Companys Form 10-Q (File
    No. 0-27491) filed on November 14, 2002).                                                                                                                                                        
|       
|        | *10.39 |  |  |            |  | Amendment to Employment Agreement for David
    McTarnaghan dated October 7, 2002 (Incorporated by
    reference to Exhibit 10.4 to the Companys
    Form 10-Q (File No. 0-27491) filed on
    November 14, 2002).                                                                                                                                                  
|       
|        | 10.40  |  |  |            |  | Form of Common Stock Purchase Warrant by and
    between Daleen Technologies, Inc. and the purchasers named
    in the Abiliti Acquisition Agreement and Investment Agreement
    (Incorporated by reference to Exhibit 10.63 to the
    Companys Form 10-K (File No. 0-27491) filed on
    March 28, 2003).                                                        
|       
|        | 10.41  |  |  |            |  | Form of Common Stock Purchase Warrant by and
    between Daleen Technologies, Inc. and the purchasers named
    in the Investment Agreement (Incorporated by reference to
    Exhibit 10.64 to the Companys Form 10-K (File
    No. 0-27491) filed on March 28, 2003).                                                                                              
|       
|        | 10.42  |  |  |            |  | Supplemental Voting Agreement by and among
    Harbourvest Partners V Direct Fund, L.P., Harbourvest Partners
    VI Direct Fund, L.P., Abiliti Solutions, Inc., Behrman
    Capital II L.P. and Strategic Entrepreneur Fund II,
    L.P. (Incorporated by reference to Exhibit 10.65 to the
    Companys Form 10-K (File No. 0-27491) filed on
    March 28, 2003).
|       
|        | *10.43 |  |  |            |  | Employment Agreement effective December 20,
    2002, between Gordon Quick and Daleen Technologies, Inc.
    (Incorporated by reference to Exhibit 10.66 to the
    Companys Form 10-K (File No. 0-27491) filed on
    March 28, 2003).                                                                                                                             
|       
|        | *10.44 |  |  |            |  | Long-Term Incentive Compensation Plan
    (Incorporated by reference to Exhibit 10.67 to the
    Companys Form 10-K (File No. 0-27491) filed on
    March 28, 2003).                                                                                                                                                                                                
|       
|        | 10.45  |  |  |            |  | Lease dated May 12, 1998 between 400
    Chesterfield Corp. and Intertech Management Group, Inc.
    (subsequently assigned to Daleen Solutions, Inc.) and
    Amendments thereto (Incorporated by reference to
    Exhibit 10.68 to the Companys Form 10-K (File
    No. 0-27491) filed on March 28, 2003).                                                        
|       
|        | *10.46 |  |  |            |  | Settlement and Release Agreement dated
    December 20, 2002, between James Daleen and Daleen
    Technologies, Inc. (Incorporated by reference to
    Exhibit 10.69 to the Companys Form 10-K (File
    No. 0-27491) filed on March 28, 2003).                                                                                                                     
|       
|        | *10.47 |  |  |            |  | Employment Agreement between Jeanne Prayther and
    Daleen Technologies, Inc. dated June 1, 2000
    (Incorporated by reference to Exhibit 10.1 to the
    Companys Form 10-Q (File No. 0-27491) filed on
    May 15, 2003).                                                                                                                                       
|       
|        | 10.48  |  |  |            |  | Lease dated September 16, 1999 between
    Olympia Properties, L.L.C. and Intertech Management
    Group, Inc. (subsequently assigned to Daleen
    Solutions, Inc.) and Assignment of Lease (Incorporated by
    reference to Exhibit 10.1 to the Companys
    Form 10-Q (File No. 0-27491) filed on August 14,
    2003).                                         
|       
|        | 10.49  |  |  |            |  | Amendment No. 1 to Registration Rights
    Agreement dated March 30, 2001, dated as of June 3,
    2002 (Incorporated by reference to Exhibit 10.2 to the
    Companys Form 10-Q (File No. 0-27491) filed on
    August 14, 2003).                                                                                                                                  

59



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##### Table of Contents



|        |        |  |  |             |  |                                                                                                                                                                                                                                                                                                               
|------- | ------ |  |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |  |            
|Number  |        |  |  | Description
|        |        |  |  |            
|       
|        | 10.50 |  |  |            |  | Lease Amendment dated October 17, 2003
    between 400 Chesterfield Center, Inc. and Daleen
    Solutions, Inc. (Incorporated by reference to
    Exhibit 10.1 to the Companys Form 10-Q (File
    No. 0-27491) filed on November 12, 2003).                                                                 
|       
|        | 10.51  |  |  |            |  | Lease Agreement dated January 14, 2004
    between Regent Holding LLC and Daleen Technologies, Inc.
    filed herewith.                                                                                                                                                                                       
|       
|        | 10.52  |  |  |            |  | Export-Import Bank Loan and Security Agreement
    among Daleen Technologies, Inc., Daleen
    Solutions, Inc., DSI, Inc., Daleen IAC, LLC and
    Silicon Valley Bank dated February 24, 2004 filed herewith.                                                                                                
|       
|        | 10.53  |  |  |            |  | Export-Import Bank of the United States Working
    Capital Guarantee Program Borrower Agreement among Daleen
    Technologies, Inc., Daleen Solutions, Inc.,
    DSI, Inc., Daleen IAC, LLC, Export-Import Bank of the
    United States, and Silicon Valley Bank dated February 24,
    2004 filed herewith.
|       
|        | 10.54  |  |  |            |  | Revolving Note between Daleen
    Technologies, Inc., Daleen Solutions, Inc.,
    DSI, Inc., Daleen IAC, LLC, and Silicon Valley Bank dated
    February 24, 2004 filed herewith.                                                                                                                             
|       
|        | 14.1   |  |  |            |  | Daleen Technologies, Inc. Code of Ethics for
    Principal Executive and Financial Officers filed herewith.                                                                                                                                                                                                   
|       
|        | 21.1   |  |  |            |  | Subsidiaries filed herewith.                                                                                                                                                                                                                                                                                  
|       
|        | 23.1   |  |  |            |  | Independent Auditors Consent filed herewith.                                                                                                                                                                                                                                                                 
|       
|        | 31.1   |  |  |            |  | Certification of Principal Executive Officer
    pursuant to Rule 13a-14(a) under the Securities Exchange
    Act of 1934, as amended, filed herewith.                                                                                                                                                        
|       
|        | 31.2   |  |  |            |  | Certification of Principal Financial Officer
    pursuant to Rule 13a-14(a) under the Securities Exchange
    Act of 1934, as amended, filed herewith.                                                                                                                                                        
|       
|        | 32.1   |  |  |            |  | Certification of Principal Executive Officer
    pursuant to 18 U.S.C. Section 1350, as adopted
    pursuant to section 906 of the Sarbanes-Oxley Act of 2002
    furnished herewith.                                                                                                                         
|       
|        | 32.2   |  |  |            |  | Certification of Principal Financial and
    Accounting Officer pursuant to 18 U.S.C. Section 1350,
    as adopted pursuant to section 906 of the Sarbanes-Oxley
    Act of 2002 furnished herewith.                                                                                                          






|  |                  
|- | -----------------
| | Previously filed.



|  |                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------
|* | Exhibits identified above with an asterisk (*)
    are management contracts or compensation plans or arrangements.

(b) Reports on Form 8-K:



| |    |                                                                                                                                                                                                                                                                                            
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Current Report on
    Form 8-K, Item 5, filed on October 31, 2003
    with respect to Daleens delivery of a Notice of Election
    Not to Renew to Allegiance Telecom Company Worldwide.                                                                                                  
|
| | 2. | Current Report on
    Form 8-K, Item 12, furnished under Item 9
    filed on November 4, 2003 with respect to Daleens
    third quarter 2003 financial operating results.                                                                                                                 
|
| | 3. | Current Report on
    Form 8-K, Item 5, filed on November 21, 2003
    with respect to the denial by the bankruptcy court of
    Daleens Motion for Relief from the Automatic Stay related
    to the Notice of Election Not to Renew sent to Allegiance
    Telecom Company Worldwide.   
|
| | 4. | Current Report on
    Form 8-K, Item 5, filed on December 8, 2003
    with respect to the Counterclaim filed against Daleen by
    Houlihan, Lokey, Howard and Zukin Capital, Inc. and
    Houlihan, Lokey, Howard and Zukin Financial Advisors, Inc.
    in a declaratory judgment action.

60



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 18th day of March,
2004.



| |                          
| | -------------------------
| | DALEEN TECHNOLOGIES, INC.



| |     |                 
| | --- | ----------------
| | BY: | /s/ GORDON QUICK

| |                                          
| | -----------------------------------------
| |                                          
| | GORDON QUICK                             
| | President and Chief Executive
    Officer
| | (Principal Executive Officer)            

POWER OF ATTORNEY

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant in the capacities
and on the dates indicated.

|                                         |  |                                                                                      |  |      |                | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------ |  | ---- | -------------- | 
|Signature                                |  | Title                                                                                |  | Date
|                                         |  |                                                                                      |  |     
|/s/ JAMES DALEENJames Daleen             |  | Chairman of the Board                                                                |  |      | March 18, 2004 | 
|                                        
|/s/ GORDON QUICKGordon Quick             |  | President and Chief Executive Officer (Principal
    Executive Officer) and Director |  |      | March 18, 2004 | 
|                                        
|/s/ JEANNE T. PRAYTHERJeanne T. Prayther |  | Chief Financial Officer (Principal Financial and
    Accounting Officer)             |  |      | March 18, 2004 | 
|                                        
|/s/ DANIEL J. FOREMANDaniel J. Foreman   |  | Director                                                                             |  |      | March 18, 2004 | 
|                                        
|/s/ STEPHEN J. GETSYStephen J. Getsy     |  | Director                                                                             |  |      | March 18, 2004 | 
|                                        
|/s/ JOHN MCCARTHYJohn McCarthy           |  | Director                                                                             |  |      | March 18, 2004 | 
|                                        
|Ofer Nemirovsky                          |  | Director                                                                             |  |      |                | 
|                                        
|/s/ DENNIS SISCODennis Sisco             |  | Director                                                                             |  |      | March 18, 2004 | 

61



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##### Table of Contents



DALEEN TECHNOLOGIES, INC.

AND SUBSIDIARIES


Consolidated Financial Statements

December 31, 2002 and 2003


(With Independent Auditors Report
Thereon)


F-1



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors and Stockholders 
 Daleen Technologies, Inc.:

We have audited the accompanying consolidated
balance sheets of Daleen Technologies, Inc. and
Subsidiaries (the Company) as of December 31, 2002 and
2003, and the related consolidated statements of operations,
stockholders (deficit) equity and cash flows for each
of the years in the three-year period ended December 31,
2003. In connection with our audits of the consolidated
financial statements, we have also audited the financial
statement schedule for each of the years in the three-year
period ended December 31, 2003, as listed in item 15(a) 2
of the Companys 2003 Annual Report on Form 10-K.
These consolidated financial statements and financial statement
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits.

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

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Daleen
Technologies, Inc. and Subsidiaries as of December 31,
2002 and 2003, and the results of their operations and their
cash flows for each of the years in the three-year period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

The accompanying consolidated financial
statements and financial statement schedule have been prepared
assuming that the Company will continue as a going concern. As
discussed in note 2 to the consolidated financial
statements, the Company has suffered recurring losses from
operations and has an accumulated deficit of $214.5 million
at December 31, 2003. These matters raise substantial doubt
about the Companys ability to continue as a going concern.
Managements plans in regard to these matters are also
described in note 2. The consolidated financial statements
and financial statement schedule do not include any adjustments
that might result from the outcome of this uncertainty.

As discussed in note 1 (m) to the
consolidated financial statements, the Company adopted the
provisions of Statements of Financial Accounting Standards
No. 142, Goodwill and Other Intangible
Assets,in 2002.



| |             
| | ------------
| | /s/ KPMG LLP

Miami, Florida

February 2, 2004, except as to note 18(a),


which is as of March 1, 2004


F-2



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES






CONSOLIDATED BALANCE SHEETS


December 31, 2002 and 2003


|                                         |                                                                                                                                                                                                                                   |                                            |       |          |        |  |       |          |        | 
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | -------- | ------ |  | ----- | -------- | ------ | 
|                                         |                                                                                                                                                                                                                                   | 2002                                       |       | 2003    
|                                         |                                                                                                                                                                                                                                   |                                            |       |         
|                                         |                                                                                                                                                                                                                                   |                                           
|                                         |                                                                                                                                                                                                                                   | (In thousands, except share               
|                                         |                                                                                                                                                                                                                                   | and per share data)                       
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                                                                                   |                                            |       |          |        |  |       |         
|                                         | Cash and cash equivalents                                                                                                                                                                                                         |                                            | $     | 6,589    |        |  | $     | 2,497    |       
|                                         | Restricted cash                                                                                                                                                                                                                   |                                            |       | 30       |        |  |       | 561      |       
|                                         | Accounts receivable, less allowance for doubtful
    accounts of $3,976 and $887 at December 31, 2002 and
    December 31, 2003, respectively                                                                                     |                                            |       | 2,558    |        |  |       | 610      |       
|                                         | Costs in excess of billings                                                                                                                                                                                                       |                                            |       |         |        |  |       | 2,032    |       
|                                         | Unbilled revenue                                                                                                                                                                                                                  |                                            |       | 203      |        |  |       | 392      |       
|                                         | Other current assets                                                                                                                                                                                                              |                                            |       | 1,022    |        |  |       | 487      |       
|                                         |                                                                                                                                                                                                                                   |                                            |       |          |        |  |       |         
|                                         |                                                                                                                                                                                                                                   | Total current assets                       |       |          | 10,402 |  |       |          | 6,579  | 
|Property and equipment, net              |                                                                                                                                                                                                                                   |                                            | 1,824 |          |        |  | 931   |         
|Goodwill                                 |                                                                                                                                                                                                                                   |                                            | 5,086 |          |        |  | 5,086 |         
|Other assets                             |                                                                                                                                                                                                                                   |                                            | 1,477 |          |        |  | 430   |         
|                                         |                                                                                                                                                                                                                                   |                                            |       |          |        |  |       |         
|                                         |                                                                                                                                                                                                                                   | Total assets                               |       | $        | 18,789 |  |       | $        | 13,026 | 
|                                         |                                                                                                                                                                                                                                   |                                            |       |          |        |  |       |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                                                                                   |                                            |       |          |        |  |       |         
|                                         | Accounts payable                                                                                                                                                                                                                  |                                            | $     | 368      |        |  | $     | 148      |       
|                                         | Accrued payroll and other accrued expenses                                                                                                                                                                                        |                                            |       | 2,576    |        |  |       | 2,267    |       
|                                         | Current portion of capitalized lease                                                                                                                                                                                              |                                            |       | 164      |        |  |       | 26       |       
|                                         | Billings in excess of costs                                                                                                                                                                                                       |                                            |       | 616      |        |  |       | 97       |       
|                                         | Deferred revenue                                                                                                                                                                                                                  |                                            |       | 1,279    |        |  |       | 372      |       
|                                         | Other current liabilities                                                                                                                                                                                                         |                                            |       | 53       |        |  |       | 16       |       
|                                         |                                                                                                                                                                                                                                   |                                            |       |          |        |  |       |         
|                                         |                                                                                                                                                                                                                                   | Total current liabilities                  |       |          | 5,056  |  |       |          | 2,926  | 
|Other long term liabilities              |                                                                                                                                                                                                                                   |                                            | 26    |          |        |  | 5     |         
|                                         |                                                                                                                                                                                                                                   |                                            |       |          |        |  |       |         
|                                         |                                                                                                                                                                                                                                   | Total liabilities                          |       |          | 5,082  |  |       |          | 2,931  | 
|Stockholders equity:                    |                                                                                                                                                                                                                                   |                                            |       |          |        |  |       |         
|                                         | Series F convertible Preferred Stock
    $.01 par value; 588,312 shares authorized ; 458,224
    and 453,322 issued and outstanding at December 31, 2002 and
    2003, respectively ($110.94 per share liquidation value)         |                                            |       | 27,656   |        |  |       | 27,112   |       
|                                         | Common stock-$.01 par value;
    200,000,000 shares authorized; 46,848,876 shares
    issued and 45,847,865 outstanding at December 31, 2002 and
    47,449,127 shares issued and 46,429,163 outstanding at
    December 31, 2003 |                                            |       | 469      |        |  |       | 475      |       
|                                         | Additional paid-in capital                                                                                                                                                                                                        |                                            |       | 196,649  |        |  |       | 197,187  |       
|                                         | Accumulated deficit                                                                                                                                                                                                               |                                            |       | (210,918 | )      |  |       | (214,528 | )     
|                                         | Treasury stock at cost; 1,001,011 and
    1,019,964 shares at December 31, 2002 and
    December 31, 2003 respectively                                                                                                            |                                            |       | (149     | )      |  |       | (151     | )     
|                                         |                                                                                                                                                                                                                                   |                                            |       |          |        |  |       |         
|                                         |                                                                                                                                                                                                                                   | Total stockholders equity                 |       |          | 13,707 |  |       |          | 10,095 | 
|                                         |                                                                                                                                                                                                                                   |                                            |       |          |        |  |       |         
|                                         |                                                                                                                                                                                                                                   | Total liabilities and stockholders equity |       | $        | 18,789 |  |       | $        | 13,026 | 
|                                         |                                                                                                                                                                                                                                   |                                            |       |          |        |  |       |         

See accompanying notes to consolidated financial
statements.

F-3



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF
OPERATIONS


Years ended December 31, 2001, 2002 and
2003


|                                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |        |        | 
|---------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------- | -------- | ------ | ------ | ---- | ------- | ----- | ------ | - | ------ | ------ | ------ | 
|                                                                             |                                                | 2001                                  |          | 2002   |        | 2003
|                                                                             |                                                |                                       |          |        |        |     
|                                                                             |                                                |                                      
|                                                                             |                                                | (In thousands, except per share data)
|Revenue:                                                                     |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|                                                                             | Professional services and other                |                                       | $        | 8,867  |        |      | $       | 5,154 |        |   | $      | 16,590 |       
|                                                                             | License fees                                   |                                       |          | 3,565  |        |      |         | 1,450 |        |   |        | 1,562  |       
|                                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|                                                                             |                                                | Total revenue                         |          |        | 12,432 |      |         |       | 6,604  |   |        |        | 18,152 | 
|                                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|Cost of revenue:                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|                                                                             | Professional services and other                |                                       |          | 7,302  |        |      |         | 2,523 |        |   |        | 5,312  |       
|                                                                             | License fees                                   |                                       |          | 1,646  |        |      |         | 232   |        |   |        | 506    |       
|                                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|                                                                             |                                                | Total cost of revenue                 |          |        | 8,948  |      |         |       | 2,755  |   |        |        | 5,818  | 
|                                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|Gross Margin                                                                 |                                                |                                       | 3,484    |        |        |      | 3,849   |       |        |   | 12,334 |       
|Operating expenses:                                                          |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|                                                                             | Sales and marketing                            |                                       |          | 10,895 |        |      |         | 3,738 |        |   |        | 3,315  |       
|                                                                             | Research and development                       |                                       |          | 12,502 |        |      |         | 3,967 |        |   |        | 6,521  |       
|                                                                             | General and administrative                     |                                       |          | 13,820 |        |      |         | 5,817 |        |   |        | 5,829  |       
|                                                                             | Amortization of goodwill and other intangibles |                                       |          | 12,014 |        |      |         |      |        |   |        |       |       
|                                                                             | Impairment of long-lived assets                |                                       |          | 34,604 |        |      |         |      |        |   |        | 500    |       
|                                                                             | Restructuring charges                          |                                       |          | 11,763 |        |      |         | 745   |        |   |        |       |       
|                                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|                                                                             |                                                | Total operating expenses              |          |        | 95,598 |      |         |       | 14,267 |   |        |        | 16,165 | 
|                                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|Operating loss                                                               |                                                |                                       | (92,114  | )      |        |      | (10,418 | )     |        |   | (3,831 | )     
|                                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|Nonoperating income:                                                         |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|                                                                             | Interest income, net                           |                                       |          | 875    |        |      |         | 217   |        |   |        | 64     |       
|                                                                             | Gain on sale of subsidiary                     |                                       |          |       |        |      |         | 391   |        |   |        |       |       
|                                                                             | Other income                                   |                                       |          | 250    |        |      |         | 149   |        |   |        | 157    |       
|                                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|                                                                             |                                                | Total nonoperating income             |          |        | 1,125  |      |         |       | 757    |   |        |        | 221    | 
|                                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|Net loss                                                                     |                                                |                                       | (90,989  | )      |        |      | (9,661  | )     |        |   | (3,610 | )     
|Preferred stock dividends arising from beneficial
    conversion features    |                                                |                                       | (28,512  | )      |        |      |        |       |        |   |       |       
|                                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|Net loss applicable to common stockholders                                   |                                                | $                                     | (119,501 | )      |        | $    | (9,661  | )     |        | $ | (3,610 | )     
|                                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|Net loss applicable to common stockholders per
    share  basic and diluted |                                                | $                                     | (5.47    | )      |        | $    | (0.40   | )     |        | $ | (0.08  | )     
|                                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |       
|Weighted average shares  basic and
    diluted                              |                                                |                                       | 21,836   |        |        |      | 23,919  |       |        |   | 45,980 |       
|                                                                             |                                                |                                       |          |        |        |      |         |       |        |   |        |       

See accompanying notes to consolidated financial
statements.

F-4



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##### Table of Contents



DALEEN TECHNOLOGIES INC. AND
SUBSIDIARIES







CONSOLIDATED STATEMENTS OF STOCKHOLDERS
(DEFICIT) EQUITY


Years ended December 31 2001, 2002, and
2003


|                           |                                                                             |                                   |         |                |   |              |        |             |   |           |           |            |  |            |      |              |   |         |            |             |  |       |     |     |  |   |      |     |   |   |        |       |  |   |         |        |   |  |          |         |   |   |        |         |  
|-------------------------- | --------------------------------------------------------------------------- | --------------------------------- | ------- | -------------- | - | ------------ | ------ | ----------- | - | --------- | --------- | ---------- |  | ---------- | ---- | ------------ | - | ------- | ---------- | ----------- |  | ----- | --- | --- |  | - | ---- | --- | - | - | ------ | ----- |  | - | ------- | ------ | - |  | -------- | ------- | - | - | ------ | ------- | -
|                           |                                                                             |                                   |         |                |   |              |        |             |   |           |           |            |  |            |      |              |   |         |            |            
|                           |                                                                             | Series F Preferred                |         |                |   |              |        |             |   |           |           |            |  |            |      |             
|                           |                                                                             | Stock                             |         | Treasury Stock |   | Common Stock |        |             |   |           |           |            |  |            |      |             
|                           |                                                                             |                                   |         |                |   |              |        | Stockholder |   | Deferred  |           | Additional |  |            |      |             
|                           |                                                                             | Number of                         |         |                |   | Number of    |        |             |   | Number of |           | Par        |  | Notes      |      | Stock        |   | Paid-in |            | Accumulated |  |      
|                           |                                                                             | Shares                            |         | Amount         |   | Shares       |        | Amount      |   | Shares    |           | Value      |  | Receivable |      | Compensation |   | Capital |            | Deficit     |  | Total
|                           |                                                                             |                                   |         |                |   |              |        |             |   |           |           |            |  |            |      |              |   |         |            |             |  |      
|                           |                                                                             |                                  
|                           |                                                                             | (In thousands, except share data)
|Balance, December 31, 2000 |                                                                             |                                   |        |                |   | $            |       |             |   |           |          |            |  | $          |     |              |   |         | 21,781,727 |             |  | $     | 218 |     |  | $ | (274 | )   |   | $ | (2,148 | )     |  | $ | 161,460 |        |   |  | (81,755  | )       |   | $ | 77,501 |        
|                           | Issuance of preferred stock-Series F, net                                   |                                   |         | 247,882        |   |              |        | 25,564      |   |           |           |            |  |            |      |              |   |         |            |             |  |       |     |     |  |   |      |     |   |   |        |       |  |   |         |        |   |  |          |         |   |   |        | 25,564  |  
|                           | Options issued for consulting services related to
    Series F issuance     |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      |    |   |   |        |      |  |   |         | 8      |   |  |          |        |   |   |        | 8       |  
|                           | Preferred stock dividends arising from beneficial
    conversion features   |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      |    |   |   |        |      |  |   |         | 19,067 |   |  |          | (19,067 | ) |   |        |        |  
|                           | Issuance of warrants related to Series F
    preferred stock                |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      |    |   |   |        |      |  |   |         | 9,446  |   |  |          | (9,446  | ) |   |        |        |  
|                           | Forfeitures of unvested stock options                                       |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      |    |   |   |        | 421   |  |   |         | (421   | ) |  |          |        |   |   |        |        |  
|                           | Non-cash stock compensation expense                                         |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      |    |   |   |        | 1,639 |  |   |         |       |   |  |          |        |   |   |        | 1,639   |  
|                           | Exercise of stock options and warrants                                      |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            | 94,827      |  |       |     | 1   |  |   |      |    |   |   |        |      |  |   |         | 10     |   |  |          |        |   |   |        | 11      |  
|                           | Payment of stockholder note receivable                                      |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      | 53  |   |   |        |      |  |   |         |       |   |  |          |        |   |   |        | 53      |  
|                           | Non-cash interest on stockholder note                                       |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      | (20 | ) |   |        |      |  |   |         |       |   |  |          |        |   |   |        | (20     | )
|                           | Warrants issued-non-cash settlement expense                                 |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      |    |   |   |        |      |  |   |         | 495    |   |  |          |        |   |   |        | 495     |  
|                           | Net loss                                                                    |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      |    |   |   |        |      |  |   |         |       |   |  |          | (90,989 | ) |   |        | (90,989 | )
|                           |                                                                             |                                   |         |                |   |              |        |             |   |           |           |            |  |            |      |              |   |         |            |             |  |       |     |     |  |   |      |     |   |   |        |       |  |   |         |        |   |  |          |         |   |   |        |        
|Balance, December 31, 2001 |                                                                             |                                   | 247,882 |                |   |              | 25,564 |             |   |           |          |            |  |            |     |              |   |         | 21,876,554 |             |  |       | 219 |     |  |   | (241 | )   |   |   | (88    | )     |  |   | 190,065 |        |   |  | (201,257 | )       |   |   | 14,262 |        
|                           | Issuance of stock related to Abiliti asset
    purchase, net                |                                   |         | 115,681        |   |              |        | 2,471       |   |           |           |           |  |            |      |             |   |         |            | 11,406,284  |  |       |     | 114 |  |   |      |    |   |   |        |      |  |   |         | 1,825  |   |  |          |        |   |   |        | 4,410   |  
|                           | Warrants issued for transaction costs related to
    Abiliti asset purchase |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      |    |   |   |        |      |  |   |         | 615    |   |  |          |        |   |   |        | 615     |  
|                           | Issuance of stock related to 2002 Private
    Placement, net                |                                   |         | 115,681        |   |              |        | 1,953       |   |           |           |           |  |            |      |             |   |         |            | 10,992,136  |  |       |     | 110 |  |   |      |    |   |   |        |      |  |   |         | 1,210  |   |  |          |        |   |   |        | 3,273   |  
|                           | Issuance of warrants related to 2002 Private
    Placement                  |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      |    |   |   |        |      |  |   |         | 648    |   |  |          |        |   |   |        | 648     |  
|                           | Forfeitures of unvested stock options                                       |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      |    |   |   |        | 20    |  |   |         | (20    | ) |  |          |        |   |   |        |        |  
|                           | Non-cash stock compensation                                                 |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      |    |   |   |        | 68    |  |   |         |        |   |  |          |        |   |   |        | 68      |  
|                           | Conversion of preferred stock- Series F- to
    common stock                |                                   |         | (21,020        | ) |              |        | (2,332      | ) |           |           |           |  |            |      |             |   |         |            | 2,573,902   |  |       |     | 26  |  |   |      |    |   |   |        |      |  |   |         | 2,306  |   |  |          |        |   |   |        |        |  
|                           | Payment of stockholder note receivable                                      |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      | 73  |   |   |        |      |  |   |         |       |   |  |          |        |   |   |        | 73      |  
|                           | Write-off of shareholder note receivable                                    |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      | 28  |   |   |        |      |  |   |         |       |   |  |          |        |   |   |        | 28      |  
|                           | Acquisition of treasury stock                                               |                                   |         |               |   |              |        |            |   |           |           | 1,001,011  |  |            |      | (149         | ) |         |            |            |  |       |     |    |  |   |      |     |   |   |        |      |  |   |         |       |   |  |          |        |   |   |        | (149    | )
|                           | Non-cash interest on stockholder note                                       |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      | (8  | ) |   |        |      |  |   |         |       |   |  |          |        |   |   |        | (8      | )
|                           | Sale of PartnerCommunity, Inc.                                              |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      | 148 |   |   |        |      |  |   |         |       |   |  |          |        |   |   |        | 148     |  
|                           | Net loss                                                                    |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      |    |   |   |        |      |  |   |         |       |   |  |          | (9,661  | ) |   |        | (9,661  | )
|                           |                                                                             |                                   |         |                |   |              |        |             |   |           |           |            |  |            |      |              |   |         |            |             |  |       |     |     |  |   |      |     |   |   |        |       |  |   |         |        |   |  |          |         |   |   |        |        
|Balance, December 31, 2002 |                                                                             |                                   | 458,224 |                |   |              | 27,656 |             |   |           | 1,001,011 |            |  |            | (149 | )            |   |         | 46,848,876 |             |  |       | 469 |     |  |   |     |     |   |   |       |       |  |   | 196,649 |        |   |  | (210,918 | )       |   |   | 13,707 |        
|                           | Conversion of preferred stock- Series F- to
    common stock                |                                   |         | (4,902         | ) |              |        | (544        | ) |           |           |           |  |            |      |             |   |         |            | 600,251     |  |       |     | 6   |  |   |      |    |   |   |        |      |  |   |         | 538    |   |  |          |        |   |   |        |        |  
|                           | Acquisition of treasury stock                                               |                                   |         |               |   |              |        |            |   |           |           | 18,953     |  |            |      | (2           | ) |         |            |            |  |       |     |    |  |   |      |    |   |   |        |      |  |   |         |       |   |  |          |        |   |   |        | (2      | )
|                           | Net loss                                                                    |                                   |         |               |   |              |        |            |   |           |           |           |  |            |      |             |   |         |            |            |  |       |     |    |  |   |      |    |   |   |        |      |  |   |         |       |   |  |          | (3,610  | ) |   |        | (3,610  | )
|                           |                                                                             |                                   |         |                |   |              |        |             |   |           |           |            |  |            |      |              |   |         |            |             |  |       |     |     |  |   |      |     |   |   |        |       |  |   |         |        |   |  |          |         |   |   |        |        
|Balance, December 31, 2003 |                                                                             |                                   | 453,322 |                |   |              | 27,112 |             |   |           | 1,019,964 |            |  |            | (151 | )            |   |         | 47,449,127 |             |  |       | 475 |     |  |   | 0    |     |   |   | 0      |       |  |   | 197,187 |        |   |  | (214,528 | )       |   |   | 10,095 |        
|                           |                                                                             |                                   |         |                |   |              |        |             |   |           |           |            |  |            |      |              |   |         |            |             |  |       |     |     |  |   |      |     |   |   |        |       |  |   |         |        |   |  |          |         |   |   |        |        

See accompanying notes to consolidated financial
statements

F-5



---



##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF CASH
FLOWS


Years Ended December 31, 2001, 2002 and
2003


|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |        |       |        |        |  
|----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------------------------- | ------ | ------ | ------- | ------ | ----- | ------ | ------ | ------ | ----- | ------ | ------ | -
|                                                                                                |                                                                                 | 2001                                                                          |                                            | 2002                                                    |        | 2003  
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |       
|                                                                                                |                                                                                 |                                                                              
|                                                                                                |                                                                                 | (In thousands)                                                               
|Cash flows from operating activities:                                                           |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|                                                                                                | Net loss                                                                        |                                                                               | $                                          | (90,989                                                 | )      |        | $       | (9,661 | )     |        | $      | (3,610 | )    
|                                                                                                | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |        |      
|                                                                                                |                                                                                 | Depreciation and amortization                                                 |                                            |                                                         | 4,304  |        |         |        | 2,747 |        |        |        | 3,538 |       
|                                                                                                |                                                                                 | Amortization of deferred stock compensation                                   |                                            |                                                         | 1,639  |        |         |        | 68    |        |        |        |      |       
|                                                                                                |                                                                                 | Amortization of goodwill and other intangibles                                |                                            |                                                         | 12,014 |        |         |        |      |        |        |        |      |       
|                                                                                                |                                                                                 | Loss on disposal of property and equipment                                    |                                            |                                                         | 3,185  |        |         |        | 14    |        |        |        | 36    |       
|                                                                                                |                                                                                 | Impairment of long lived assets and other assets                              |                                            |                                                         | 36,803 |        |         |        |      |        |        |        | 500   |       
|                                                                                                |                                                                                 | Bad debt expense (recovery)                                                   |                                            |                                                         | 2,863  |        |         |        | 729   |        |        |        | (72   | )     
|                                                                                                |                                                                                 | Interest income on stockholders notes
    receivable                         |                                            |                                                         | (168   | )      |         |        | (75   | )      |        |        | (4    | )     
|                                                                                                |                                                                                 | Non-cash stock settlement expense                                             |                                            |                                                         | 495    |        |         |        |      |        |        |        |      |       
|                                                                                                |                                                                                 | Gain on sale of subsidiary                                                    |                                            |                                                         |       |        |         |        | (391  | )      |        |        |      |       
|                                                                                                |                                                                                 | Purchased in-process research and development                                 |                                            |                                                         |       |        |         |        | 104   |        |        |        |      |       
|                                                                                                |                                                                                 | Change in assets and liabilities (net of effects
    of Abiliti Acquisition): |                                            |                                                         |        |        |         |        |       |        |        |        |       |       
|                                                                                                |                                                                                 |                                                                               | Restricted cash                            |                                                         |        | 101    |         |        |       |       |        |        |       | (531   | )     
|                                                                                                |                                                                                 |                                                                               | Accounts receivable                        |                                                         |        | 8,992  |         |        |       | 324    |        |        |       | 2,159  |       
|                                                                                                |                                                                                 |                                                                               | Costs in excess of billings                |                                                         |        | 2,202  |         |        |       | (51    | )      |        |       | (2,032 | )     
|                                                                                                |                                                                                 |                                                                               | Unbilled revenue                           |                                                         |        | 350    |         |        |       | 101    |        |        |       | (189   | )     
|                                                                                                |                                                                                 |                                                                               | Other current assets                       |                                                         |        | (26    | )       |        |       | (949   | )      |        |       | (1,312 | )     
|                                                                                                |                                                                                 |                                                                               | Other assets                               |                                                         |        | (42    | )       |        |       | 16     |        |        |       | (7     | )     
|                                                                                                |                                                                                 |                                                                               | Accounts payable                           |                                                         |        | (2,274 | )       |        |       | 210    |        |        |       | (120   | )     
|                                                                                                |                                                                                 |                                                                               | Accrued payroll and other accrued expenses |                                                         |        | (8,314 | )       |        |       | (1,696 | )      |        |       | (164   | )     
|                                                                                                |                                                                                 |                                                                               | Billings in excess of costs                |                                                         |        | (143   | )       |        |       | (708   | )      |        |       | (519   | )     
|                                                                                                |                                                                                 |                                                                               | Deferred revenue                           |                                                         |        | (1,931 | )       |        |       | 33     |        |        |       | (1,636 | )     
|                                                                                                |                                                                                 |                                                                               | Other current liabilities                  |                                                         |        | (924   | )       |        |       |       |        |        |       | (53    | )     
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|                                                                                                |                                                                                 |                                                                               |                                            | Net cash used in operating activities                   |        |        | (31,863 | )      |       |        | (9,185 | )      |       |        | (4,016 | )
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|Cash flows provided by (used in) financing
    activities:                                      |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|                                                                                                | Proceeds from sale of Series F preferred
    stock and warrants, net            |                                                                               |                                            | 25,564                                                  |        |        |         | 3,551  |       |        |        |       |      
|                                                                                                | Payment of capital lease                                                        |                                                                               |                                            | (476                                                    | )      |        |         |       |       |        |        | (164   | )    
|                                                                                                | Proceeds from exercise of stock options and
    bridge warrants                 |                                                                               |                                            | 11                                                      |        |        |         |       |       |        |        |       |      
|                                                                                                | Acquisition of cash from Abiliti                                                |                                                                               |                                            |                                                        |        |        |         | 92     |       |        |        |       |      
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|                                                                                                |                                                                                 |                                                                               |                                            | Net cash provided by (used in) financing
    activities |        |        | 25,099  |        |       |        | 3,643  |        |       |        | (164   | )
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|Cash flows used in investing activities:                                                        |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|                                                                                                | Issuance of stockholders notes receivable                                      |                                                                               |                                            | (1,187                                                  | )      |        |         |       |       |        |        |       |      
|                                                                                                | Proceeds from sale of fixed assets                                              |                                                                               |                                            |                                                        |        |        |         | 1      |       |        |        |       |      
|                                                                                                | Net proceeds from sale of subsidiary                                            |                                                                               |                                            |                                                        |        |        |         | 68     |       |        |        |       |      
|                                                                                                | Repayment of stockholders notes receivable                                     |                                                                               |                                            | 33                                                      |        |        |         | 141    |       |        |        | 30     |      
|                                                                                                | Payments related to the asset purchase of Daleen
    Solutions, Inc.            |                                                                               |                                            |                                                        |        |        |         | (1,094 | )     |        |        | (262   | )    
|                                                                                                | Capital expenditures                                                            |                                                                               |                                            | (780                                                    | )      |        |         | (211   | )     |        |        | (340   | )    
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|                                                                                                |                                                                                 |                                                                               |                                            | Net cash used in investing activities                   |        |        | (1,934  | )      |       |        | (1,095 | )      |       |        | (572   | )
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|Effect of exchange rates on cash and cash
    equivalents                                       |                                                                                 |                                                                               | (477                                       | )                                                       |        |        | 133     |        |       |        | 660    |       
|Net decrease in cash and cash equivalents                                                       |                                                                                 |                                                                               | (9,175                                     | )                                                       |        |        | (6,504  | )      |       |        | (4,092 | )     
|Cash and cash equivalents-beginning of period                                                   |                                                                                 |                                                                               | 22,268                                     |                                                         |        |        | 13,093  |        |       |        | 6,589  |       
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|Cash and cash equivalents-end of period                                                         |                                                                                 | $                                                                             | 13,093                                     |                                                         |        | $      | 6,589   |        |       | $      | 2,497  |       
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|Non-cash investing and financing activities (in
    thousands)                                  |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|Forfeiture of unvested stock options                                                            |                                                                                 | $                                                                             | 421                                        |                                                         |        | $      | 20      |        |       | $      |       |       
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|Sale of equipment at book value                                                                 |                                                                                 | $                                                                             | 389                                        |                                                         |        | $      |        |        |       | $      |       |       
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|Issuance of notes receivable                                                                    |                                                                                 | $                                                                             | 1,241                                      |                                                         |        | $      |        |        |       | $      |       |       
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|Fixed assets exchanged for receivables                                                          |                                                                                 | $                                                                             |                                           |                                                         |        | $      | 131     |        |       | $      |       |       
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|Acquisition of treasury stock in exchange of
    notes receivable                               |                                                                                 | $                                                                             |                                           |                                                         |        | $      | 149     |        |       | $      | 2      |       
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|Warrant received in sale of PartnerCommunity                                                    |                                                                                 | $                                                                             |                                           |                                                         |        | $      | 166     |        |       | $      |       |       
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|Conversion of preferred stock to common                                                         |                                                                                 | $                                                                             |                                           |                                                         |        | $      | 2,332   |        |       | $      | 544    |       
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       
|Issuance of common and preferred stock related to
    asset purchase and 2002 private placement |                                                                                 | $                                                                             |                                           |                                                         |        | $      | 5,017   |        |       | $      |       |       
|                                                                                                |                                                                                 |                                                                               |                                            |                                                         |        |        |         |        |       |        |        |       

See accompanying notes to consolidated financial
statements.

F-6



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2002 and 2003




|    |                                                                           
|--- | --------------------------------------------------------------------------
|(1) | Description of Business and Summary of
    Significant Accounting Policies



|    |         
|--- | --------
|(a) | Business

Daleen Technologies, Inc.
(Daleen or the Company) is a global
provider of advanced billing and customer care, event
management, and revenue assurance software for convergent
communication service providers and other technology solutions
providers. Daleens solutions are designed using the latest
open Internet technologies to enable providers to enhance
operational efficiency while driving maximum revenue from their
products and services. The Companys products and services
are used by communications providers to support a variety of
voice, data, and internet based services across wireless,
wireline and satellite networks. The Companys
RevChain® billing and customer management and
AsuritiTM event management and revenue assurance
applications deliver proven interoperability with other legacy
billing systems and other downstream operational support systems
applications. RevChain and Asuriti can be purchased as licensed
software applications or as part of a turnkey solution through
BillingCentral®, a carrier-class outsourcing operation.
BillingCentral provides the flexibility to offer the
Companys products on a licensed basis or outsourced
solution. This outsourcing solution has the capacity to provide
multiple levels of services to customers of all sizes.

The Company has a professional services
department to provide a variety of professional consulting
services to assist customers with implementation, custom
integration and configuration services, as well as training and
support for customers and business partners. The Company
maintains a customer service department to provide technical
assistance to customers, in addition to providing customer care
for upgrades and new releases of its products.

In December 1999, the Company completed its
acquisition of a wholly owned subsidiary, Inlogic Software
Inc. (renamed Daleen Canada).

In July 2000, the Company formed a subsidiary,
PartnerCommunity, Inc. (PartnerCommunity).
PartnerCommunity provided partner management software products
and services for providers of data content and communication
services. PartnerCommunitys products enable these service
providers to build their own private community to integrate
business processes with their partners and business customers,
and to offer partner management services. The Company sold this
subsidiary in June 2002. See note 14.

In September 2000, the Company formed a
wholly-owned subsidiary to carry out the European operations,
Daleen Technologies Europe B.V., a corporation formed under the
laws of The Netherlands with its registered office in Amsterdam.

In January 2002, the Company formed a
wholly-owned subsidiary, Daleen Australia Pty Limited, a
corporation formed under the laws of Australia to carry out the
Asia-Pacific operations.

On October 3, 2002, the Company formed a
wholly-owned subsidiary DSI, Inc. and a wholly-owned
subsidiary of DSI, Inc., Daleen Solutions, Inc.
(Daleen Solutions). These entities were formed for
the purpose of purchasing the assets and assuming certain
liabilities of Abiliti Solutions, Inc.
(Abiliti), which was consummated on
December 20, 2002. See note 3 for description of
transaction.

On July 4, 2003, the Company formed a branch
office in Bogotá, Colombia, Daleen Technologies Surcursal
Colombia. This branch was formed for the purpose of doing
business with a customer in Bogotá, Colombia.



|    |                            
|--- | ---------------------------
|(b) | Principles of Consolidation

The consolidated financial statements include the
accounts and operations of the Company and its subsidiaries. All
intercompany accounts and transactions have been eliminated.

F-7



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                    
|--- | -------------------
|(c) | Revenue Recognition

The Company recognizes revenue related to
outsourcing services under Emerging Issues Task Force
Issue 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables(EITF 00-21). EITF 00-21 relates to
accounting for multiple-deliverable arrangements and specifies
circumstances under which a revenue arrangement should be
separated into different revenue-generating deliverables or
units of accounting and how the revenue arrangement
should be allocated to the different deliverables or units of
accounting.

Revenue related to outsourcing services consists
of (1) discovery work and (2) monthly processing fees
generated from the Companys provision of billing and event
management services. These two deliverables are considered
separate units of accounting because these elements can and have
been sold separately and they create stand-alone value for the
customer. The revenue associated with discovery work is
recognized on a time and materials basis as the work is
performed. The monthly processing fees are recognized as the
related services are rendered and are billed monthly based on
transaction volume processed, percentage of revenue billed on
behalf of customers or monthly minimum charges per contractual
arrangements.

The Company primarily recognizes revenue related
to site license and services agreements under Statement of
Position 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions(SOP 98-9). SOP 98-9 requires
recognition of revenue using the residual method
when (1) there is vendor-specific objective evidence
(VSOE) of the fair values of all undelivered
elements in a multiple-element arrangement that is not accounted
for using long-term contract accounting, (2) VSOE of fair
value does not exist for one or more of the delivered elements
in the arrangement, and (3) all revenue recognition
criteria in Statement of Position 97-2, Software Revenue
Recognition(SOP 97-2) other than the
requirement for VSOE of the fair value of each delivered element
of the arrangement are satisfied.

The following elements could be included in the
Companys software license arrangements with its customers:



| |   |                                              
| | - | ---------------------------------------------
| |  | Software license                             
|
| |  | Maintenance and support                      
|
| |  | Professional services                        
|
| |  | Third party software licenses and maintenance
|
| |  | Training                                     

VSOE exists for all of these elements except for
the software license. The software license is delivered upon the
execution of the license agreement. Based on this delivery and
the fact that VSOE exists for all other elements, the Company
recognizes revenue under SOP 98-9 as long as all other
revenue recognition criteria in SOP 97-2 are satisfied.

Under SOP 98-9, the arrangement fee is
recognized as follows: (1) the total fair value of the
undelivered elements, as indicated by VSOE, is deferred and
subsequently recognized in accordance with the relevant sections
of SOP 97-2 and as described below and (2) the
difference between the total arrangement fee and the amount
deferred for the undelivered elements is recognized as revenue
related to the delivered elements.

Revenue related to delivered elements of the
arrangement is recognized when persuasive evidence of an
arrangement exists, the software has been delivered, the fee is
fixed and determinable and collectibility is probable.

F-8



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Revenue related to undelivered elements of the
arrangement is valued by the price charged when the element is
sold separately and is recognized as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue related to customer maintenance
    agreements is deferred and recognized ratably using the
    straight-line method basis over the applicable maintenance
    period. The VSOE of maintenance is determined using the rate at
    which maintenance is renewed each year and is dependent on the
    amount of the license fee as well as the type of maintenance the
    customer chooses.                                                                                                                                                                                                                                                                                                                                           
|
| |  | Revenue related to professional service fees is
    recognized separately from the license fee since the services
    are not considered significant to the functionality of the
    software and the software does not require significant
    modification, production or customization. In instances when the
    services performed in conjunction with certain contracts are
    significant to the functionality of the software and the
    software requires significant modification and customization at
    the customers site, the Company recognizes the total
    license and services amount together. There are two types of
    service contracts that are entered into with customers: fixed
    fee and time and materials.



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company recognizes revenue from fixed fee
    contracts using the percentage of completion method, based on
    the ratio of total hours incurred to date to total estimated
    labor hours. Changes in job performance, job conditions,
    estimated profitability and final contract settlement may result
    in revisions to costs and income and are recognized in the
    period in which the revisions are determined. Contract costs
    include all direct material and labor costs and those indirect
    costs related to contract performance, such as indirect labor
    and supplies. These costs are readily determinable since the
    Company uses the costs that would have been charged if the
    contract was a time and materials contract. Provisions for
    estimated losses on uncompleted contracts are recorded in the
    period in which losses are determined. Amounts billed in excess
    of revenue recognized to date are classified as Billings
    in excess of costs, whereas revenue recognized in excess
    of amounts billed are classified as Costs in excess of
    billings in the accompanying condensed unaudited
    consolidated balance sheets.
|
| |  | Revenue under a time and materials arrangement is
    recognized as services are performed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



| |   |                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue related to third party software is
    recognized when delivered to the customer. The value of third
    party software is based on the Companys acquisition cost
    plus a reasonable margin and is readily determinable since the
    Company frequently sells these licenses separate of the other
    elements.
|
| |  | Training revenue is recognized when training is
    provided to customers and is based on the amount charged for
    training when it is sold separately.                                                                                                                                                                    

The Company typically receives 25 percent of
the license fee as a down payment and the balance is typically
due between three and nine months from contract execution. In
limited situations, the Company enters into extended payment
terms with certain customers if the Company believes it is a
good business opportunity. When it enters into these
arrangements, the Company evaluates each arrangement
individually to determine whether collectibility is probable and
the fees are fixed and determinable. An arrangement fee is not
presumed to be fixed and determinable if payment of a
significant portion of the license fee is due after the normal
and customary terms usually offered to customers by the Company.
Revenue related to arrangements containing extended payment
terms where the fees are not considered fixed and determinable
is deferred until payments are due.

In order to ensure that collectibility is
probable, the Company performs credit reviews on each customer.
If collectibility is determined to not be probable upon contract
execution, revenue is recognized when cash is received.

In October 2003, the Securities and Exchange
Commission (the SEC) issued Staff Accounting
Bulletin No. 104, Revenue Recognition,(SAB No. 104) which was effective as of
December 31, 2003. The Companys revenue recognition
policies described above are in compliance with SAB No. 104.

F-9



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                          
|--- | -------------------------
|(d) | Cash and Cash Equivalents

The Company considers all highly liquid
investments with original maturities of three months or less to
be cash equivalents.



|    |                 
|--- | ----------------
|(e) | Notes Receivable

Full recourse notes receivable are recorded at
cost, less any related allowance for impaired notes receivable.
Management, considering current information and events regarding
the borrowers ability to repay their obligations,
considers a note to be impaired when it is probable that the
Company will be unable to collect all amounts due according to
the contractual terms of the note agreement. When a loan is
considered to be impaired, the amount of the impairment is
measured based on the present value of expected future cash
flows discounted at the notes effective interest rate. See
note 13.

Non-recourse notes receivable are recorded at
cost, less any related allowance for the difference between the
fair value of the note plus accrued interest and the fair value
of the underlying collateral. See note 13.



|    |                            
|--- | ---------------------------
|(f) | Property and Equipment, Net

Property and equipment is stated at cost.
Depreciation on property and equipment is calculated using the
straight-line method over the estimated useful lives of the
assets, ranging from three to seven years. Leasehold
improvements are amortized over their useful lives or the term
of the related lease, whichever is shorter.



|    |                           
|--- | --------------------------
|(g) | Software Development Costs

The Company accounts for software development
costs under Statement of Financial Accounting Standards
No. 86, Accounting for Costs of Computer Software
to Be Sold, Leased or Otherwise Marketed(SFAS No. 86). Under
SFAS No. 86, the costs associated with software
development are required to be capitalized after technological
feasibility has been established. Based on the Companys
product development process, technological feasibility is
generally established upon completion of the working model.
Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general
release are insignificant and, as a result, the Company has not
capitalized any software development costs.



|    |                                    
|--- | -----------------------------------
|(h) | Impairment of Long-Lived
    Assets

Pursuant to Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived
Assets,(SFAS No. 144) long lived
assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be
separately presented in the balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The asset and liabilities of a
disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of
the balance sheet.

Goodwill and intangible assets not subject to
amortization are tested annually for impairment, and are tested
for impairment more frequently if events and circumstances
indicate that the asset might be impaired. An impairment loss is
recognized to the extent that the carrying amount exceeds the
assets fair value.

F-10



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Prior to the adoption of SFAS No. 144,
the Company accounted for long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121,
Accounting for Impairment of Long-Lived Assets to be
Disposed of.



|    |             
|--- | ------------
|(i) | Income Taxes

The Company uses the asset and liability method
of accounting for income taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as
a change in expense in the period that includes the enactment
date.



|    |                   
|--- | ------------------
|(j) | Stock Option Plans

The Company applies the intrinsic-value based
method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employeesand related interpretations
including Financial Accounting Standards Board
(FASB) Interpretation No. 44 Accounting for
Certain Transactions Involving Stock Compensation, an
Interpretation of APB No. 25,issued in March
2000, to account for its fixed plan stock options. Under this
method, compensation expense is recorded on the date of the
grant only if the current price of the underlying stock exceeds
the exercise price. Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation,(SFAS No. 123)
established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the
Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and
has adopted only the disclosure requirements of SFAS No.
123. The fair value of each option granted to employees is
estimated on the date of grant using the Black Scholes option
pricing model with the following assumptions:

|                        |  |             |  |            |  |        
|----------------------- |  | ----------- |  | ---------- |  | -------
|                        |  | 2001        |  | 2002       |  | 2003   
|                        |  |             |  |            |  |        
|Expected life           |  | 5 years     |  | 5 years    |  | 5 years
|Dividends               |  | None        |  | None       |  | None   
|Risk-free interest rate |  | 2.17- 5.07% |  | 1.19-3.78% |  | 4.27%  
|Expected volatility     |  | 106.4%      |  | 195.6%     |  | 141.71%

Had compensation expense for the Companys
plans been determined consistent with SFAS No. 123,
the Companys net loss and net loss per share would have
been increased to pro forma amounts indicated below (in
thousands):

|                                     |                                                                                                                                 |      |         |        |   |      |         |        |   |  |        |        |  
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------- | ---- | ------- | ------ | - | ---- | ------- | ------ | - |  | ------ | ------ | -
|                                     |                                                                                                                                 | 2001 |         | 2002   |   | 2003
|                                     |                                                                                                                                 |      |         |        |   |     
|Net Loss, as reported                |                                                                                                                                 | $    | (90,989 | )      |   |      | (9,661  | )      |   |  | (3,610 | )     
|                                     | Deduct Additional stock based employee
    compensation expense determined under the fair-value based
    method for all awards |      |         | (6,041 | ) |      |         | (2,915 | ) |  |        | (3,037 | )
|                                     |                                                                                                                                 |      |         |        |   |      |         |        |   |  |        |       
|Proforma net loss                    |                                                                                                                                 | $    | (97,030 | )      |   |      | (12,576 | )      |   |  | (6,647 | )     
|                                     |                                                                                                                                 |      |         |        |   |      |         |        |   |  |        |       
|Net loss per share basic and diluted |                                                                                                                                 | $    | (4.17   | )      |   |      | (0.40   | )      |   |  | (0.08  | )     
|Basic and diluted, proforma          |                                                                                                                                 | $    | (4.44   | )      |   |      | (0.53   | )      |   |  | (0.14  | )     

F-11



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock Based
Compensation  Transition and Disclosure, an amendment
of SFAS No. 123. This Statement amends
SFAS No.123, to provide alternative methods of transition
for a voluntary change to the fair value method of accounting
for stock based employee compensation. In addition, this
Statement amends the disclosures in both annual and interim
financial statements which the Company has adopted on
January 1, 2003 (see note 6).



|    |                                        
|--- | ---------------------------------------
|(k) | Fair Value of Financial
    Instruments

Statement of Financial Accounting Standards
No. 107, Disclosures About Fair Value of Financial
Instruments(SFAS No. 107),
requires disclosure of fair value of certain financial
instruments. Cash and cash equivalents, restricted cash,
accounts receivable, costs in excess of billings and other
current assets, as well as accounts payable, accrued payroll and
other accrued expenses, billings in excess of costs, deferred
revenue and other current liabilities, as reflected in the
consolidated financial statements, approximate fair value
because of the short-term maturity of these instruments.

Fair value estimates are made at a specific point
in time, based on relevant market information and information
about the financial instrument. These estimates are subjective
in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.



|    |                 
|--- | ----------------
|(l) | Use of Estimates

Management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to
prepare these accompanying financial statements in conformity
with generally accepted accounting principles. Actual results
could differ from those estimates.



|    |                                         
|--- | ----------------------------------------
|(m) | Goodwill and Other Intangible
    Assets

Goodwill represents the excess of costs over the
fair value of assets of business acquired. The Company adopted
the provisions of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible
Assets(SFAS No. 142). Goodwill and
other intangible assets acquired in a purchase business
combination and determined to have an infinite useful life are
not amortized, but instead tested for impairment at least
annually in accordance with the provisions of
SFAS No. 142. SFAS No. 142 also requires
that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with
SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets.

Prior to adoption of SFAS No. 142,
goodwill and other intangibles was amortized on a straight-line
basis over the expected periods to be benefited, and assessed
for recoverability by determining whether the amortization of
the goodwill balance over its remaining life could be recovered
through undiscounted future operating cash flows of the acquired
operation. The amount of goodwill and other intangible asset
impairment, if any, was measured based on projected discounted
future operating cash flows using a discount rate reflecting the
Companys average cost of funds.

In 2001 goodwill represented the excess of the
cost to acquire Daleen Canada over the fair value of the assets
and liabilities purchased. Goodwill was being amortized on a
straight-line basis over four years, the expected period to be
benefited.

Other intangibles represented the fair value of
the employee work force acquired from Daleen Canada and were
also being amortized over four years.

F-12



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Due to economic conditions and the Companys
past revenue performance, the Company assessed the
recoverability of these intangible assets by determining whether
the amortization of the goodwill and other intangible asset
balances over their remaining lives could be recovered through
undiscounted future operating cash flows over the remaining
amortization period. The Companys carrying value of
goodwill and other intangible assets was reduced by the
estimated shortfall of cash flows, discounted at a rate
commensurate with the associated risks. These assets were
written off during the year ended December 31, 2001. See
note 5 related to impairment charges for the year ended
December 31, 2001.

At December 31, 2003, goodwill represents
the excess of cost over fair value of assets of businesses
acquired. The Company adopted the provisions of
SFAS No. 142 as of January 1, 2002. Goodwill and
intangible assets acquired in a purchase business combination
and determined to have an indefinite useful life are not
amortized, but instead tested for impairment at least annually
in accordance with the provisions of SFAS No. 142.

Amortization expense related to goodwill and
other intangible assets was $15.3 million for the year
ended December 31, 2001. The following table reconciles
previously reported net loss applicable to common stockholders
as if the provisions of SFAS No. 142 were in effect in
2001:

|                                                                              |  |      |          |  
|----------------------------------------------------------------------------- |  | ---- | -------- | -
|                                                                              |  | 2001
|                                                                              |  |     
|Reported loss applicable to common stockholders                               |  | $    | (119,501 | )
|Add back goodwill amortization                                                |  |      | 15,282   |  
|                                                                              |  |      |          |  
|Adjusted net loss applicable to common
    stockholders                       |  | $    | 104,219  |  
|                                                                              |  |      |          |  
|Net loss applicable to common stockholders per
    share  basic and diluted: |  |      |          |  
|Reported net loss applicable to common
    stockholders                       |  | $    | (5.47    | )
|Goodwill amortization                                                         |  |      | 0.70     |  
|                                                                              |  |      |          |  
|Adjusted net income                                                           |  | $    | (4.77    | )
|                                                                              |  |      |          |  



|    |                                         
|--- | ----------------------------------------
|(n) | Basic and Diluted Net Loss per
    Share

Basic and diluted net loss applicable to common
stockholders per share was computed by dividing net loss
applicable to common stockholders by the weighted-average number
of shares of common stock outstanding for each period presented.
Common stock equivalents were not considered for each of the
years in the three-year period ended December 31, 2003
since their effect would be antidilutive. Common stock
equivalents amounted to 56,653,497 and 56,144,804 shares as
of December 31, 2003 and 2002, respectively. Net loss
applicable to common stockholders differs from net loss in the
year ended December 31, 2001 due to the preferred stock
dividends arising from the beneficial conversion features from
the sale (2001 Private Placement) of the
Series F convertible preferred stock (Series F
preferred stock) and warrants to purchase additional
shares of Series F preferred stock (Series F
Warrants). See note 6.



|    |                           
|--- | --------------------------
|(o) | Comprehensive Income(Loss)

Comprehensive income(loss) is defined as a change
in equity during the financial reporting period of a business
enterprise resulting from non-owner sources. There were no
differences between net loss and comprehensive loss for each of
the years in the three-year period ended December 31, 2003.



|    |                             
|--- | ----------------------------
|(p) | Foreign Currency Translation

The functional currency of the Companys
foreign subsidiaries is the U.S. dollar. The translation of
the foreign currency into U.S. dollars is performed for
balance sheet accounts using the current exchange rates in

F-13



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

effect at the balance sheet date and for revenue
and expense accounts using average rates prevailing during the
year. The adjustments resulting from the translation of foreign
currency financial statements for the three-year period ended
December 31, 2003 were immaterial and were recorded in the
consolidated statements of operations for the respective periods.

The Company enters into transactions based on the
Companys local currency, which results in limited foreign
currency risk. The Company did not engage in foreign currency
hedging in the three-year period ended December 31, 2003.



|    |                    
|--- | -------------------
|(q) | Segment Information

Statement of Financial Accounting Standards
No. 131, Disclosure about Segments of an Enterprise and
Related Information(SFAS No. 131)
establishes standards for the way that public business
enterprises report information about operating segments in
annual financial statements and requires those enterprises to
report selected information about operating segments in interim
financial reports issued to stockholders. The Company operates
in one segment for management reporting purposes. Although the
Company has subsidiaries, the Company does not assess the
performance of its subsidiaries on a stand-alone basis. The
revenue generated by the foreign operations of the Company was
not material in the periods presented.



|    |                             
|--- | ----------------------------
|(r) | Asset Retirement Obligations

In June 2001, the FASB Issued Statement of
Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations(SFAS No. 143). SFAS No. 143
requires a company to record the fair value of an asset
retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of
tangible long-lived assets. A company also records a
corresponding asset that is depreciated over the life of the
asset. Subsequent to the initial measurement of the asset
retirement obligation, the obligation will be adjusted at the
end of each period to reflect the passage of time and changes in
the estimated future cash flows underlying the obligation. The
Company adopted SFAS No. 143 on January 1, 2003.
The Company does not have asset retirement obligations and the
adoption of SFAS No. 143 did not have an impact on the
Companys financial statements.



|    |                   
|--- | ------------------
|(s) | Equity Instruments

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities
and Equity (SFAS No. 150).
SFAS No. 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity.
SFAS No. 150 applies specifically to a number of
financial instruments that companies have historically presented
within their financial statements either as equity or between
the liabilities section and the equity section, rather than as
liabilities. SFAS 150 is effective for financial
instruments entered into or modified after May 31, 2003,
and the Company adopted this on July 1, 2003. The adoption
of SFAS No. 150 did not have an impact on the
Companys consolidated financial statements.



|    |          
|--- | ---------
|(2) | Liquidity

The Company incurred net losses of approximately
$3.6 million for the year ended December 31, 2003 and
had an accumulated deficit of $214.5 million at
December 31, 2003. Cash and cash equivalents and restricted
cash at December 31, 2003 were $3.1 million. Cash used
in operations for the year ended December 31, 2003 was
$4.0 million. As a result of the Companys business
concentration risk, past recurring losses from operations and
accumulated deficit, it raises substantial doubt about the
Companys ability to continue as a going concern.

F-14



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In February 2004, the Company closed a revolving
loan facility (the Operating Loan) with Silicon
Valley Bank (SVB) and guaranteed by EXIM Bank. The
term of the Operating Loan is fifteen months. Total funding
under the Operating Loan is $2,700,000. The Company can borrow
against the Operating Loan based on estimated funding dates and
may have outstanding borrowings at any given time of up to
$2,000,000. The proceeds for the Operating Loan will be used for
operating costs associated with its contract with Empresa De
Telecomunicaciones de Bogotá (ETB), (the
ETB Contract). The Company has borrowed $1,732,000
through March 1, 2004 under the Operating Loan (see
Note 18(a) for a description of terms).

The Company filed a preliminary proxy statement
on January 28, 2004 in connection with a proposed
one-for-500 reverse stock split of our issued and outstanding
common stock (the Reverse Split). See
Note 18(b) for description of this transaction.

The Company is exploring the possibility of
entering into a convertible bridge loan arrangement (the
Bridge Loan) with certain of the current holders of
our Series F convertible preferred stock
(Series F preferred stock). See Note 18(c)
for additional information.

The Company believes the cash and cash
equivalents at December 31, 2003, together with the
Operating Loan proceeds, may be sufficient to fund operations
for the foreseeable future, assuming continued improvement in
the Companys overall cost structure resulting from overall
cost reduction activities, ongoing efforts aimed at controlling
costs, including without limitation, the cost savings expected
to result if the Company implements the Reverse Split and
terminates its public company status and anticipated future
revenues including a continued significant, but declining,
customer relationship with Allegiance Telecom Company Worldwide
(Allegiance), the Companys largest customer in
2003.

The Company provides outsourcing services to
Allegiance pursuant to an agreement expiring on
December 31, 2004. Allegiance accounted for 38.7% of total
revenue for the year ended December 31, 2003. There are no
minimum revenues from Allegiance under this agreement.
Allegiance has informed the Company that they are migrating data
to another software system and intend to discontinue use of the
Companys services gradually so that all data will be
migrated by June 2004. When Allegiance ceases doing business
with us, the Company may be required to reduce operations and/or
seek additional private equity financing or financing from other
sources including the possible Bridge Loan, or consider other
strategic alternatives, including a possible merger, sale of
assets, or other business combination or restructuring
transactions. There can be no assurances that additional
financing or strategic alternatives will be obtainable on terms
acceptable to the Company or that any additional financing would
not be substantially dilutive to existing stockholders. At such
time as Allegiance ceases doing business with us, the Company
may need to obtain additional financing or engage in one or more
strategic alternatives, or such events may have a material
adverse effect on our ability to continue to operate as a going
concern. The consolidated financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.



|    |                                                   
|--- | --------------------------------------------------
|(3) | Abiliti Acquisition and 2002 Private
    Placement

On December 20, 2002, pursuant to an Asset
Purchase Agreement dated October 7, 2002 (the Asset
Purchase Agreement), Daleen Solutions, an indirect
wholly-owned subsidiary of Daleen, consummated its purchase of
substantially all of the assets and assumption of certain
liabilities of Abiliti (the Abiliti Acquisition). As
consideration for the Abiliti Acquisition, Daleen issued to
Abiliti 11,406,284 shares of common stock,
115,681 shares of Series F preferred stock and
warrants to purchase 5,666,069 additional shares of common stock
at an exercise price of $0.9060 per share (the Asset
Purchase Warrants). The total consideration for the
Abiliti Acquisition was $6.1 million. A portion of the
securities are currently held in escrow pending resolution of
certain retained liabilities (see note 16), including
1,140,629 shares of common stock, 11,568 shares of
Series F preferred stock, and warrants to purchase 566,607
additional shares of the Companys common stock at an
exercise price of $.9060 per share (collectively the
Escrowed Shares).

F-15



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Concurrently with the consummation of the Abiliti
Acquisition, on December 20, 2002, pursuant to an
Investment Agreement dated October 7, 2002 (the
Investment Agreement), Daleen completed its private
placement of 10,992,136 shares of common stock,
115,681 shares of Series F preferred stock, warrants
to purchase 5,666,069 additional shares of common stock at an
exercise price of $0.906 (the Investment Warrants)
per share, and warrants to purchase 500,000 additional shares of
common stock at an exercise price of $0.17 per share (the
Additional Warrants), for total proceeds of
$5.015 million in cash (the 2002 Private
Placement). The purchasers in the 2002 Private Placement
were Behrman Capital II L.P. and Strategic Entrepreneur
Fund II, L.P. (collectively, the Behrman
Funds), which are related entities and stakeholders of
Abiliti. The proceeds of the 2002 Private Placement are being
used for working capital and general corporate purposes.

The terms of the Series F preferred stock
are identical to the previously outstanding Series F
preferred stock. See terms of Series F preferred stock in
note 6.

The stockholders of Daleen approved the Abiliti
Acquisition and the 2002 Private Placement, including an
amendment to Daleens Certificate of Incorporation to amend
the terms and preferences of the Series F preferred stock,
at a special meeting of Daleens stockholders held on
December 20, 2002.

The Asset Purchase Warrants, Investment
Warrants and Additional Warrants expire on June 7, 2006.
The fair value of each of the Asset Purchase Warrants and
Investment Warrants issued was approximately $580,000 using the
Black-Scholes Model. The fair value of the Additional Warrants
issued was approximately $69,000 using the Black Scholes Model.
The Company used the following assumptions in calculating the
fair value of the Asset Purchase Warrants, Investment
Warrants and Additional Warrants:

|                        |  |                                                                                                                      
|----------------------- |  | ---------------------------------------------------------------------------------------------------------------------
|Expected Life           |  | 3.5 years                                                                                                            
|Dividends               |  | None                                                                                                                 
|Risk-free interest rate |  | 2.15%                                                                                                                
|Expected volatility     |  | 137.26%                                                                                                              
|Stock price             |  | $0.17 per share for Additional Warrants
    $0.9060 per share for Investment Warrants and Asset
    Purchase Warrants

Daleen has agreed to file up to three
registration statements at any time after the closing of the
transactions upon the demand of holders of more than a majority
of, and covering, the following (i) the common stock
issuable upon conversion of the Series F preferred stock
issued in each of the Abiliti Acquisition and the 2002 Private
Placement, (ii) the common stock issued in the Abiliti
Acquisition and the 2002 Private Placement, and (iii) the
common stock issuable upon exercise of the warrants issued in
the Abiliti Acquisition and the 2002 Private Placement.

The Abiliti Acquisition resulted in a charge of
$104,000 related to the write-off of purchased in-process
research and development. In-process research and development
relates to the development of Abilitis products at the
time of the Abiliti Acquisition. The products were in the early
stages of their development and were undergoing further
development and integration with Daleens products. The
value assigned to in-process research and development was
determined based on managements estimates of the
percentage of completion of the underlying development effort,
resulting net cash flows from Abilitis products and the
discounting of such cash flows back in their present value.

The Abiliti Acquisition was accounted for as a
purchase transaction and accordingly, the acquisition price was
allocated to the acquired assets and assumed liabilities based
on their estimated fair value as of the acquisition date. The
excess of the consideration paid over the estimated fair value
of net assets and purchase in-process research and development
acquired was recorded as goodwill.

F-16



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The consolidated statement of operations for the
year ended December 31, 2002 included the operating results
of Daleen Solutions from the date of acquisition. The
preliminary purchase price was allocated as follows (in
thousands):

|                                             |  |   |       | 
|-------------------------------------------- |  | - | ----- | 
|Purchase in-process research and development |  | $ | 104   | 
|Net assets                                   |  | $ | 921   | 
|Goodwill                                     |  | $ | 5,086 | 
|                                             |  |   |       | 
|                                             |  | $ | 6,111 | 
|                                             |  |   |       | 

The following unaudited proforma results of
operations of the Company for the year ended December 31,
2002 and 2001 assume the acquisition occurred as of
January 1, 2001. The costs associated with the in-process
research and development of $104,000 were not included in the
proforma results in 2001 since they are considered to be a
non-recurring charge in 2002. The proforma results have been
prepared for comparative purposes only and do not purport to
indicate the results of operations that would have actually
occurred had the combinations been in effect on the dates
indicated, or which may occur in the future. The unaudited
proforma results of operations are as follows (in thousands):

|                                                                           |  |      |         |      |  |   |          |  
|-------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | -------- | -
|                                                                           |  | 2002 |         | 2001
|                                                                           |  |      |         |     
|Total Revenue                                                              |  | $    | 18,246  |      |  | $ | 27,501   |  
|                                                                           |  |      |         |      |  |   |          |  
|Net loss applicable to common stockholders                                 |  | $    | (11,274 | )    |  | $ | (121,910 | )
|                                                                           |  |      |         |      |  |   |          |  
|Net loss applicable to common stockholders per
    share basic and diluted |  | $    | (0.25   | )    |  | $ | (2.76    | )
|                                                                           |  |      |         |      |  |   |          |  
|Weighted average outstanding shares                                        |  |      | 45,447  |      |  |   | 44,234   |  
|                                                                           |  |      |         |      |  |   |          |  

The proforma revenue amounts above include a high
business concentration risk due to three customers amounting to
approximately 60% (unaudited) of the total proforma revenue
in 2002 and 48% (unaudited) in 2001.



|    |                         
|--- | ------------------------
|(4) | Restructuring Activities

On January 4, 2001, the Companys Board
of Directors formally approved a plan to reduce operating
expenses. The process culminated with the announcement on
January 5, 2001 (the January Restructuring)
that the Company was taking certain specific cost reduction
measures. The Company recorded a $3.0 million restructuring
charge for the year ended December 31, 2001 related to the
January Restructuring. Such charge included the estimated costs
related to workforce reductions, downsizing of facilities, asset
writedowns and other costs. Management implemented these actions
associated with the January Restructuring immediately following
the January 5, 2001 announcement.

The workforce reductions associated with the
January Restructuring included the termination of approximately
140 employees throughout the Companys Boca Raton, Florida;
Atlanta, Georgia; and Toronto, Ontario, Canada facilities and
included employees from substantially all of the Companys
employee groups. The downsizing of facilities included the
downsizing of the Atlanta and Toronto facilities to one floor at
each location. The asset writedowns were primarily related to
the disposition of duplicative furniture and equipment and
computer equipment from terminated employees, which was not
resalable. Other costs included costs incurred that are no
longer going to provide benefit to the Company such as
recruiting fees and relocation costs related to employment
offers that were rescinded, penalties for cancellation of a user
conference and trade show and other miscellaneous expenses.

In late March 2001, management initiated a second
business review to identify additional areas for cost
reductions. As a result, the Companys Board of Directors
formally approved and the Company announced a

F-17



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

plan on April 10, 2001 (the April
Restructuring) to further reduce operating expenses. The
Company recorded a $4.8 million restructuring charge for
the year ended December 31, 2001 in connection with the
April Restructuring. Such charge included the estimated costs
related to workforce reductions, closing of facilities, asset
writedowns and other costs. Management implemented these actions
immediately following the April 10, 2001 announcement.

The workforce reductions associated with the
April Restructuring included the termination of 193 employees
throughout all of the Companys facilities. The Company
consolidated its North American workforce into its Boca Raton
corporate offices and closed its Toronto and Atlanta facilities.
In addition, the Company consolidated its North American
research and development and professional services resources and
further reduced its administrative support functions. The asset
writedowns were primarily related to computer equipment from
terminated employees, which was not resalable. Other costs
included accounting and legal fees, penalties for cancellation
of software maintenance contracts in Atlanta and Toronto and
penalties for cancellation of a trade show.

In October 2001, management initiated a third
business review to continue to identify areas for cost
reduction. As a result, the Companys Board of Directors
formally approved a plan to further reduce operating expenses on
October 19, 2001 (the October Restructuring).
Management began to implement these actions immediately
following the October 19, 2001 announcement. The Company
recorded a restructuring charge of $4.1 million in the year
ended December 31, 2001 in connection with the October
Restructuring. Such charge included the estimated costs related
to workforce reductions due to the termination of 75 employees
throughout all of the employees groups, further downsizing
of facilities which included lease buyout charges of
$1.4 million, asset writedowns, and other costs which were
comprised mostly of accounting and legal fees associated with
the October Restructuring.

In May 2002, management initiated another
business review continuing to identify additional areas for cost
reduction. As a result, the Companys Board of Directors
formally approved a plan to further reduce operating expenses on
May 13, 2002 (the 2002 Restructuring). On
May 14, 2002 we announced and immediately began to
implement the 2002 Restructuring. The Company recorded a
$745,000 restructuring charge for the year ended
December 31, 2002 related to the 2002 Restructuring. Such
charge included the estimated costs related to workforce
reductions, due to termination of 35 employees from
substantially all of the Companys employee groups.

The January Restructuring, April Restructuring,
October Restructuring, and 2002 Restructuring encompassed the
following components (in thousands):

|                                       |  |               |       |               |  |               |       |               |  |       |       |  |  |   |     |  |  |   |        |  
|-------------------------------------- |  | ------------- | ----- | ------------- |  | ------------- | ----- | ------------- |  | ----- | ----- |  |  | - | --- |  |  | - | ------ | -
|                                       |  | January       |       | April         |  | October       |       | 2002          |  |      
|                                       |  | Restructuring |       | Restructuring |  | Restructuring |       | Restructuring |  | Total
|                                       |  |               |       |               |  |               |       |               |  |      
|Employee termination benefits          |  | $             | 1,405 |               |  | $             | 3,193 |               |  | $     | 1,641 |  |  | $ | 745 |  |  | $ | 6,984  |  
|Facility costs/rent on idle facilities |  |               | 854   |               |  |               | 1,274 |               |  |       | 443   |  |  |   |    |  |  |   | 2,571  |  
|Asset writedowns (see note 5)          |  |               | 620   |               |  |               | 240   |               |  |       | 1,999 |  |  |   |    |  |  |   | 2,859  |  
|Other costs                            |  |               | 114   |               |  |               | 58    |               |  |       | 32    |  |  |   |    |  |  |   | 204    |  
|Foreign currency translation charges   |  |               |      |               |  |               |      |               |  |       |      |  |  |   |    |  |  |   | (110   | )
|                                       |  |               |       |               |  |               |       |               |  |       |       |  |  |   |     |  |  |   |        |  
|                                       |  | $             | 2,993 |               |  | $             | 4,765 |               |  | $     | 4,115 |  |  | $ | 745 |  |  | $ | 12,508 |  
|                                       |  |               |       |               |  |               |       |               |  |       |       |  |  |   |     |  |  |   |        |  

The costs were from the following financial
statement captions (in thousands):

F-18



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                     |  |               |       |               |  |               |       |               |  |       |       |  |  |   |     |  |  |   |        | 
|------------------------------------ |  | ------------- | ----- | ------------- |  | ------------- | ----- | ------------- |  | ----- | ----- |  |  | - | --- |  |  | - | ------ | 
|                                     |  | January       |       | April         |  | October       |       | 2002          |  |      
|                                     |  | Restructuring |       | Restructuring |  | Restructuring |       | Restructuring |  | Total
|                                     |  |               |       |               |  |               |       |               |  |      
|Costs of sales-professional services |  | $             | 387   |               |  | $             | 1,198 |               |  | $     | 134   |  |  | $ | 140 |  |  | $ | 1,859  | 
|Research and development             |  |               | 522   |               |  |               | 1,392 |               |  |       | 694   |  |  |   | 168 |  |  |   | 2,776  | 
|Sales and marketing                  |  |               | 278   |               |  |               | 725   |               |  |       | 568   |  |  |   | 148 |  |  |   | 1,719  | 
|General and administrative           |  |               | 1,806 |               |  |               | 1,450 |               |  |       | 2,719 |  |  |   | 289 |  |  |   | 6,264  | 
|                                     |  |               |       |               |  |               |       |               |  |       |       |  |  |   |     |  |  |   |        | 
|                                     |  | $             | 2,993 |               |  | $             | 4,765 |               |  | $     | 4,115 |  |  | $ | 745 |  |  | $ | 12,618 | 
|                                     |  |               |       |               |  |               |       |               |  |       |       |  |  |   |     |  |  |   |        | 

Included in the above totals is $110,000 related
to foreign currency translation exchange losses.

Amounts charged against the restructuring accrual
through the year ended December 31, 2003 were as follows
(in thousands):

|                                              |  |               |       |               |  |               |       |               |  |       |       |  |  |   |     |  |  |   |        |  
|--------------------------------------------- |  | ------------- | ----- | ------------- |  | ------------- | ----- | ------------- |  | ----- | ----- |  |  | - | --- |  |  | - | ------ | -
|                                              |  | January       |       | April         |  | October       |       | 2002          |  |      
|                                              |  | Restructuring |       | Restructuring |  | Restructuring |       | Restructuring |  | Total
|                                              |  |               |       |               |  |               |       |               |  |      
|Employee termination benefits                 |  | $             | 1,405 |               |  | $             | 3,193 |               |  | $     | 1,641 |  |  | $ | 745 |  |  | $ | 6,984  |  
|Facility costs/rent on idle facilities        |  |               | 828   |               |  |               | 1,274 |               |  |       | 443   |  |  |   |    |  |  |   | 2,545  |  
|Asset writedowns                              |  |               | 620   |               |  |               | 240   |               |  |       | 1,999 |  |  |   |    |  |  |   | 2,859  |  
|Other costs                                   |  |               | 114   |               |  |               | 58    |               |  |       | 32    |  |  |   |    |  |  |   | 204    |  
|Foreign exchange currency translation changes |  |               |      |               |  |               |      |               |  |       |      |  |  |   |    |  |  |   | (110   | )
|                                              |  |               |       |               |  |               |       |               |  |       |       |  |  |   |     |  |  |   |        |  
|                                              |  | $             | 2,967 |               |  | $             | 4,765 |               |  | $     | 4,115 |  |  | $ | 745 |  |  | $ | 12,482 |  
|                                              |  |               |       |               |  |               |       |               |  |       |       |  |  |   |     |  |  |   |        |  

As of December 31, 2003, a restructuring
accrual remains on the consolidated balance sheet in accrued
payroll and other accrued expenses consisting of $26,000 related
to rent on idle facilities.



|    |                   
|--- | ------------------
|(5) | Impairment Charges

The Company recorded an impairment of $500,000 in
the year ended December 31, 2003 related to an investment
in a third party technology company due to a decline in fair
value which was other than temporary. As result of an assessment
preformed by management, the Company determined that the asset
was impaired, and the investment was written off in full during
the year ended December 31, 2003.

The Company recorded an impairment charge for the
year ended December 31, 2001 related to the following (in
thousands):

|                                      |  |   |        | 
|------------------------------------- |  | - | ------ | 
|Employee workforce  other intangible |  | $ | 1,545  | 
|Property and equipment                |  |   | 1,888  | 
|Goodwill                              |  |   | 31,171 | 
|                                      |  |   |        | 
|                                      |  | $ | 34,604 | 
|                                      |  |   |        | 

Due to the Companys operating results and
the various restructuring activities initiated as described in
note 4, the Company performed an evaluation of the
recoverability of the employee workforce intangible asset under
SFAS No. 121 in March 2001. Management determined that
this asset was impaired and recorded an impairment charge of
approximately $1.5 million for the year ended
December 31, 2001.

F-19



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In March 2001, the Company determined that
certain property, leasehold improvements and equipment, which
mainly represented computer equipment and furniture from the
Toronto and Atlanta facilities, was impaired. The Company
recorded an impairment charge of approximately $1.9 million
for the difference between the fair value and the carrying value
of the assets for the year ended December 31, 2001.

In 2001, the Company reduced goodwill by
approximately $1.1 million due to its decision that it will
no longer promote and license certain gateway products that it
originally acquired as a result of its acquisition of Daleen
Canada in December 1999. The development of these gateway
products was in process at the time of the Daleen Canada
acquisition and was subsequently completed. In connection with
this decision, the Company accelerated the amortization for a
proportionate amount of goodwill related to these products. In
addition, due to economic conditions and the Companys past
revenue performance, the Company assessed the recoverability of
goodwill by determining whether the amortization of the goodwill
over the remaining life can be recovered through undiscounted
future operating cash flows. The Companys carrying value
of goodwill was reduced by the estimated shortfall of cash
flows, discounted at a rate commensurate with the associated
risks. This amounted to an additional reduction of goodwill in
the amount of $30.1 million for the year ended
December 31, 2001.

(6)     2001 Private
Placement

On March 30, 2001, the Company entered into
definitive agreements (collectively, the Purchase
Agreements) for the 2001 Private Placement of
$27.5 million of Series F preferred stock and
Series F Warrants. Pursuant to the terms of the Purchase
Agreements, the Company consummated the 2001 Private Placement
on June 7, 2001. The Company received net proceeds on
June 7, 2001 of approximately $25.7 million from the
2001 Private Placement. The consummation of the 2001 Private
Placement was subject to the receipt of approval from the
Companys stockholders, including approval of an amendment
to the Companys certificate of incorporation to increase
the number of authorized shares of common stock to
200 million shares and to create and designate the
Series F preferred stock. The Companys stockholders
approved the 2001 Private Placement and the related amendments
to the certificate of incorporation at the Companys annual
meeting of stockholders held on June 7, 2001.

Pursuant to the terms of the Purchase Agreements,
the Company issued and sold (i) an aggregate of
247,882 shares of Series F preferred stock and
(ii) Series F Warrants to purchase an aggregate of
109,068 shares of Series F preferred stock, including
a Series F Warrant that the Company issued to the placement
agent. Purchasers of Series F preferred stock received
Warrants to purchase an aggregate of 99,153 shares of
Series F preferred stock. Additionally, we issued to
Robertson Stephens Warrants for the purchase of
9,915 shares of Series F preferred stock. The
Series F Warrants have an exercise price of
$166.41 per share of Series F preferred stock and are
exercisable at any time for a period of five years following the
closing of the Private Placement. The exercise price per share
is equal to 150% of the Original Price.

The purchase price per share of the Series F
preferred stock (without giving effect to the allocation of any
part of the purchase price to the Series F Warrants) was
$110.94, which is equal to (i) $1.1094, the average closing
price per share of the Companys common stock during the
ten trading days ending on March 30, 2001, multiplied by
(ii) 100, the number of shares of common stock initially
issuable upon conversion of a share of Series F preferred
stock.

Each share of Series F preferred stock is
convertible at any time at the option of the holder into shares
of the Companys common stock. The number of shares of
common stock issuable upon conversion of a single share of
Series F preferred stock is determined by dividing the
original price per share of the Series F preferred stock,
or $110.94, by the conversion price in effect on the date of
conversion. The current conversion price of the Series F
preferred stock is $0.9060 after giving effect to a one-time
reset following our earnings release for the quarter ended
June 30, 2001. Based on the reset conversion price
established by the July 26, 2001 final

F-20



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Earnings Release and pursuant to the terms of the
Purchase Agreements, each share of Series F preferred stock
is convertible into 122.4503 shares of common stock.

In the event the Company issues common stock or
securities convertible into common stock at a price per share
less than the conversion price of the Series F preferred
stock, the conversion price will be reduced to be equal to the
price per share of the securities sold by the Company. This
adjustment provision is subject to a number of exceptions,
including the issuance of stock or options to employees and the
issuance of stock or options in connection with acquisitions.
The conversion price will also be subject to adjustment as a
result of stock splits and stock dividends on the common stock.

The Series F preferred stock will
automatically convert into common stock at any time after
March 30, 2002 if the common stock trades on The Nasdaq or
a national securities exchange at a price per share of at least
$3.3282 for ten trading days within any twenty-day trading
period. The Series F preferred stock is not subject to
automatic conversion if our common stock is not then listed for
trading on the Nasdaq National Market or a national security
exchange.

In the event, and only in such event, the Company
pays dividends on its common stock, the holders of the
Series F preferred stock would be entitled to dividends on
an as-if-converted basis.

In the event of an acquisition of the Company by
another entity, the Company will be required to redeem all of
the issued and outstanding shares of Series F preferred
stock unless the holders of the Series F preferred stock
otherwise consent.

The Company granted to the purchasers certain
demand and piggyback registration rights.

The Series F Warrants issued are exercisable
at any time for a period of five years. The fair value of all
warrants issued to the holders of the Series F preferred
stock was approximately $9.4 million using the
Black-Scholes at the grant date. The Company used the following
assumptions in the Black-Scholes model.

|                        |  |  |          | 
|----------------------- |  |  | -------- | 
|Expected life           |  |  | 5  years | 
|Dividends               |  |  | None     | 
|Risk-free interest rate |  |  | 4.96%    | 
|Expected volatility     |  |  | 68.6%    | 

Due to the reset conversion price established by
the July 26, 2001 final Earnings Release which resulted in
a final conversion price of $0.9060 the Company recorded a
beneficial conversion feature during the year ended
December 31, 2001 in the amount of $19.1 million based
on the proceeds from the Series F preferred stock reduced
by the amount allocated to the warrants. This was recorded as a
preferred stock dividend.

The total number of shares of Series F
preferred stock outstanding as of February 1, 2004 is
449,237 shares.

F-21



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                            
|--- | ---------------------------
|(7) | Property and Equipment, Net

Property and equipment, net consist of the
following at December 31 (in thousands):

|                                               |  |      |        |      |  |             |        |   |  |  |                         | 
|---------------------------------------------- |  | ---- | ------ | ---- |  | ----------- | ------ | - |  |  | ----------------------- | 
|                                               |  |      |        |      |  | Estimated  
|                                               |  | 2002 |        | 2003 |  | Useful Life
|                                               |  |      |        |      |  |            
|Computer hardware                              |  | $    | 4,198  |      |  | $           | 4,408  |   |  |  | 3-5 years or lease term | 
|Purchased computer software                    |  |      | 1,952  |      |  |             | 1,920  |   |  |  | 3-5 years               | 
|Office furniture and equipment                 |  |      | 1,116  |      |  |             | 1,218  |   |  |  | 5-7 years or lease term | 
|Leasehold improvements                         |  |      | 1,027  |      |  |             | 1,058  |   |  |  | lease term              | 
|Patents and trademarks                         |  |      | 107    |      |  |             | 130    |   |  |  | 20 years                | 
|                                               |  |      |        |      |  |             |        |   |  |  |                         | 
|                                               |  |      | 8,400  |      |  |             | 8,734  |   |  |  |                         | 
|Less accumulated depreciation and amortization |  |      | (6,576 | )    |  |             | (7,803 | ) |  |  |                         | 
|                                               |  |      |        |      |  |             |        |   |  |  |                         | 
|Property and equipment, net                    |  | $    | 1,824  |      |  | $           | 931    |   |  |  |                         | 
|                                               |  |      |        |      |  |             |        |   |  |  |                         | 

For the year ended December 31, 2002, and
2003 depreciation and amortization expense related to property
and equipment was approximately $1.6 million and
$1.1 million, respectively.



|    |             
|--- | ------------
|(8) | Income Taxes

Pretax losses are derived from the following
sources (in thousands):

|         |  |      |        |      |  |      |       |  |  |   |       |  
|-------- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ----- | -
|         |  | 2001 |        | 2002 |  | 2003
|         |  |      |        |      |  |     
|Domestic |  | $    | 82,185 |      |  | $    | 9,146 |  |  | $ | 3,726 |  
|Foreign  |  |      | 8,804  |      |  |      | 515   |  |  |   | (116  | )
|         |  |      |        |      |  |      |       |  |  |   |       |  
|         |  | $    | 90,989 |      |  | $    | 9,661 |  |  | $ | 3,610 |  
|         |  |      |        |      |  |      |       |  |  |   |       |  

The Company did not recognize an income tax
benefit for any of the years in the three year period ended
December 31, 2003. This differed from an income tax benefit
computed by applying the Federal income tax rate of
34 percent to pretax losses as a result of the following
(in thousands):

|                                                         |                                                                 |      |        |         |   |      |       |        |   |   |       |        |  
|-------------------------------------------------------- | --------------------------------------------------------------- | ---- | ------ | ------- | - | ---- | ----- | ------ | - | - | ----- | ------ | -
|                                                         |                                                                 | 2001 |        | 2002    |   | 2003
|                                                         |                                                                 |      |        |         |   |     
|Computed expected tax benefit                          |                                                                 | $    | 30,936 |         |   | $    | 3,285 |        |   | $ | 1,228 |       
|Increase (reduction) in income taxes
    resulting from: |                                                                 |      |        |         |   |      |       |        |   |   |       |       
|                                                         | State income taxes (net of federal benefit)                     |      |        | 3,197   |   |      |       | 328    |   |   |       | 131    |  
|                                                         | Increase in the valuation allowance for deferred
    tax assets |      |        | (33,449 | ) |      |       | (3,389 | ) |   |       | (1,378 | )
|                                                         | Other items                                                     |      |        | (684    | ) |      |       | (224   | ) |   |       | 19     |  
|                                                         |                                                                 |      |        |         |   |      |       |        |   |   |       |       
|                                                         |                                                                 | $    |       |         |   | $    |      |        |   | $ |      |       
|                                                         |                                                                 |      |        |         |   |      |       |        |   |   |       |       

F-22



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets at
December 31, 2002 and 2003, are presented below (in
thousands):

|                     |                                                   |                           |                          |        |        |         |   |        |        |         |  
|-------------------- | ------------------------------------------------- | ------------------------- | ------------------------ | ------ | ------ | ------- | - | ------ | ------ | ------- | -
|                     |                                                   | 2002                      |                          | 2003  
|                     |                                                   |                           |                          |       
|Deferred tax assets: |                                                   |                           |                          |        |        |         |   |       
|                     | Net operating loss carryforwards                  |                           | $                        | 47,527 |        |         | $ | 53,819 |       
|                     | Depreciation and amortization                     |                           |                          | 136    |        |         |   | 695    |       
|                     | Goodwill amortization                             |                           |                          | 18,146 |        |         |   | 17,139 |       
|                     | Allowance for doubtful accounts                   |                           |                          | 1,449  |        |         |   | 350    |       
|                     | Research and experimentation credit carryforwards |                           |                          | 1,664  |        |         |   | 1,412  |       
|                     | Accrued expenses                                  |                           |                          | 452    |        |         |   | 360    |       
|                     | Other                                             |                           |                          | 830    |        |         |   | 1,712  |       
|                     |                                                   |                           |                          |        |        |         |   |       
|                     |                                                   | Gross deferred tax assets |                          |        | 70,204 |         |   |        | 75,487 |        
|                     |                                                   |                           | Less valuation allowance |        |        | (70,204 | ) |        |        | (75,487 | )
|                     |                                                   |                           |                          |        |        |         |   |       
|                     |                                                   | Total deferred tax asset  |                          | $      |       |         |   | $      |       |        
|                     |                                                   |                           |                          |        |        |         |   |       

Realization of deferred tax assets is dependent
upon generating sufficient taxable income. Management believes
that it is more likely than not that these assets will not be
realized and, therefore, has established a valuation allowance
for the entire deferred tax assets, net of the deferred tax
liabilities. The valuation allowance increased $5.3 million
and $2.3 million for the years ended December 31, 2003
and 2002, respectively. Included in the $5.3 million
valuation allowance change is a net increase of
$3.9 million attributed to changes in estimates of
temporary differences.

Net operating loss carryforwards for U.S. and
State income tax purposes amount to approximately
$136.2 million and expire through year 2018. Of the total
net operating loss carry forward, the future utilization of
approximately $14,842,000 will be subject to an annual
limitation prescribed by the tax law as a result of a change in
the ownership of the Company which occurred in 1998. In
addition, approximately $66,900,000 of net operating losses may
be limited due to the 2001 Private Placement. In addition, the
Company has net operating loss carryforwards for Canada of
approximately $24,000,000, which expire through year 2008.



|    |                                               
|--- | ----------------------------------------------
|(9) | Accrued Payroll and Other Accrued
    Expenses

Accrued payroll and other accrued expenses
consist of the following at December 31 (in thousands):

|                                     |  |      |       |      |  |   |       | 
|------------------------------------ |  | ---- | ----- | ---- |  | - | ----- | 
|                                     |  | 2002 |       | 2003
|                                     |  |      |       |     
|Accrued payroll and related expenses |  | $    | 1,571 |      |  | $ | 1,284 | 
|Due to subcontractors                |  |      | 194   |      |  |   | 612   | 
|Accrued professional fees            |  |      | 377   |      |  |   | 209   | 
|Restructuring accrual                |  |      | 144   |      |  |   | 26    | 
|Other accrued expenses               |  |      | 290   |      |  |   | 136   | 
|                                     |  |      |       |      |  |   |       | 
|                                     |  | $    | 2,576 |      |  | $ | 2,267 | 
|                                     |  |      |       |      |  |   |       | 

F-23



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|     |            
|---- | -----------
|(10) | Commitments



|    |       
|--- | ------
|(a) | Leases

The Company signed a lease agreement renewal in
Boca Raton, FL in January 2004, which is effective March 1,
2004. This operating lease expires on February 28, 2009.
The Company also has agreements to lease office facilities in
Atlanta Georgia, Chesterfield, Missouri, Town and Country,
Missouri and Toronto, Ontario, Canada. These leases expire on
various dates through November 2004. The facilities in Atlanta
were closed during 2001. These leases were bought out or
terminated or the space is currently being sublet. See
Note 4 on restructuring activities.

The Abiliti Acquisition included certain computer
hardware and furniture and equipment that are under capital
leases, which expire on various dates in 2004. The gross amount
of the leased equipment and related accumulated amortization
recorded under capital leases as of December 31, 2003 are
as follows (in thousands):

|                              |  |   |      |  
|----------------------------- |  | - | ---- | -
|Furniture and Equipment       |  | $ | 141  |  
|Less accumulated amortization |  |   | (119 | )
|                              |  |   |      |  
|                              |  | $ | 22   |  
|                              |  |   |      |  

Future minimum lease payments under non
cancelable operating leases (with initial or remaining lease
terms in excess of one year) and future minimum capital lease
payments as of December 31, 2003 are as follows (in
thousands):

|                                                                         |                                                 |                |    |                  |  |   |       |  | 
|------------------------------------------------------------------------ | ----------------------------------------------- | -------------- | -- | ---------------- |  | - | ----- |  | 
|Year Ending December 31:                                                 |                                                 | Capital Leases |    | Operating Leases
|                                                                         |                                                 |                |    |                 
|2004                                                                     |                                                 | $              | 27 |                  |  | $ | 1,011 | 
|2005                                                                     |                                                 |                |   |                  |  |   | 265   | 
|2006                                                                     |                                                 |                |   |                  |  |   | 271   | 
|2007                                                                     |                                                 |                |   |                  |  |   | 278   | 
|2008 and thereafter                                                      |                                                 |                |   |                  |  |   | 266   | 
|                                                                         |                                                 |                |    |                  |  |   |       | 
|Total minimum lease payments                                             |                                                 |                | 27 |                  |  |   | 2,139 | 
|                                                                         |                                                 |                |    |                  |  |   |       | 
|Less amount representing interest                                        |                                                 |                | 1  |                  |  |   |       | 
|                                                                         |                                                 |                |    |                  |  |   |       | 
|                                                                         | Present value of minimum capital lease payments |                | $  | 26               |  |   |       |  | 
|Less current installment of obligations under
    capital lease payments |                                                 |                | 26 |                  |  |   |       | 
|                                                                         |                                                 |                |    |                  |  |   |       | 
|Obligation under capital leases, excluding
    current installment       |                                                 | $              | 0  |                  |  |   |       | 
|                                                                         |                                                 |                |    |                  |  |   |       | 

The Company subleases office space in Toronto and
in Atlanta. The amounts of minimum operating lease payments
reflected in the above table are offset by future minimum rental
receipts from sublessees of $180,921 in 2004.

The Company is currently reviewing its options
regarding the Missouri offices and expects to decrease the
square footage occupied, however nothing has been finalized.

Total rent expense for operating leases was
$3,611,288, $901,918, and $1,708,090 for the years ended
December 31, 2001, 2002 and 2003, respectively. The expense
for year 2001, 2002 and 2003 was offset by $137,606, $268,154
and $356,029 of sublease income. In addition to rent payments,
the Company paid $1,646,354 for lease termination agreements in
Atlanta, Toronto and Boca Raton, which was included in
restructuring charges for the year ended December 31, 2001.
See note 4.

F-24



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                   
|--- | ------------------
|(b) | Contribution Plans

Daleen Technologies, Inc. 401(k) Profit
Sharing Plan (the Plan) covers substantially all of
its U.S. employees. In 2000, 2001, and through
July 12, 2002 the Company matched 35% of the
employees contribution, up to a maximum of 8 percent
deferral made by the employees. The Company match was terminated
on July 13, 2002. The Plan allows for discretionary
contributions from the Company. The total expense associated
with the Plan for 2001 and 2002 was $185,507 and $75,423
respectively. In February 2003 the Company made a discretionary
contribution to employees by matching their contributions made
from July 13, 2002 to December 31, 2002. The amount of
$17,354 was paid out of the Companys forfeiture accounts
under the Plan.

In 2000, Daleen Canada established a Group
Retirement Plan (the Daleen Canada Plan). The Daleen
Canada Plan consisted of a Deferred Profit Sharing Plan
(DPSP) and a Group Registered Retirement Savings Plan
(RRSP). The Daleen Canada Plan covered substantially all of its
Canadian employees. The Plan contributed to the DPSP $0.35 for
each $1.00 of employee contribution to the RRSP, to a maximum of
2.8% of total earnings subject to maximum limits set by the
Income Tax Act. The total expense for this plan was $28,854 in
the year 2001. The Daleen Canada Plan is currently inactive due
to the implementation of the April Restructuring and termination
of all of the Canadian employees.



|    |                      
|--- | ---------------------
|(c) | Employment Agreements

The Company has an employment agreement with
specified employment terms with one executive that provides for
an annual base salary which may be increased at the discretion
of the Companys Board of Directors or compensation
committee and periodic stock option grants subject to the
approval by the compensation committee of the Companys
Board of Directors. He will be eligible to receive a bonus for
meeting certain goals and will be eligible to receive
compensation under a long term incentive plan subject to the
approval of the Companys Board of Directors or
compensation committee. The term of the agreement is three years
with automatic one year extensions unless 90 day written
notice is given and provides for an annual base salary of
$350,000. This agreement provides for severance payments of up
to two years base salary.

The Company also has agreements with other
executive officers and senior management employees, which
provide for severance payments of up to one year base salary and
they also have bonus provisions included.



|    |                  
|--- | -----------------
|(d) | Letters of Credit

In October 2003, the Company entered into a
letter of credit in the amount of $531,000 to collateralize
insurance premiums due from November 2003 through August 2004.
Beginning in February 2004, the letter of credit will be reduced
$53,000 per month.

In January 2004, the Company entered into a
letter of credit in the amount of $52,000 to partially
collateralize the lease commitments the Company has under the
Boca Raton corporate lease that was signed in January 2004.
Beginning one year after the commencement date of the lease the
letter of credit will be reduced 20% per year.

In 2001, the Company entered into a letter of
credit in the amount of $30,000 to collateralize any balances on
corporate cards from employees that are not made by employees in
a timely manner. The letter of credit will be in existence for
as long as the Company keeps the corporate card program.

F-25



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|     |                     
|---- | --------------------
|(11) | Stockholders Equity



|    |              
|--- | -------------
|(a) | Stock Options

The Company has eight stock option
plans:the 1994 Employee Non-Qualified
Stock Option Plan (the 1994 Plan), the 1995
Qualified Employee Incentive Stock Option Plan (the 1995
Plan), the 1996 Employee Non-Qualified Stock Option Plan
(the 1996 Plan), the 1997 Employee Incentive Stock
Option Plan (the 1997 Plan), the 1998 Non-Qualified
Employee Stock Option Plan (the 1998 Plan), the 1998
Qualified Employee Incentive Stock Option Plan (the 1998
ISO Plan), the Amended and Restated 1999 Stock Incentive
Plan (the 1999 Plan) and the 2001 Broad-Based Stock
Incentive Plan (the 2001 Plan). Each Plan provides
that the exercise price of the options granted will be issued at
no less than the fair market value of the underlying common
stock at the date of grant. A summary of the Companys
active stock option plans are presented below:

|               |  |              |            |                |  |                                               |  |                    
|-------------- |  | ------------ | ---------- | -------------- |  | --------------------------------------------- |  | -------------------
|               |  | Shares       |            |                |  |                                              
|               |  | Authorized   |            |                |  |                                              
|               |  | for Issuance |            |                |  | Contractual Life of                          
|               |  | Under Plan   |            | Vesting Period |  | Options                                      
|               |  |              |            |                |  |                                              
|1998 ISO Plan* |  |              | 7,100      |                |  | 25% each year for first four years from grant |  | 5 years from grant 
|1999 Plan      |  |              | 13,466,944 |                |  | Discretion of the Board of Directors          |  | 10 years from grant
|2001 Plan      |  |              | 2,000,000  |                |  | Discretion of the Board of Directors          |  | 10 years from grant






| |   |                                                                         
| | - | ------------------------------------------------------------------------
| | * | The Company is no longer authorized to grant
    awards under this Plan.

The 1999 Plan authorizes the Company to
automatically adjust the number of shares of common stock
available for issuance on the first day of each fiscal year
beginning in 2000, up to an annual increase of
5,000,000 shares subject to a maximum of 20% of the
fully-diluted shares outstanding at the time. The number of
shares authorized under the 1999 Plan was increased to
18,466,944 shares on January 1, 2004.

The options issued in 2001 under the 2001 Plan
have a vesting period of two years from grant. The options
issued in 2002 under the 2001 Plan have a vesting period of four
years from grant.

A summary of the status of the Companys
stock option plans, as of December 31, 2001, 2002 and 2003,
and changes during the years then ended, is presented below:

|                                   |  |        |            |           |  |        |       |           |  |        |            |           |  |   |      |  |  |  |           |   |  |   |      | 
|---------------------------------- |  | ------ | ---------- | --------- |  | ------ | ----- | --------- |  | ------ | ---------- | --------- |  | - | ---- |  |  |  | --------- | - |  | - | ---- | 
|                                   |  |        |            |           |  |       
|                                   |  | 2001   |            | 2002      |  | 2003  
|                                   |  |        |            |           |  |       
|                                   |  |        |            | Weighted- |  |        |       | Weighted- |  |        |            | Weighted-
|                                   |  |        |            | Average   |  |        |       | Average   |  |        |            | Average  
|                                   |  |        |            | Exercise  |  |        |       | Exercise  |  |        |            | Exercise 
|                                   |  | Shares |            | Price     |  | Shares |       | Price     |  | Shares |            | Price    
|                                   |  |        |            |           |  |        |       |           |  |        |            |          
|Outstanding at beginning of year   |  |        | 5,420,963  |           |  | $      | 11.75 |           |  |        | 5,740,532  |           |  | $ | 5.33 |  |  |  | 3,092,743 |   |  | $ | 4.82 | 
|Granted                            |  |        | 4,196,851  |           |  |        | 0.96  |           |  |        | 162,500    |           |  |   | 0.19 |  |  |  | 1,500,000 |   |  |   | 0.11 | 
|Exercised                          |  |        | (94,827    | )         |  |        | 0.23  |           |  |        |           |           |  |   |     |  |  |  |          |   |  |   |     | 
|Forfeited                          |  |        | (3,782,455 | )         |  |        | 9.94  |           |  |        | (2,810,289 | )         |  |   | 5.53 |  |  |  | (478,966  | ) |  |   | 3.65 | 
|                                   |  |        |            |           |  |        |       |           |  |        |            |           |  |   |      |  |  |  |           |   |  |   |      | 
|Outstanding at end of year         |  |        | 5,740,532  |           |  |        | 5.33  |           |  |        | 3,092,743  |           |  |   | 4.82 |  |  |  | 4,113,777 |   |  |   | 3.24 | 
|                                   |  |        |            |           |  |        |       |           |  |        |            |           |  |   |      |  |  |  |           |   |  |   |      | 
|Options exercisable at end of year |  |        | 1,730,079  |           |  | $      | 8.24  |           |  |        | 1,556,270  |           |  | $ | 6.29 |  |  |  | 2,025,758 |   |  | $ | 5.74 | 
|                                   |  |        |            |           |  |        |       |           |  |        |            |           |  |   |      |  |  |  |           |   |  |   |      | 

F-26



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table summarizes information about
stock options outstanding and exercisable at December 31,
2003:

|                         |  |                     |           |                    |  |           |      |             |  |           |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------------------ |  | --------- | ---- | ----------- |  | --------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |                     |           |                    |  |          
|                         |  | Options Outstanding |           |                   
|                         |  |                     |           | Option Exercisable
|                         |  |                     |           | Weighted-          |  |           |      |            
|                         |  |                     |           | Average            |  | Weighted- |      |             |  | Weighted-
|                         |  |                     |           | Remaining          |  | Average   |      |             |  | Average  
|                         |  | Number              |           | Contractual        |  | Exercise  |      | Number      |  | Exercise 
|Range of Exercise Prices |  | Outstanding         |           | Life (Years)       |  | Price     |      | Exercisable |  | Price    
|                         |  |                     |           |                    |  |           |      |             |  |          
|$.09                     |  |                     | 1,250,000 |                    |  |           | 9.30 |             |  | $         | .09   |  |  |  |          |  |  | $ |      | 
|$.11-.22                 |  |                     | 287,500   |                    |  |           | 9.43 |             |  |           | .21   |  |  |  | 9.375     |  |  |   | .14   | 
|$.30-.35                 |  |                     | 532,500   |                    |  |           | 7.87 |             |  |           | .35   |  |  |  | 260,000   |  |  |   | .35   | 
|$.38-$.85                |  |                     | 235,025   |                    |  |           | 7.41 |             |  |           | .80   |  |  |  | 159,939   |  |  |   | .81   | 
|$.86 to .88              |  |                     | 826,625   |                    |  |           | 7.54 |             |  |           | .88   |  |  |  | 825,125   |  |  |   | .88   | 
|$1.03-$9.44              |  |                     | 502,418   |                    |  |           | 6.74 |             |  |           | 5.29  |  |  |  | 333,042   |  |  |   | 5.94  | 
|$10.38-$21.38            |  |                     | 444,459   |                    |  |           | 6.08 |             |  |           | 19.00 |  |  |  | 407,778   |  |  |   | 19.33 | 
|$21.88-$32.00            |  |                     | 33,250    |                    |  |           | 6.08 |             |  |           | 25.62 |  |  |  | 28,499    |  |  |   | 25.94 | 
|$38.81                   |  |                     | 1,000     |                    |  |           | 5.88 |             |  |           | 38.81 |  |  |  | 1,000     |  |  |   | 38.81 | 
|$52.69                   |  |                     | 1,000     |                    |  |           | 5.90 |             |  |           | 52.69 |  |  |  | 1,000     |  |  |   | 52.69 | 
|                         |  |                     |           |                    |  |           |      |             |  |           |       |  |  |  |           |  |  |   |       | 
|                         |  |                     | 4,113,777 |                    |  |           | 7.98 |             |  | $         | 3.24  |  |  |  | 2,025,758 |  |  | $ | 5.74  | 
|                         |  |                     |           |                    |  |           |      |             |  |           |       |  |  |  |           |  |  |   |       | 

In June 2000, the Company granted stock options
to a marketing executive under the 1999 Plan at an exercise
price less than the fair market value of the underlying common
stock of the Company at the date of grant. These grants resulted
in the recognition of compensation expense of $586,000 over
their one-year vesting period, which began in July 2000.
Approximately $293,000 was recorded as sales and marketing
expense for the year ended December 31, 2001.

In 2003, the Company granted stock options to
each member of the Board of Directors under the 1999 Plan at an
exercise price at the fair market value of the underlying common
stock of the Company on the date of grant. The total number of
stock options granted was 1,500,000 shares and they have a
vesting period of 33% each year starting one year from date of
grant.



|     |                                   
|---- | ----------------------------------
|(12) | Business and Credit Concentrations

For the year ended December 31, 2001, 27% of
the Companys total revenue was attributed to two
customers. Sales to two customers accounted for 15% and 12%. For
the year ended December 31, 2002, 14% of the Companys
total revenue was attributed to one customer. For the year ended
December 31, 2003 64.7% of the Companys total revenue
was attributed to three customers. Sales to three customers
accounted for 38.7%, 15.1%, and 10.9%. For the three-year period
ended December 31, 2003, all of the Companys sales
were to customers in or related to the telecommunications
industry.

There were accounts receivable from four
customers and three customers at December 31, 2002 and 2003
respectively, each of which exceeded 10% of total accounts
receivable and aggregated approximately $4,566,262 and $311,272
respectively. See unaudited proforma business concentration risk
in Note 3 for 2002.



|     |                           
|---- | --------------------------
|(13) | Related Party Transactions

Science Applications International Corporation
(SAIC) through its subsidiary SAIC Venture Capital
Corporation is a significant stockholder of the Company. Revenue
related to SAIC for the years ended December 31, 2003, 2002
and 2001 was $66,800, $101,800, and $36,893, respectively. SAIC
owns 48.84% of the voting stock of Danet, Inc.
(Danet), 100 percent of the voting stock of
Telcordia Technologies, Inc.

F-27



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

(Telcordia) and 60% of the voting
stock of Intesacol. Danet is a customer and a distributor of the
Companys products. Revenue related to Danet for each of
the years in the three year period ended was less than one
percent. The Company paid Danet, in its capacity as a
subcontractor for assistance with product development services
$283,000, $0 and $249,018 for the years ended December 31,
2003, 2002, and 2001 respectively. The Company has a strategic
alliance relationship and an OEM Agreement with Telcordia.
Revenue related to Telcordia for the years ended
December 31, 2003, 2002 and 2001 was $3,590, $665,150, and
$219,315. Intesacol became a subcontractor of the Company to
perform services under the ETB Contract. In the year ended
December 31, 2003, the Company paid $213,300 to Intesacol
for professional services.

The chairman of our board of directors, James
Daleen, is the chief financial officer of Affinity
Express, Inc. (Affinity). The Company derived
$18,000 of revenue in 2003 pursuant to a services agreement
between Affinity and the Company.

In January 2001, the Company loaned $1,237,823 to
its then Chairman, President and Chief Executive Officer and his
limited partnership (collectively the Makers). The
loan bore interest at a rate of 8.75% per annum. The
principal was payable in full January 31, 2006 with
interest payable annually on January 31 of each year. The
loan was secured by 901,945 shares of the Companys
common stock, and was non-recourse to the Makers except to the
extent of 901,945 shares of the Companys common stock
held as the collateral. On January 31, 2002, an interest
payment of $119,871 was due and payable. The interest payment
was not made and as a result the loan was in default. Pursuant
to the terms of the loan, the Company gave notice of default. On
September 11, 2002, the makers surrendered the
Companys common stock held as collateral for the loan to
the Company and the loan was deemed satisfied. The stock was
recorded as treasury stock at a value of $135,292 or
$0.15 per share (the closing price per share on The Nasdaq
SmallCap Market on September 11, 2002). As a result of the
loan being non-recourse, the Company had previously recorded a
reserve for the difference between the face value of the loan
plus accrued interest and the fair market value of the
underlying collateral at the end of each period. The loan was
written off in 2002.

The Company has made loans to several executive
officers who are no longer employed with the Company and other
employees for purposes of providing funds primarily for the
payment of tax obligations resulting from the exercise of
options to purchase the Companys common stock. The loans
bear interest at a rate of 8.75% per annum. All principal
and accrued interest payable under the notes were due not later
than five years from their issue date. The loans are full
recourse. Additionally, each borrower has pledged the common
stock issued upon exercise of his options as security for the
loan. As of December 31, 2002 and 2003, the balance on
these loans was approximately $77,000, and $0. During 2002, one
of the original loans was paid in its entirety; two of the loans
were partially paid, the collateralized stock surrendered, and
the remainder written off. The stock was recorded as treasury
stock at various values depending on the price per share on the
surrender date. All loans were deemed satisfied.

The Company also had loans to executive officers
who are no longer employed with the Company for purposes of
providing funds for the exercise of vested, non-qualified stock
options. The loans bore interest at a rate of 8.75% per
annum. These loans were full recourse against the borrower. In
addition, each officer pledged the stock issued upon exercise of
the non-qualified option as security for his respective loan. As
of December 31, 2002, and 2003, the aggregate outstanding
balance on these loans was approximately $241,000 and $0
respectively. During 2002, two of these loans were partially
paid, the collateralized stock surrendered and the balance
written off. The stock was recorded as treasury stock at various
values depending on the price per share on the surrender date.

Total bad debt expense related to the write-off
of notes receivable for the years ended December 31, 2001,
2002 and 2003 was $0, $458,426 and $0, respectively.

BizProLink.Com, Inc.
(BizProLink), a nonpublic entity, is a customer of
the Company. BizProLink purchased a software license from the
Company. Revenue recognized related to BizProLink during the
years

F-28



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

ended December 31, 2001, 2002, and 2003
amounted to $422,300, $0, and $20,200, respectively. In November
2000, the Company made an investment in BizProLink for
$1,500,000. The investment was written down to $500,000 during
2001 due to BizProLink receiving a lower valuation since the
initial investment. The Company recorded an impairment charge of
$500,000 in the year ended December 31, 2003 related to an
investment in a third party technology company due to a decline
in fair value which was other than temporary. As a result of an
assessment performed by management, the Company determined that
the asset was impaired, and the investment was written off in
full during the year ended December 31, 2003.



|     |                   
|---- | ------------------
|(14) | Sale of Subsidiary

On June 24, 2002, the Company sold all of
its common and preferred stock in PartnerCommunity, a majority
owned subsidiary, in exchange for net cash proceeds of
approximately $69,000; a promissory note for $200,000 payable in
30 months which bears interest at a rate of 8% per
year payable annually; and five year warrants to purchase
1,200,000 shares of PartnerCommunity preferred stock at a
price of $0.10 per share. The estimated fair value of the
warrants of $165,700 was recorded as another asset in the
accompanying balance sheet. The fair value of the warrants was
calculated using the Black-Scholes model. The investment in
PartnerCommunity was evaluated for impairment and no write-down
was necessary for the year ended December 31, 2002. The
Company recorded a gain on sale of the subsidiary of
approximately $391,000 in the year ended December 31, 2002.

The Company placed a 100% reserve against the
note receivable due to the long-term nature of the note and the
uncertainty of collectibility. As cash is received, the Company
will record an additional gain on the transaction.



|     |                                                
|---- | -----------------------------------------------
|(15) | Quarterly Financial Information
    (unaudited)

Supplementary Financial Information-Reg
SK229.302

|                                           |  |                    |        |                    |  |                    |        |                    |  |               |        |               |  |              |        |              |  |   |       |   |  |   |        |   |  |   |       |   |  |   |        |  
|------------------------------------------ |  | ------------------ | ------ | ------------------ |  | ------------------ | ------ | ------------------ |  | ------------- | ------ | ------------- |  | ------------ | ------ | ------------ |  | - | ----- | - |  | - | ------ | - |  | - | ----- | - |  | - | ------ | -
|                                           |  |                    |        |                    |  |                    |        |                   
|                                           |  | Three Months Ended |        | Three Months Ended |  | Three Months Ended |        | Three Months Ended
|                                           |  |                    |        |                    |  |                    |        |                   
|                                           |  | March 31,          |        | March 31,          |  | June 30,           |        | June 30,           |  | September 30, |        | September 30, |  | December 31, |        | December 31,
|                                           |  | 2003               |        | 2002               |  | 2003               |        | 2002               |  | 2003          |        | 2002          |  | 2003         |        | 2002        
|                                           |  |                    |        |                    |  |                    |        |                    |  |               |        |               |  |              |        |             
|                                           |  |                    |        |                    |  |                    |        |                   
|                                           |  | (Unaudited)        |        | (Unaudited)        |  | (Unaudited)        |        | (Unaudited)       
|Net Sales                                  |  | $                  | 4,069  |                    |  | $                  | 1,900  |                    |  | $             | 4,213  |               |  | $            | 2,043  |              |  | $ | 4,924 |   |  | $ | 1,246  |   |  | $ | 4,951 |   |  | $ | 1,283  |  
|                                           |  |                    |        |                    |  |                    |        |                    |  |               |        |               |  |              |        |              |  |   |       |   |  |   |        |   |  |   |       |   |  |   |        |  
|Gross profit                               |  |                    | 2,699  |                    |  |                    | 861    |                    |  |               | 2,939  |               |  |              | 1,372  |              |  |   | 3,467 |   |  |   | 808    |   |  |   | 3,224 |   |  |   | 768    |  
|                                           |  |                    |        |                    |  |                    |        |                    |  |               |        |               |  |              |        |              |  |   |       |   |  |   |        |   |  |   |       |   |  |   |        |  
|Operating loss                             |  |                    | (1,496 | )                  |  |                    | (2,949 | )                  |  |               | (1,511 | )             |  |              | (2,760 | )            |  |   | (396  | ) |  |   | (1,787 | ) |  |   | (431  | ) |  |   | (2,941 | )
|                                           |  |                    |        |                    |  |                    |        |                    |  |               |        |               |  |              |        |              |  |   |       |   |  |   |        |   |  |   |       |   |  |   |        |  
|Net loss applicable to common stockholders |  | $                  | (1,418 | )                  |  | $                  | (2,802 | )                  |  | $             | (1,412 | )             |  | $            | (2,251 | )            |  | $ | (371  | ) |  | $ | (1,745 | ) |  | $ | (409  | ) |  | $ | (3,006 | )
|                                           |  |                    |        |                    |  |                    |        |                    |  |               |        |               |  |              |        |              |  |   |       |   |  |   |        |   |  |   |       |   |  |   |        |  
|Net loss per share-basic and diluted       |  | $                  | (0.03  | )                  |  | $                  | (0.13  | )                  |  | $             | (0.03  | )             |  | $            | (0.10  | )            |  | $ | (0.01 | ) |  | $ | (0.07  | ) |  | $ | (0.01 | ) |  | $ | (0.11  | )
|                                           |  |                    |        |                    |  |                    |        |                    |  |               |        |               |  |              |        |              |  |   |       |   |  |   |        |   |  |   |       |   |  |   |        |  



---



|      |                                                                                                                    
|----- | -------------------------------------------------------------------------------------------------------------------
|Note: | These numbers do not agree to the years ended
    December 31, 2003 and 2002 due to foreign currency
    adjustment

The results of operations in the three months
ended December 31, 2002 include the Abiliti Acquisition on
December 20, 2002 through December 31, 2002. In the
three months ended December 31, 2003, the results of
operations include the entire three months.

In the three months ended December 31, 2002,
the Company recorded a severance expense of $696,500 related to
James Daleens termination of employment in connection with
the Abiliti Acquisition of Abiliti. In December 2002, $328,900
of that amount was paid. The remainder will be paid over
twenty-four months beginning January 1, 2004.

F-29



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In the three months ended December 31, 2002,
the Company recorded bad debt expense of $220,000 related to an
accounts receivable that was deemed to be uncollectible. In the
three months ended December 31, 2003 there was a recovery
of bad debt expense in the amount of $72,000.



|     |                  
|---- | -----------------
|(16) | Legal Proceedings



| |                      
| | ---------------------
| | Settlement of Lawsuit

On June 6, 2001, the Company settled a
lawsuit against Mohammad Aamir, 1303949 Ontario Inc. and the
Vengrowth Investment Fund Inc. (collectively, the
Defendants). In connection with the settlement, on
June 8, 2001, the Company granted to the Defendants
warrants to purchase an aggregate of 750,000 shares of the
Companys common stock with an exercise price of
$1.134 per share. The warrants are exercisable for a period
of two years. The issuance of the warrants resulted in the
recognition of non-cash expense of approximately $495,000 in the
year ended December 31, 2001, and represents the fair value
of such warrants. The Company also executed a license to an
affiliate of certain of the Defendants for a version of one of
the Companys software products as part of the settlement.
The Defendants also released the Company from any claims they
may have had against the Company.



| |                                        
| | ---------------------------------------
| | Fazari v. Daleen
    Technologies, Inc.

On December 5, 2001, a class action
complaint was filed in the United States District Court for the
Southern District of New York. On April 22, 2002 an
amended complaint was filed by two plaintiffs purportedly on
behalf of persons purchasing the Companys common stock
between September 20, 1999 and December 6, 2000. The
complaint is styled as Angelo Fazari, on behalf of himself
and all others similarly situated, vs. Daleen
Technologies, Inc., BancBoston Robertson Stephens Inc.,
Hambrecht & Quist LLC, Salomon Smith Barney Inc., James
Daleen, David B. Corey and Richard A. Schell. The individual
defendants, Messrs. Corey, Schell and Daleen, have entered
into tolling agreements with the plaintiffs resulting in their
dismissal from the case without prejudice. The remaining
defendants include us and certain of the underwriters from the
Companys initial public offering (IPO). More
than 300 similar class action lawsuits filed in the Southern
District of New York against numerous companies and their
underwriters have been consolidated for pretrial purposes before
one judge under the caption In re Initial Public Offering
Securities Litigation.

The complaint includes allegations of violations
of (i) Section 11 of the Securities Act of 1933 by all
named defendants, (ii) Section 15 of the Securities
Act of 1933 by the individual defendants and
(iii) Section 10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder by the
underwriter defendants. Specifically, the plaintiffs allege in
the complaint that, in connection with the IPO, the defendants
failed to disclose excessive commissions purportedly
solicited by and paid to the underwriter defendants in exchange
for allocating shares of the Companys common stock in the
IPO to the underwriter defendants preferred customers.
Plaintiffs further allege that the underwriter defendants had
agreements with preferred customers tying the allocation of
shares sold in the IPO to the preferred customers
agreements to make additional aftermarket purchases at
pre-determined prices. Plaintiffs further allege that the
underwriters used their analysts to issue favorable reports
about the Company to further inflate the Companys share
price following the IPO. Plaintiffs claim that the defendants
knew or should have known of the underwriters actions and
that the failure to disclose these alleged arrangements rendered
the prospectus included in the Companys registration
statement on Form S-1 filed with the SEC in September 1999
materially false and misleading. Plaintiffs seek unspecified
damages and other relief.

In June 2003, the Company approved the terms of a
proposed settlement involving the plaintiffs, the insurance
companies and numerous issuers, including the Company and the
individual defendants, that includes a waiver by the insurance
companies of any retention amounts under the policies. Court
approval of the settlement is required. Under the terms of the
proposed settlement, there would be no liability to be

F-30



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

recorded by the Company other than legal fees
incurred in the initial defense of the action, which are
immaterial. There is no assurance that a settlement with the
plaintiffs will be finalized. In the event that the settlement
is not finalized and approved by the court, the Company intends
to defend vigorously against the plaintiffs claims. The
Company believes that it is entitled to indemnification by the
underwriters under the terms of the underwriting agreements. The
Company has notified the underwriters of the action, but the
underwriters have not yet agreed to indemnify the Company. The
lead underwriter, BancBoston Robertson Stephens Inc., has ceased
doing business and there is no assurance it will have the
financial resources to provide indemnification. Currently the
amount of a loss, if any, cannot be determined and, accordingly
no amounts have been recorded by the Company in the accompanying
consolidated financial statements with respect to this
litigation.



| |                           
| | --------------------------
| | Abiliti-Related Litigation

On August 1, 2003, a First Amended Petition,
styled as James E. Kientzy and David K. Wilson vs. Abiliti
Solutions, Inc., a corporation, and Daleen
Technologies, Inc., a corporation, and Daleen
Solutions, Inc., a corporation and wholly-owned subsidiary
of Daleen, was filed in the Circuit Court of the County of
St. Louis, State of Missouri. The First Amended Petition
added Daleen Technologies and Daleen Solutions as defendants in
the named action. The First Amended Petition contains certain
allegations against Abiliti related to the non-payment of
certain promissory notes in the aggregate principal amount of
$1.2 million. The promissory notes that are the subject of
the First Amended Petition are liabilities that were retained by
Abiliti pursuant to the terms of the Abiliti Acquisition. The
plaintiffs allege that the purchase of substantially all of the
assets and certain liabilities of Abiliti constituted a de facto
merger and, as a result, Daleen Technologies and its indirect
wholly owned subsidiary, Daleen Solutions, are responsible for
payment of the promissory notes and indemnification of the
plaintiffs in connection with Abilitis counterclaim
against the plaintiffs. The First Amended Petition also seeks to
set aside the transfer of Abiliti assets as a fraudulent
transfer. In December 2003, the court granted summary judgment
to the plaintiffs against Abiliti n/k/a Albacore
Holdings, Inc. (Albacore) on the promissory
notes awarding a judgment in the amount of $1,796,938.14.
However, the judgment provides that it is not subject to
execution until such time as the senior debt (certain promissory
notes and series B preferred stock) is paid in full. Albacore
currently has insufficient assets and no operating income with
which to pay the senior debt. The trial on the remaining claims
in this matter has been set for July 2004. Daleen Solutions and
Daleen Technologies believe that they are entitled to
indemnification by Albacore pursuant to the terms of the
purchase agreement relating to the Abiliti Acquisition. The
Company has provided notice to Albacore of the action and
Albacore has assumed the defense of the First Amended Petition
on the Companys behalf. However, there can be no assurance
that Albacore will have the financial resources to defend and/or
settle the claims, pay any judgment ultimately obtained by
plaintiffs, or continue to provide indemnification in connection
with this matter. Due to the early stage of the proceeding, a
loss and its effect on the Company, if any, cannot be determined
and, accordingly, no amounts have been recorded in the
accompanying consolidated financial statements with respect to
this litigation. All or a portion of the Escrowed Shares
described in note 3 may be retained by the Company in the
event it is required to fund any of its own defense costs or
costs related to a settlement or judgment in this matter.

On October 14, 2003, the Company, Daleen
Solutions and Albacore filed a declaratory judgment action
against Houlihan Lokey Howard & Zukin
Capital, Inc. and Houlihan Lokey Howard & Zukin
Financial Advisors, Inc. (Houlihan) seeking a
declaration that they are not liable to Houlihan for fees under
an engagement letter between Abiliti Solutions, Inc. and
Houlihan (a liability Daleen assumed in the acquisition of
Abiliti). Houlihan filed a counterclaim for fees in excess of
$800,000. The parties have agreed in principal to settle the
action and counterclaim and are preparing the settlement
documents. The Company expects to pay Houlihan approximately
$55,000. The purchase price allocation of the Abiliti
Acquisition described in note 3 may be adjusted if the
settlement is consummated.

F-31



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

On December 24, 2003, Daleen Solutions filed
a collection action against Data Integration Systems, Inc.
(DIS) seeking payment of license fees, services fees
and equipment in the amount of $694,600 (which includes
DIS obligation to make future payments under the
contract). On January 30, 2004, DIS filed a cross-complaint
against Daleen Solutions alleging damages of $1,500,000. Due to
the early stage of the proceeding, a loss and its effect on the
Company, if any, cannot be determined with respect to this
litigation.



| |                   
| | ------------------
| | General litigation

On August 5, 2003, the Company reached a
settlement in satisfaction of an outstanding obligation with a
customer under a software license agreement. Under the terms of
the settlement, this customer satisfied their obligations by
agreeing to make payments in cash of $365,000 plus interest. The
Company received $250,000 on August 20, 2003, and $57,500
plus interest on November 5, 2003 and received $57,500 plus
interest in February 2004. In accordance with SOP 97-2, the
revenue related to the contractual agreement with this customer
is recognized on a cash basis. Therefore, the Company recorded
$307,500 as license revenue in the year ended December 31,
2003.

The Company is involved in other lawsuits and
claims incidental to its ordinary course of business. Management
does not believe the outcome of any of these other activities
would have a material adverse effect on the Companys
financial position or results of operations.



|     |                              
|---- | -----------------------------
|(17) | New Accounting Pronouncements

In July 2002, the FASB issued a Statement of
Financial Accounting Standards No. 146, Accounting
for Exit or Dismissal Activities (SFAS No.
146). SFAS No. 146 is effective for disposal
activities initiated by the Company after December 31,
2002. The Company has not initiated any exit or dismissal
activities in 2003 and therefore the adoption of
SFAS No. 146 did not have an impact on the
Companys consolidated financial statements.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness to Others,(FIN
No. 45) an interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation
No. 34. This Interpretation elaborates on the disclosures
to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The
Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and
measurement provisions of the Interpretation are applicable to
guarantees issued or modified after December 31, 2002. The
Company does not have guarantees falling under the requirements
of FIN No. 45 and as a result the adoption of this
interpretation did not have an impact on the Companys
consolidated financial statements.

In December 2003, the FASB issued Interpretation
No. 46 (FIN 46R) (revised December 2003),
Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin No. 51 (ARB
51), which addresses how a business enterprise should
evaluate whether it has a controlling interest in an entity
through means other than voting rights and accordingly should
consolidate the entity. FIN 46R replaces FASB
Interpretation No. 46 (FIN 46), which was issued in
January 2003. Before concluding that it is appropriate to apply
ARB 51 voting interest consolidation model to an entity, an
enterprise must first determine that the entity is not a
variable interest entity (VIE). As of the effective date of
FIN 46R, an enterprise must evaluate its involvement with
all entities or legal structures created before February 1,
2003, to determine whether consolidation requirements of
FIN 46R apply to those entities. There is no grandfathering
of existing entities. Public companies must apply either
FIN 46 or FIN 46R immediately to entities created
after January 31, 2003 and no later than the end of the
first reporting period that ends after March 15, 2004. The
adoption of FIN 46 did not have an impact on the
Companys consolidated financial position and results of
operations.

F-32



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In October 2003, the Emerging Issues Task Force
(EITF) reached a consensus on its tentative
conclusions for EITF 03-05, Applicability of
SOP 97-2 to Non-Software Deliverables in an Arrangement
Containing More-Than-Incidental Software(EITF 03-05). EITF 03-05 discusses
that software deliverables are within the scope of SOP 97-2
as are non-software deliverables. The Company is required to
adopt this consensus for fiscal periods beginning after August
2003. The Company believes the adoption of EITF 03-05 will
not have an impact on the Companys consolidated financial
statements.



|     |                  
|---- | -----------------
|(18) | Subsequent Events



|    |               
|--- | --------------
|(a) | Operating Loan

In February 2004, the Company closed the
Operating Loan with SVB and guaranteed by EXIM Bank. The term of
the Operating Loan is fifteen months. Total funding under the
Operating Loan is $2,700,000. The Company can borrow against the
Operating Loan based on estimated funding dates and may have
outstanding borrowings at any given time up to $2,000,000. The
proceeds of the Operating Loan will be used for operating costs
associated with the ETB Contract. We have borrowed $1,732,000
against this loan as of March 1, 2004. Interest accrues at
the rate of prime plus 2% (minimum 4%) per annum. SVB will have
a first priority security interest in all of our assets until
the Operating Loan is paid in full. The Operating Loan contains
customary representations and warranties and covenants including
maintaining a tangible net worth requirement of $4,000,000. The
Company is currently in compliance with all covenants under the
Operating Loan. The Company intends to repay the Operating Loan
solely from revenues received from the ETB Contract.



|    |              
|--- | -------------
|(b) | Reverse Split

The Company filed a preliminary proxy statement
on January 28, 2004 in connection with the Reverse Split.
If implemented, the Reverse Split would enable the Company to
terminate the Companys obligations to file annual,periodic
reports and other filings with the SEC. If the Reverse Split is
implemented, stockholders holding fractional shares of common
stock after the Reverse Split would receive a cash payment equal
to $.30 per pre-split share of common stock in lieu of the
issuance of fractional shares. Stockholders holding less than
500 shares of common stock before the Reverse Split would
be cashed out and would have no further equity interest in the
Company. With respect to shares of common stock held in
brokerage accounts, the Company intends to look through the
stockholders of record to the beneficial owners of such shares
for purposes of determining whether or not the Reverse Split
results in such beneficial owners holding fractional shares on
common stock. Payment also would be made to such beneficial
owners in lieu of the issuance of any such fractional shares.
The total estimated consideration (excluding fees and expenses)
that would be paid as a result of the Reverse Split is expected
to be approximately $225,000 and would be paid out of working
capital or from the possible Bridge Loan. The Board of Directors
has retained the discretion to determine whether or not to
implement the Reverse Split even after receipt of the requisite
stockholder approval.



|    |            
|--- | -----------
|(c) | Bridge Loan

The Company is exploring the possibility of
entering into the Bridge Loan with certain of the current
holders of the Series F preferred stock. Discussions
regarding the possible Bridge Loan are in the initial stages. It
is unclear at this time whether such a transaction will be
consummated and the timing is unknown.

F-33



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##### Table of Contents



DALEEN TECHNOLOGIES, INC. AND
SUBSIDIARIES






SCHEDULE II: VALUATION AND QUALIFYING
ACCOUNTS


For Each of the Years in the Three Year
Period


Ended December 31, 2003


|             |                                                          |              |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |   |  |            |            | 
|------------ | -------------------------------------------------------- | ------------ | -------------------------------------- | ---------- | - | ---------------- | ---------- | --------- |  | ------------- | ---------- | ---------- |  | ------- | ------- |  |  | ------- | ------- |  |  | ---------- | ---------- | - |  | ---------- | ---------- | 
|             |                                                          | Balance at   |                                        |            |   |                  |            | Partner   |  |               |            | Balance at
|             |                                                          | Beginning of |                                        |            |   | Daleen Solutions |            | Community |  |               |            | End of    
|             |                                                          | Year         |                                        | Charges(a) |   | Acquisitions(b)  |            | Sale(c)   |  | Deductions(d) |            | Year      
|             |                                                          |              |                                        |            |   |                  |            |           |  |               |            |           
|Description: |                                                          |              |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |  
|             | Reserves and allowances deducted from asset
    accounts |              |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |   | 
|             |                                                          | 2001         |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |   |  |           
|             |                                                          |              | Allowance for doubtful accounts        |            | $ | 4,600,000        |            |           |  | 1,675,000     |            |            |  |        |         |  |  |        |         |  |  | (2,486,346 | )          |   |  | 3,788,654  |           
|             |                                                          |              | Valuation allowance for deferred taxes |            |   | 34,438,000       |            |           |  | 33,449,000    |            |            |  |        |         |  |  |        |         |  |  |           |            |   |  | 67,887,000 |           
|             |                                                          |              | Reserve for notes receivable           |            |   |                 |            |           |  | 1,188,102     |            |            |  |        |         |  |  |        |         |  |  |           |            |   |  | 1,188,102  |           
|             |                                                          |              |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |  
|             |                                                          |              |                                        | Total      |   | $                | 39,038,000 |           |  |               | 36,312,102 |            |  |         |        |  |  |         |        |  |  |            | (2,486,346 | ) |  |            | 72,863,756 | 
|             |                                                          |              |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |  
|Description: |                                                          |              |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |  
|             | Reserves and allowances deducted from asset
    accounts |              |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |   | 
|             |                                                          | 2002         |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |   |  |           
|             |                                                          |              | Allowance for doubtful accounts        |            | $ | 3,788,654        |            |           |  | 270,000       |            |            |  | 348,956 |         |  |  |        |         |  |  | (431,893   | )          |   |  | 3,975,717  |           
|             |                                                          |              | Valuation allowance for deferred taxes |            |   | 67,887,000       |            |           |  | 2,317,000     |            |            |  |        |         |  |  |        |         |  |  |           |            |   |  | 70,204,000 |           
|             |                                                          |              | Reserve for notes receivable           |            |   | 1,188,102        |            |           |  | 343,516       |            |            |  |        |         |  |  | 200,000 |         |  |  | (1,531,618 | )          |   |  | 200,000    |           
|             |                                                          |              |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |  
|             |                                                          |              |                                        | Total      |   | $                | 72,863,756 |           |  |               | 2,930,516  |            |  |         | 348,956 |  |  |         | 200,000 |  |  |            | (1,963,511 | ) |  |            | 74,379,717 | 
|             |                                                          |              |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |  
|Description: |                                                          |              |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |  
|             | Reserves and allowances deducted from asset
    accounts |              |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |   | 
|             |                                                          | 2003         |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |   |  |           
|             |                                                          |              | Allowance for doubtful accounts        |            | $ | 3,975,717        |            |           |  | 20,000        |            |            |  |        |         |  |  |        |         |  |  | (3,109,028 | )          |   |  | 886,689    |           
|             |                                                          |              | Valuation allowance for deferred taxes |            |   | 70,204,000       |            |           |  | 5,283,000     |            |            |  |        |         |  |  |        |         |  |  |           |            |   |  | 75,487,000 |           
|             |                                                          |              | Reserve for notes receivable           |            |   | 200,000          |            |           |  |              |            |            |  |        |         |  |  |        |         |  |  |           |            |   |  | 200,000    |           
|             |                                                          |              |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |  
|             |                                                          |              |                                        | Total      |   | $                | 74,379,717 |           |  |               | 5,303,000  |            |  |         |        |  |  |         |        |  |  |            | (3,109,028 | ) |  |            | 76,573,689 | 
|             |                                                          |              |                                        |            |   |                  |            |           |  |               |            |            |  |         |         |  |  |         |         |  |  |            |            |  






|    |                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------
|(a) | Charges to the account represent increase in
    reserve levels and establishment of specific reserves charged to
    expense.
|(b) | Amount acquired in Abiliti Acquisition                                                                                        
|(c) | Amount of reserve placed on note receivable
    related to the sale of PartnerCommunity                                       
|(d) | Deductions to the reserve account represent
    write-offs net of recoveries which occurred during the year.                  

F-34