UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

þ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2008

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 333-46494

PRIMAL SOLUTIONS, INC.

(Exact Name of Small Business Issuer in its Charter)

Delaware		36-4170318
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

19732 MacArthur Boulevard

Suite 100

Irvine, California 92612

(Address of principal executive offices)

(949) 260-1500

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated file, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

	Large accelerated filer	o		Accelerated filer	o
	Nonaccelerated filer (Do not check if a smaller reporting company)	o		Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of the issuer's sole class of common stock ($0.01 par value) on December 10, 2008 was 1,096,676 shares.

PRIMAL SOLUTIONS, INC.

INDEX

		PAGE
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets at September 30, 2008 (unaudited) and December 31, 2007	3
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2008 and 2007 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)	5
	Notes to Condensed Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 4T.	Controls and Procedures	26

PART II - OTHER INFORMATION
Item 6.	Exhibits	26

SIGNATURES		26

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

PRIMAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2008			December 31, 2007
ASSETS	(Unaudited)
Current Assets
Cash and cash equivalents	$	606,000		$	524,000
Accounts receivable		139,000			137,000
Prepaid expenses and other current assets		61,000			144,000
Total current assets		806,000			805,000

Property and equipment, net of accumulated depreciation of $947,000 and $1,512,000, respectively		121,000			271,000
Goodwill		158,000			593,000
Other assets		57,000			76,000
	$	1,142,000		$	1,745,000
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts payable	$	71,000		$	57,000
Accrued liabilities		142,000			376,000
Accrued salaries and benefits		260,000			532,000
Deferred revenue		180,000			172,000
Short-term borrowings and current portion of long-term debt		23,000			632,000
Current portion of senior convertible debt, net of discount of $0 and $177,000, respectively		695,000			1,323,000
Total current liabilities		1,371,000			3,092,000

Long-term debt, net of current portion		—			706,000
Noncurrent portion of senior convertible debt, net of discount of $0 for each period		695,000			—
Other long-term liabilities		54,000			58,000
		2,120,000			3,856,000
Commitments and contingencies (Notes 4, 5 and 6)

Stockholders' Deficit
Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued and outstanding		—			—
Common stock and additional paid-in capital, $0.01 par value; 95,000,000 shares authorized; 1,096,676(1) shares issued and outstanding in each period		16,865,000			16,554,000
Accumulated deficit		(17,843,000	)		(18,665,000	)
Net stockholders’ deficit		(978,000	)		(2,111,000	)
	$	1,142,000		$	1,745,000

(1) Amounts have been restated to reflect the 1-for-35 reverse stock split effective June 19, 2008.

See accompanying notes to condensed unaudited consolidated financial statements

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PRIMAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007

Net revenue	$	1,680,000		$	1,541,000		$	4,817,000		$	4,760,000

Cost of revenue		355,000			440,000			1,057,000			1,328,000
Research and development		395,000			363,000			1,298,000			1,108,000
Selling, general and administrative		474,000			560,000			1,863,000			1,947,000
Goodwill impairment loss		435,000			—			435,000			—
Total costs		1,659,000			1,363,000			4,653,000			4,383,000

Operating income		21,000			178,000			164,000			377,000
Gain from debt extinguishment		—			—			1,082,000			—
Interest and other expenses, net		(35,000	)		(224,000	)		(420,000	)		(648,000	)
(Loss) income before income tax provision		(14,000	)		(46,000	)		826,000			(271,000	)
Income tax provision		—			—			3,000			3,000
Net (loss) income	$	(14,000	)	$	(46,000	)	$	823,000		$	(274,000	)

Basic earnings per share	$	(0.01	)	$	(0.04	)	$	(0.75	)	$	(0.25	)
Diluted earnings per share	$	(0.01	)	$	(0.04	)	$	(0.73	)	$	(0.25	)

Basic weighted average number of common and common equivalent shares outstanding(1)		1,096,676			1,096,676			1,096,676			1,096,676
Diluted weighted average number of common and common equivalent shares outstanding(1)		1,096,676			1,096,676			1,532,733			1,096,676

(1) Amounts have been restated to reflect the 1-for-35 reverse stock split effective June 19, 2008.

See accompanying notes to condensed unaudited consolidated financial statements

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PRIMAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended September 30,
	2008			2007
Cash Flows from Operating Activities
Net income (loss)	$	823,000		$	(274,000	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		68,000			80,000
Amortization of beneficial conversion feature into interest expense		78,000			194,000
Amortization of debt issuance cost		27,000			72,000
Warrant expense		98,000			231,000
Non-cash stock-based compensation costs		311,000			107,000
Gain from debt extinguishment		(1,082,000	)		—
Loss on disposal of property and equipment		104,000			7,000
Goodwill impairment loss		435,000			—
Changes in operating assets and liabilities:
Accounts receivable		(2,000	)		16,000
Prepaid expenses and other current assets		91,000			14,000
Accounts payable and other accrued liabilities		(289,000	)		(320,000	)
Deferred revenue		8,000			(9,000	)
Other noncurrent assets and liabilities		15,000			47,000
Net cash provided by operating activities		685,000			165,000

Cash Flow from Investing Activities
Purchase of property and equipment		(23,000	)		(26,000	)
Proceeds from sales of property and equipment		2,000			4,000
Net cash used in investing activities		(21,000	)		(22,000	)

Cash Flow from Financing Activities
Change in restricted cash		—			103,000
Payments on capital lease obligations		(19,000	)		(18,000	)
Payments to retire promissory notes		(419,000	)		(100,000	)
Payments on notes payable		(33,000	)		(44,000	)
Payments on convertible debt		(111,000	)		—
Net cash used in financing activities		(582,000	)		(59,000	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		82,000			84,000
CASH AND CASH EQUIVALENTS, beginning of period		524,000			382,000
CASH AND CASH EQUIVALENTS, end of period	$	606,000		$	466,000

Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	142,000		$	121,000
Taxes		3,000			3,000

Non-cash Financing Activities
Financing of business insurance premiums	$	38,000		$	50,000
Financing of liquidated damages payable to 2006 Private Placement investors		—			119,000

See accompanying notes to condensed unaudited consolidated financial statements

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PRIMAL SOLUTIONS, INC.

Notes to the Condensed Unaudited Consolidated Financial Statements

1. SUMMARY OF BUSINESS

Description of Business

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Financial Statement Presentation

The accompanying condensed unaudited consolidated financial statements include the accounts of Primal Solutions, Inc. and its wholly-owned subsidiary, Wireless Billing Systems. Intercompany accounts and transactions have been eliminated. The accompanying condensed unaudited consolidated financial statements of the Company as of September 30, 2008 and for the three and nine months ended September 30, 2008 and 2007 have been prepared in accordance with accounting principles generally accepted in the United States and in accordance with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair presentation have been included. The accompanying condensed unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company's 2007 Form 10-KSB. Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2008. Certain reclassifications have been made to prior year’s financial information to conform to the current year presentation.

The unaudited condensed consolidated financial statements have been presented on the basis that the Company will continue as a going concern, with the realization of assets and the satisfaction of liabilities in the normal course of business. In November 2008, the Company executed a transition agreement (the "Transition Agreement") with Time Warner Cable Inc. ("TWCI"). TWCI is the assignee of Time Warner Cable Information Services (Maine) LLC (collectively, "Time Warner"), with whom the Company has a contractual relationship under the original Master Software and License Agreement, as amended (the "Master Agreement"). Pursuant to the Master Agreement, the Company provided software and services to help Time Warner manage its digital phone services. The Transition Agreement provides written notice of Time Warner's intent to terminate all services covered under the Master Agreement on February 28, 2009. Pursuant to the terms of the Transition Agreement, the Company will provide transition assistance from the Company’s software platform to Time Warner's alternative product and platform through February 28, 2009. Additionally, the Company will be responsible for the decommission and removal of the hardware owned by Time Warner. The Master Agreement also covers an affiliate of Time Warner (the "Time Warner Affiliate"). The Company and the Time Warner Affiliate are currently in discussions concerning the terms and duration of any services that may be provided by the Company to the Time Warner Affiliate under a new stand-alone contract. Total revenue from Time Warner for the three and nine months ended September 30, 2008 was $1.3 million and $3.5 million, respectively. Total revenue from the Time Warner Affiliate for the three and nine months ended September 30, 2008 was $288,000 and $797,000, respectively. Management does not expect the Transition Agreement and the new stand-alone contract with the Time Warner Affiliate to provide sufficient revenues to support the Company’s continuing operations.

In light of these developments and the Company’s position in the current marketplace, management has recommended to the Board of Directors that the Company commence an orderly wind-down of its continuing operations. The Company reviewed various alternatives that might be available to the Company to maximize the Company's value, including continuing current operations. After reviewing such alternatives, the Board of Directors has determined to commence wind-down of the Company. As part of the wind-down, the Company, through a special committee consisting of independent directors and led by the lead director, is currently in negotiations with certain members of management regarding an arrangement whereby the Company would transfer certain customer contracts and other assets, as well as license its technology to a newly formed company owned and operated by these members of management. Such arrangement is expected to be completed, if at all, in January 2009. Whether or not such arrangement is consummated, given the Company’s outstanding senior secured convertible debt obligation in the aggregate amount of $1.3 million, the Company believes it is unlikely there will be any remaining value available for distribution to the holders of the Company's common stock following completion of the Company’s wind-down. The accompanying unaudited financial statements do not include any adjustments to reflect the effects on the recoverability and classification of assets or the amounts and classification of liabilities due to these recent developments.

Reverse Stock Split

On June 19, 2008, the Company implemented a 1-for-35 reverse stock split. All fractional shares were rounded up to the nearest whole share. The number of authorized shares of common stock and their par value, and the other terms of the Company's common stock, were not affected by the reverse stock split. However, the number of shares of common stock underlying all of the Company's outstanding warrants, options, and convertible notes, as well as the maximum number of options authorized under its stock option plans and the number of shares of common stock that are reserved pursuant to such plans, were proportionately adjusted to reflect the reverse stock split. All shares and per share amounts have been restated in the condensed unaudited consolidated financial statements and in the notes to the condensed unaudited consolidated financial statements for all periods presented to reflect the reverse stock split as if it occurred on the first day of the first period presented.

Recent Accounting Pronouncements

In June 2008, the Financial Accounting Standards Board Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 08-4, Transition Guidance for Conforming Changes to EITF Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios (“EITF No. 08-4”). Subsequent to the issuance of EITF No. 98-5, certain portions of the guidance contained in EITF No. 98-5 were nullified by EITF Issue No. 00-27, Application of EITF Issue No. 98-5, ‘Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios’ (“EITF No. 00-27”). However, the portions of EITF No. 98-5 that were nullified by EITF No. 00-27 were not specifically identified in EITF No. 98-5, nor were the illustrative examples in EITF No. 98-5 updated for the effects of EITF No. 00-27. EITF No. 08-4 specifically addresses the conforming changes to EITF Issue No. 98-5 and provides transition guidance for the conforming changes. EITF No. 08-4 is effective for the Company for the fiscal year ending December 31, 2008. The Company adopted the provisions of EITF No. 08-4 and such provisions had no material impact on the Company's consolidated financial position or results of operations.

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PRIMAL SOLUTIONS, INC.

Notes to the Condensed Unaudited Consolidated Financial Statements

In March 2008, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133, ("SFAS 161"). SFAS 161 amends and expands the disclosure requirements for derivative instruments and hedging activities by requiring enhanced disclosures about how and why the Company uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect the Company's financial position, financial performance and cash flows. This statement is effective for the Company's 2009 fiscal year. The adoption of SFAS 161 is not expected to have a material impact on the Company's consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations—a replacement of FASB Statement No. 141, ("SFAS 141R"), which establishes principles and requirements for determining how an enterprise recognizes and measures fair value of certain assets and liabilities acquired in a business combination, including noncontrolling interests, contingent consideration, and certain acquired contingencies. SFAS 141R also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. This statement is effective prospectively for the Company's 2009 fiscal year. The adoption of SFAS 141R is not expected to have a material impact on the Company's consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51 ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary. SFAS 160 also requires that a retained noncontrolling interest upon the deconsolidation of a subsidiary be initially measured at its fair value. SFAS 160 is effective for the Company's 2009 fiscal year. The adoption of SFAS 160 is not expected to have an effect on the Company's consolidated financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 gives the Company the irrevocable option to carry most financial assets and liabilities at fair value, with changes in fair value recognized in earnings. The Company adopted SFAS 159 on January 1, 2008 and has elected not to apply the fair value option to any of its financial instruments existing as of the adoption date.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”) which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements and does not require any new fair value measurements. In February 2008, the FASB issued Staff Position (“FSP”) FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, which scopes out leasing transactions accounted for under Statement of Financial Accounting Standards No. 13, Accounting for Leases. In February 2008, FSP FAS 157-2, Effective Date of FASB Statement No. 157, was issued, which delays the effective date of SFAS 157 to fiscal years and interim periods within those fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). In October 2008, FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining fair value of a financial asset when the market for that financial asset is not active. The Company's adoption of SFAS 157 on January 1, 2008 for financial assets and financial liabilities did not have a material impact on the Company's condensed unaudited consolidated financial statements. The Company's early adoption of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities during the third quarter of 2008 did not have a material impact on the Company's condensed unaudited consolidated financial statements.

Summary of Significant Accounting Policies

Revenue Recognition—The Company derives revenues from three sources: (1) subscription revenue, (2) upfront software license fees and related support revenue, and (3) professional services and other revenue. The Company typically enters into a multiple element arrangement with the customer under either a Software as a Service (“SaaS”) agreement or a license and maintenance agreement. These agreements include professional services fees for installation, training and customization. Both types of agreements are based on the customer’s number of subscribers or a similar measure. Any additional professional services provided to the customer subsequent to the initial implementation is typically covered under a separate service agreement.

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

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PRIMAL SOLUTIONS, INC.

Notes to the Condensed Unaudited Consolidated Financial Statements

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

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

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

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

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

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

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

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

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

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

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PRIMAL SOLUTIONS, INC.

Notes to the Condensed Unaudited Consolidated Financial Statements

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

Goodwill and Intangible Assets—The Company accounts for its goodwill in accordance to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), which requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized. Pursuant to SFAS 142, the Company evaluates goodwill for impairment on an annual basis at the end of the third quarter and more frequently if events or changes in circumstances indicate that the asset value might be impaired. Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit's carrying amount, including goodwill, to the fair value of the reporting unit. The fair value of the respective reporting unit are estimated using the income approach. If the carrying amount of the reporting unit exceeds it fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. The excess of the carrying amount of goodwill over it implied fair value represents the impairment loss to be recognized. During the third quarter of 2008, the Company determined that the carrying value of the goodwill exceeded its implied fair value. Accordingly, a goodwill impairment loss of $435,000 was recognized during the quarter ended September 30, 2008.

Stock-Based Compensation—The Company has adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS 123R”), using the modified prospective transition method which required the application of the accounting standard as of January 1, 2006, the first day of the Company's fiscal year 2006. Under SFAS 123R, the Company is required to measure the cost employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The measured cost is recognized in the statement of operations over the period during which an employee is required to provide service in exchange for the award. Additionally, if an award of an equity instrument involves a performance condition, the related compensation cost is recognized only if it probable that the performance condition will be achieved. For the three and nine months ended September 30, 2008, the Company recognized stock-based compensation costs of $23,000 and $311,000, respectively, pursuant to SFAS 123R. For the three and nine months ended September 30, 2007, the Company recognized stock-based compensation costs of $35,000 and $107,000, respectively.

Income Taxes—Income taxes are accounted for in accordance SFAS 109. This statement requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and tax bases of the Company's assets and liabilities result in a deferred tax asset, SFAS 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such assets. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized. A full valuation allowance for deferred tax assets has been provided at September 30, 2008 and December 31, 2007.

On January 1, 2007, the Company adopted the provisions of FIN 48 and analyzed its filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company has identified its federal tax return and its state tax return in California as a “major” tax jurisdiction, as defined by FIN 48. The only periods subject to examination for the Company's federal return are the tax years 2003 through 2006. The periods subject to examination for the Company's state returns in California are tax years 2002 through 2006. The Company believes that its income tax filing positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material change to its financial position. Therefore, no reserves for uncertain income tax positions have been recorded pursuant to FIN 48. In addition, the Company did not record a cumulative effect adjustment related to the adoption of FIN 48. The Company recognizes interest and penalties related to uncertain tax positions as a component of income taxes. For the three and nine months ended September 30, 2008 and 2007, the Company had no interest or penalties.

Concentration of Credit Risk—The Company sells its products to large communications companies, as well as emerging communications carriers. Credit is extended based on an evaluation of the customer’s financial condition, and collateral is generally not required. The Company also evaluates its credit customers for potential credit losses. The accounts receivable balances at September 30, 2008 and December 31, 2007 are primarily due from the major customers indicated below.

For the three and nine months ended September 30, 2008 and 2007, the Company had two customers, Time Warner and the Time Warner Affiliate, that individually accounted for more than 10% of the Company's total revenues for each respective period. At September 30, 2008, the Company had three customers, two of which were Time Warner and the Time Warner Affiliate, that individually accounted for more than 10% of the net accounts receivable balance and in aggregate totaled $86,000. At December 31, 2007, the Company had three customers that individually accounted for more than 10% of the net accounts receivable balance and in aggregate totaled $94,000.

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

Segment Information—The Company has adopted Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information (“SFAS 131”). The Company currently operates in one business segment providing solutions for streamlining and improving transaction management of traditional voice services as well as services delivered via Internet Protocol ("IP") to customers primarily in the United States. The Company is not organized by market and does not operate any material separate lines of business. A single management team reports to the chief operating decision maker who comprehensively manages the Company as one business. Accordingly, pursuant to SFAS 131, the Company does not accumulate discrete financial information with respect to separate lines of business and does not have separately reportable segments.

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PRIMAL SOLUTIONS, INC.

Notes to the Condensed Unaudited Consolidated Financial Statements

Net Income (Loss) Per Share—The Company has computed net income (loss) per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). Basic earnings per share was computed by dividing net income (loss) by the weighted-average number of common shares outstanding for the period. Diluted earnings per share was computed by dividing the adjusted net income (loss) by the sum of the weighted-average number of common shares outstanding and any dilutive potential common shares for the period. The adjusted net income (loss) for the diluted earnings per share calculation equals net income (loss) plus any interest expense related to dilutive convertible debt held by Company for the period. The following table represents the computation of basic and diluted loss per common share for the periods presented:

	For the three months ended September 30,						For the nine months ended September 30,
	2008			2007			2008		2007

Net (loss) income	$	(14,000	)	$	(46,000	)	$	823,000	$	(274,000	)
PLUS: Interest on convertible debt		—			—			297,000		—
Net (loss) income and assumed conversions	$	(14,000	)	$	(46,000	)	$	1,120,000	$	(274,000	)

Weighted-average shares – basic		1,096,676			1,096,676			1,096,676		1,096,676
Dilutive effect of stock options		—			—			7,508		—
Dilutive effect of warrants		—			—			—		—
Dilutive effect of convertible debt		—			—			428,573		—
Weighted-average shares – diluted		1,096,676			1,096,676			1,532,733		1,096,676

Net (loss) income per share – basic	$	(0.01	)	$	(0.04	)	$	0.75	$	(0.25	)
Net (loss) income per share – diluted	$	(0.01	)	$	(0.04	)	$	0.73	$	(0.25	)

Options and warrants to purchase 971,570 and 662,754 shares of common stock were outstanding during the third quarter of 2008 and 2007, respectively, but were not included in the computation of diluted earnings per share because the respective exercise price was greater than the average market price of the common shares. Additionally, options and warrants to purchase 7,063 and 262,860 shares of common stock were outstanding during the third quarter of 2008 and 2007, respectively, but were not included in the computation of diluted earnings per share because these options and warrants were deemed to be contingently issuable shares whereby the necessary condition had not been met at the end of the respective quarter. For the period ended September 30, 2008 and 2007, options and warrants to purchase 9,258 and 132,283 shares of common stock, respectively, were outstanding at quarter-end and were excluded from the diluted EPS computation as they were considered anti-dilutive. During the three and nine months ended September 30, 2008 and 2007, the Company held convertible debt that could be converted into 428,573 shares of common stock. These shares were excluded from the diluted EPS calculation for the three months ended September 30, 2008 as well as the three and nine months ended September 30, 2007 due to their antidilutive effect.

GOODWILL

The goodwill relates to the Company's legacy software platform. The Company has expanded its capabilities beyond this legacy software solution, but continues to generate revenue from this reporting unit. During the third quarter of 2008, the Company conducted its annual impairment review of its goodwill. With the settlement of the outstanding debt obligation with CyberSource Corporation ("CyberSource") (see Note 4) which was tied to this reporting unit, the Company determined that the carrying amount this reporting unit exceeded the estimated fair value which was based on the income approach discussed under SFAS 157. Under the second step of the impairment test under SFAS 142, the Company calculated the implied fair value of goodwill and established that the carrying amount of goodwill of $593,000 exceeded the implied fair value. The excess of the carrying amount over the implied fair value totaled $435,000 and was recorded as impairment loss in the consolidated Statement of Operations on a separate line item before "Operating Income".

4.	BORROWINGS

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

	September 30, 2008			December 31, 2007
CIT Group Inc. (formerly CITI Capital)	$	18,000		$	37,000
AICCO		5,000			—
CyberSource Corporation (formerly, Authorize.Net Holdings, Inc.)		—			982,000
Spieker Properties, L.P.		—			200,000
Special Situations Funds		—			119,000
Total borrowings		23,000			1,338,000
Less: current portion		(23,000	)		(632,000	)
Noncurrent portion	$	—		$	706,000

Note Payable to CIT Group Inc. (formerly CITI Capital)

In June 2005, the Company entered into a 48-month equipment lease agreement with CITI Capital Technology Finance, Inc. to finance the purchase of equipment. The total amount financed under this agreement was $96,000 with monthly payments including interest of $2,000 through May 2009. The effective interest rate was 8.25%. In 2007, the lease was transferred to CIT Group, Inc. At September 30, 2008, the outstanding balance was $18,000. This lease is accounted for as a capital lease.

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PRIMAL SOLUTIONS, INC.

Notes to the Condensed Unaudited Consolidated Financial Statements

Note Payable to AICCO

During the first quarter of 2008, the Company entered into a premium finance agreement with AICCO, Inc. to finance a portion of the Company's annual Director & Officer and EPL insurance policies. The total amount financed was $38,000 at an interest rate of 8.75%. The Company is obligated to make eight monthly principal and interest payments of $5,000 from March 2008 through October 2008. At September 30, 2008, the outstanding balance on this note was $5,000.

Note Payable to CyberSource Corporation

In 1999, the Company executed a secured promissory note in the amount of $2.2 million, originally payable to Corsair Communications, Inc. ("Corsair") as consideration for the assets acquired by the Company from Corsair. As of December 31, 2007, the current holder of this secured note was CyberSource, the successor by way of merger to Authorize.Net Holdings, Inc. (formerly Lightbridge, Inc., which succeeded to Corsair by way of merger). The note held a security interest in substantially all the property and equipment originally acquired from Corsair. This obligation was subordinated to the $1.5 million secured convertible notes issued to Special Situations Private Equity Fund, L.P., Special Situations Technology Fund, L.P., Special Situations Technology Fund II, L.P., Special Situations Fund III, L.P., and Special Situations Fund III QP, L.P. (collectively “SSF”) in connection with the Company's private placement in March 2006 (see Note 5).

Since 2001, the terms of this secured note have been amended seven separate times, and the note was fully settled in April 2008. Under the amended terms effective in January 2007, the monthly interest-only payments of $7,000 continued from January 2007 through June 2007. Beginning in July 2007, principal and interest payments of $22,000 were due monthly through November 2011 with a final payment of $20,000 in December 2011. The interest rate remained at 8.0%. At the end of the first quarter of 2008, the principal and interest payments of $22,000 per month for July 2007 through March 2008 remained outstanding.

On April 15, 2008, the Company entered into a settlement agreement with CyberSource related to the outstanding note of $982,000 and paid $100,000 to CyberSource in full settlement of this debt obligation, including accrued interest. The Company recognized a gain of $945,000 for this debt extinguishment in the second quarter of 2008.

Note Payable to Spieker Properties, L.P.

In June 2001, the Company executed an unsecured note in the amount of $200,000, payable to Spieker Properties, L.P. (“Spieker”), its then landlord. This obligation was a result of an amendment to the Company's lease agreement. Interest accrued at an interest rate of 9.0% and compounded monthly. The principal and accrued interest balance was due on April 30, 2007, the end of the lease term. During 2007, the office building was sold to a new owner and in May 2007, the Company moved its corporate office to another office building that is not owned or managed by the same landlord.

In February 2008, the Company agreed to and remitted a one-time payment of $200,000 as final settlement of the Company's total obligation of $337,000, which included accrued interest, to its former landlord. The Company recognized a gain of $137,000 for this debt extinguishment in the first quarter of 2008.

Notes Payable to Special Situations Funds

Pursuant to the registration rights agreement relating to the private placement in March 2006 (see Note 5), the Company owed liquidated damages because the registration statement was not declared effective by the agreed-upon date. In April 2007, the Company executed five unsecured adjustable promissory notes to SSF in the aggregate principal amount of $119,000 to cover these liquidated damages. The original issuance date of these promissory notes was December 22, 2006, the date the registration statement was declared effective. On April 1, 2008, the Company paid the outstanding aggregate principal balance and accrued interest related to the five unsecured promissory notes in full.

5.	PRIVATE PLACEMENTS

In 2006, the Company completed two separate private placements, one in March 2006 and the other in April 2006 (collectively, the “2006 Private Placements”). The private placement in March 2006 involved $1.5 million in aggregate principal amount of its 5% Senior Secured Convertible Notes (the “Notes”) along with warrants to purchase 214,288 shares of the Company's common stock (the “March 2006 Private Placement”) to SSF. As part of the private placement in April 2006 (the “April 2006 Private Placement”), the Company received $175,000 in exchange for 50,001 shares of common stock and 25,001 warrants to purchase shares of the Company's common stock, issued to two accredited investors, one of which is currently a member of the Company's Board of Directors (“Director Investor”).

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PRIMAL SOLUTIONS, INC.

Notes to the Condensed Unaudited Consolidated Financial Statements

The Notes were originally due March 31, 2008 and are secured by a first priority security interest in all of the Company's assets. Upon election by SSF, at any time, any or the entire outstanding principal and any accrued but unpaid interest on the Notes may be converted into shares of the Company's common stock at a conversion price of $3.50 per share. The warrants issued in the 2006 Private Placements expire March 31, 2011 and are exercisable for cash at an exercise price of $5.25 per share.

Effective March 31, 2008, the Company amended the Notes, modifying the payment terms and extending the maturity date to December 31, 2009 from March 31, 2008. Pursuant to the amended terms of the Notes, the interest rate changed to 10% from 5% per annum. The Company is required to make quarterly principal and interest payments, beginning in June 2008. Additionally, pursuant to a related Amendment Letter Agreement dated March 31, 2008 between the Company and SSF, on April 1, 2008, the Company paid the accrued interest of $19,000 on the original Notes for the quarter ended March 31, 2008.

Pursuant to the separate registration rights agreements entered into as part of the March 2006 Private Placement and the April 2006 Private Placement, the Company filed a registration statement, registering for the resale of the shares of common stock and the shares of common stock issuable upon conversion of the Notes and exercise of the warrants on May 1, 2006. The registration statement was declared effective on December 22, 2006. Because the registration statement was not declared effective by the agreed-upon date of July 16, 2006, the Company owed aggregate liquidated damages of $123,000 to SSF and the non-director investor of the April 2006 Private Placement. In April 2007, the Company executed five unsecured adjustable promissory notes to SSF in the aggregate principal amount of $119,000 to cover these liquidated damages payable to SSF. The Company paid $4,000 in liquidated damages plus accrued interest payable to the non-director investor in October 2007. On April 1, 2008, the Company paid the aggregate outstanding principal and accrued interest of $126,000 related to these five unsecured promissory notes payable to SSF in full. In addition, the Company is required to maintain and update the registration statement as necessary in order to keep it current so that these shares of common stock are freely tradable. If the Company does not keep such registration statement current, the Company may be required to pay additional liquidated damages to SSF and the non-director investor.

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

In 2006, under the provisions of SFAS 133 and Emerging Issues Task Force Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock (“EITF 00-19”), the Company accounted for the warrants issued to SSF and the non-director investor as freestanding derivative instruments. The Company calculated the fair value of each of the issued warrants on the date of issuance using the Black-Scholes model. The warrants issued as part of the March 2006 Private Placement were valued at $995,000 and the warrants issued as part of the April 2006 Private Placement were valued at $24,000. The Company recognized a liability of $1.0 million with an offsetting reduction paid-in capital of $24,000 and an offsetting reduction of $995,000 to the carrying amount of the Notes. The resulting debt discount of $995,000 was amortized over the original life of the Notes, using the effective interest method. Additionally, the net change in the fair value of the warrants during the fiscal year ended December 31, 2006 was recorded as a net gain of $4,000.

Pursuant to Emerging Issues Task Force Issue No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios (“EITF 98-5”) and Emerging Issues Task Force Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments (“EITF 00-27”), the Company calculated an effective conversion price of $1.05 per share for the embedded conversion option on the date issuance. Because the market value of the common stock was higher than the effective conversion price on the date of issuance, the conversion feature was considered to be a beneficial conversion feature. The Company recognized a beneficial conversion feature as a reduction to the net carrying amount of the Notes and an addition to paid-in capital of $505,000, which was based on the effective conversion rate, capped at the net carrying amount of the Notes. The discount resulting from this allocation to the beneficial conversion feature was being amortized over the life of the Notes, using the effective interest method. For the nine months ended September 30, 2008 and 2007, the amortization of the debt discount totaled $79,000 and $194,000, respectively, and was recorded as interest expense.

On January 1, 2007, the Company adopted EITF 00-19-2 which clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. Pursuant to EITF 00-19-2, the Company determined that the warrants issued in the March 2006 Private Placement and the warrants issued to the non-director investor in the April 2006 Private Placement qualified for equity classification under EITF 00-19 and should be accounted for under the provisions of APB 14. Additionally, the Company determined that any additional liquidated damages payments under the registration payment arrangement were not probable. The Company recorded a cumulative-effect adjustment resulting only from the reclassification of these warrants to equity, which included the reversal of the current fair value of the warrant liability of $1.0 million, an offsetting credit to additional paid-in capital for $614,000 and debt discount of $340,000 as well as a credit of $60,000 to opening retained earnings. The credit to additional paid-in capital equals the amount that the Company would have allocated to the warrants based on the relative fair value on the date of issuance under the provisions of APB 14. The debt discount of $417,000 upon adoption of EITF 00-19-2 continues to be amortized over the original life of the Notes, using the effective interest method. For the nine months ended September 30, 2008 and 2007, the amortization of the debt discount totaled $98,000 and $231,000, respectively, and was recorded as interest expense. The adoption of EITF 00-19-2 did not impact the accounting treatment of the beneficial conversion feature.

Pursuant to Emerging Issues Task Force Issue No. 96-19, Debtor's Accounting for a Modification or Exchange of Debt Instruments ("EITF 96-19"), the Company determined that the amended terms of the Notes effective March 31, 2008 did not meet any of the three conditions that would require the modification to be treated the same way as a debt extinguishment.

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PRIMAL SOLUTIONS, INC.

Notes to the Condensed Unaudited Consolidated Financial Statements

6.	COMMITMENTS AND CONTINGENCIES

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

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

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

7.	STOCK-BASED COMPENSATION

Stock Options

In February 2001, the Board of Directors approved the Company's 2001 Flexible Incentive Plan (the “2001 FIP”) and authorized approximately 112,555 shares to be reserved for issuance pursuant to the 2001 FIP. In October 2001, the Board of Directors approved the Company's 2001 FIP, as amended. Under the terms of the 2001 FIP, as amended, employees and directors are eligible to receive a grant of incentive stock options to purchase shares of the Company's common stock at their fair market value on the date of grant. Options granted under the 2001 FIP vest at the minimum rate of 20% per year from the grant date, but could vest at an accelerated rate. At September 30, 2008 and December 31, 2007, options to purchase 77,977 and 77,378 shares, respectively, of common stock were exercisable under the 2001 FIP.

The Company's stockholders approved the adoption of Primal’s 2004 Flexible Incentive Plan (the “2004 FIP”) at the Company's 2004 Annual Meeting of Stockholders, held November 12, 2004. Pursuant to the 2004 FIP, the Company may issue up to an aggregate of 155,745 shares of the Company's common stock, $0.01 par value per share. For optionees that have been with the Company for less than one year, options granted under the 2004 FIP vest one-third on the one-year anniversary of the grant date with the remaining two-thirds vesting in four equal semi-annual installments after the one-year anniversary date. For all other optionees, options granted under the 2004 FIP vest in six equal semi-annual installments commencing on the six-month anniversary of the grant date. At September 30, 2008 and December 31, 2007, options to purchase 102,989 and 83,014 shares, respectively, of common stock were exercisable under the 2004 FIP.

In accordance with the provisions of SFAS 123R, the Company recognized stock-based compensation expense related to the 2001 FIP and 2004 FIP totaling $10,000 and $35,000 for the three months ended September 30, 2008 and 2007, respectively. The Company recognized stock-based compensation expense of $47,000 and $107,000 for the nine months ended September 30, 2008 and 2007, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model. The expected volatility is based on historical volatility of the Company's stock. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of options granted is based on historical data. The following assumptions were used for the options granted during the nine months ended September 30, 2008 and 2007:

	For the nine months ended September 30,
	2008	2007
Expected volatility	163.46% - 192.17%	129.26% - 201.43%
Weighted-average volatility	175.12%	188.82%
Risk-free rate	2.96% - 3.78%	4.47% - 4.76%
Expected term	5.41 – 10.00 years	1.11 – 7.14 years
Expected dividend	0%	0%

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PRIMAL SOLUTIONS, INC.

Notes to the Condensed Unaudited Consolidated Financial Statements

A summary of option activity under the 2001 FIP and the 2004 FIP as of September 30, 2008, and changes during the nine months ended September 30, 2008 are presented below (restated to reflect the 1-for-35 reverse stock split effective June 19, 2008):

	Number of Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding as of January 1, 2008		210,333		$	4.13
Granted		19,005			1.40
Exercised		—			—
Forfeited or expired		(17,242	)		3.76
Outstanding as of September 30, 2008		212,096		$	3.92		6.26	$	—
Exercisable as of September 30, 2008		180,966		$	4.20		5.83	$	—

The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2008 and 2007 was $1.35 and $2.36, respectively. No options were exercised during the three and nine months ended September 30, 2008 and 2007.

A summary of the status of the Company's nonvested shares as of September 30, 2008, and changes during the nine months ended September 30, 2008 are presented below (restated to reflect the 1-for-35 reverse stock split effective June 19, 2008):

	Number of Shares			Weighted-Average Grant Date Fair Value
Nonvested as of January 1, 2008		49,941		$	3.27
Granted		19,005			1.35
Vested		(31,430	)		3.26
Forfeited		(6,386	)		2.69
Nonvested as of September 30, 2008		31,130		$	2.23

As of September 30, 2008, there was $25,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the 2001 FIP and the 2004 FIP. This cost is expected to be recognized over a period of 2.3 years.

Performance Stock Options

In August 2006, the Board of Directors approved and adopted the Company's 2006 Stock Option Plan (the "2006 SOP”), as recommended by the Board’s Compensation Committee. The purpose of the 2006 SOP is to assist the Company in attracting and retaining selected individuals to serve as officers and employees of the Company who contribute to the Company's success and to achieve objectives which inure to the benefit of the stockholders of the Company through the additional incentive inherent in the ownership of the Company's common stock. The 2006 SOP is administered by the Board’s Compensation Committee, which determines to whom options are granted, the number of options to be granted, the option price and the other terms (including vesting) of each option granted under the 2006 SOP. Options granted under the 2006 SOP are nonqualified stock options. There have been reserved 228,572 shares for issuance upon exercise of options granted pursuant to the 2006 SOP. The 2006 SOP will expire in July 2016.

All options granted under the 2006 SOP from 2006 through 2007 originally were to vest fully upon the sale of all or substantially all of the assets of the Company, the acquisition by any person or group of more than 50% beneficial ownership of the Company, or the merger, consolidation or other reorganization of the Company resulting in a more than 50% change in ownership of the Company (the “Change-in-control Performance Condition”).

On June 19, 2008, the Board of Directors approved an amendment to replace the Change-in-control Performance Condition with a new vesting schedule for 196,723 of these outstanding options that the Company had previously granted under the 2006 SOP in August 2006 and May 2007. These options were also amended to extend the term from five to 10 years from the original grant date. The other terms of the options remained unchanged. For the amended options originally granted in August 2006, 61% of the total grant vested on the amendment date with the balance vesting over the next six quarters. For the amended options originally granted in May 2007, 36% of the total grant vested on the amendment date with the balance vesting over the next nine quarters.

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PRIMAL SOLUTIONS, INC.

Notes to the Condensed Unaudited Consolidated Financial Statements

At September 30, 2008, options to purchase 135,101 shares of common stock were exercisable under the 2006 SOP. At December 31, 2007, there were no options to purchase shares of common stock exercisable under the 2006 SOP.

In accordance with the provisions of SFAS 123R, the Company recognized stock-based compensation expense related to the 2006 SOP totaling $11,000 and $253,000 for the three and nine months ended September 30, 2008, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model. For the amended options, the fair value was estimated on the date of the modification using the Black-Scholes option-pricing model. The expected volatility is based on historical volatility of the Company's stock. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected term of options granted is based on historical data. The following assumptions were used for the options granted or modified during the nine months ended September 30, 2008 and 2007:

	For the nine months ended September 30,
	2008	2007
Expected volatility	187.57%	175.96%
Weighted-average volatility	187.57%	175.96%
Risk-free rate	3.89% - 4.22%	4.56%
Expected term	8.14 – 8.89 years	5.00 years
Expected dividend	0%	0%

A summary of option activity under the 2006 SOP as of September 30, 2008, and changes during the nine months ended September 30, 2008 are presented below (restated to reflect the 1-for-35 reverse stock split effective June 19, 2008):

	Number of Shares		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding as of January 1, 2008		203,786	$	2.51
Granted		—		—
Exercised		—		—
Forfeited or expired		—		—
Outstanding as of September 30, 2008		203,786	$	2.51		7.80	$	—
Exercisable as of September 30, 2008		135,101	$	2.45		7.93	$	—

No options were granted during the nine months ended September 30, 2008. The weighted-average grant-date fair value of options granted during the nine months ended September 30, 2007 was $1.39. No options were exercised during the three and nine months ended September 30, 2008 and 2007.

	Number of Shares			Weighted-Average Grant Date Fair Value
Nonvested as of January 1, 2008		203,786		$	1.48
Granted		—			—
Vested		(135,101	)		1.39
Forfeited		—			—
Nonvested as of September 30, 2008		68,685		$	1.66

For any option that was not modified on June 19, 2008, the Company determines if it is probable that the Change-in-control Performance Condition will be achieved. Until this performance condition is deemed to be probable, the compensation cost of these option grants is included in the total unrecognized compensation cost. As of September 30, 2008, there was $28,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements tied to a performance condition. As of September 30, 2008, there was $20,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements under the modified vesting schedule. This cost is expected to be recognized over a period of 1.67 years.

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PRIMAL SOLUTIONS, INC.

Notes to the Condensed Unaudited Consolidated Financial Statements

Warrants

In September 2008, the Company issued to an outside consultant 1,750 warrants to purchase common stock at a price of $1.30 per share. On the date of issuance, 58% of the total grant vested immediately with the balance ratably vesting over the following 10 months. The Company recognized stock-based compensation expense of $2,000 during the three and nine months ended September 30, 2008 related to these warrants. During the nine months ended September 30, 2007, the Company did not issue any warrants.

			Nine months ended September 30, 2008
	Expected volatility		184.97%
	Weighted-average volatility		184.97%
	Risk-free rate		3.71%
	Expected term		4.70 years
	Expected dividend		0%

A summary of compensation-based warrant activity as of September 30, 2008, and changes during the nine months ended September 30, 2008 are presented below (restated to reflect the 1-for-35 reverse stock split effective June 19, 2008):

	Number of Shares			Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding as of January 1, 2008		112,212		$	6.45
Granted		1,750			—
Exercised		—			—
Forfeited or expired		(34,286	)		9.80
Outstanding as of September 30, 2008		79,676		$	4.87		4.49	$	—
Exercisable as of September 30, 2008		79,019		$	4.94		4.53	$	—

The weighted-average grant-date fair value of warrants granted during the nine months ended September 30, 2008 was $1.30. No warrants were granted during the nine months ended September 30, 2007. No warrants were exercised during the three and nine months ended September 30, 2008 and 2007.

	Number of Shares			Weighted-Average Grant Date Fair Value
Nonvested as of January 1, 2008		34,286		$	9.80
Granted		1,750			1.30
Vested		(1,093	)		1.30
Forfeited		(34,286	)		9.80
Nonvested as of September 30, 2008		657		$	1.30

As of September 30, 2008, there was $1,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements under the modified vesting schedule. This cost is expected to be recognized over a period of nine months.

8.	SUBSEQUENT EVENT

In November 2008, the Company and Time Warner entered into the Transition Agreement which stipulates that the Company will continue to provide services provided for under the Master Agreement for a limited time. Pursuant to the Master Agreement, the Company provided software and services to help Time Warner manage its digital phone services. The Transition Agreement provides written notice of Time Warner's intent to terminate all services covered under the Master Agreement on February 28, 2009. Pursuant to the terms of the Transition Agreement, the Company will provide transition assistance from the Company’s software platform to Time Warner's alternative product and platform through February 28, 2009. Additionally, the Company will be responsible for the decommission and removal of the hardware owned by Time Warner. The Master Agreement also covers the Time Warner Affiliate. The Company and the Time Warner Affiliate are currently in discussions concerning the terms and duration of any services that may be provided by the Company to the Time Warner Affiliate under a new stand-alone contract. Total revenue from Time Warner for the three and nine months ended September 30, 2008 was $1.3 million and $3.5 million, respectively. Total revenue from the Time Warner Affiliate for the three and nine months ended September 30, 2008 was $288,000 and $797,000, respectively. Management does not expect the Transition Agreement and the new stand-alone contract with the Time Warner Affiliate to provide sufficient revenues to support the Company’s continuing operations. In light of these developments and the Company’s position in the current marketplace, management has recommended to the Board of Directors that the Company commence an orderly wind-down of its continuing operations. The Company reviewed various alternatives that might be available to the Company to maximize the Company's value, including continuing current operations. After reviewing such alternatives, the Board of Directors has determined to commence wind-down of the Company. As part of the wind-down, the Company, through a special committee consisting of independent directors and led by the lead director, is currently in negotiations with certain members of management regarding an arrangement whereby the Company would transfer certain customer contracts and other assets, as well as license its technology to a newly formed company owned and operated by these members of management. Such arrangement is expected to be completed, if at all, in January 2009. Whether or not such arrangement is consummated, given the Company’s outstanding senior secured convertible debt obligation in the aggregate amount of $1.3 million, the Company believes it is unlikely there will be any remaining value available for distribution to the holders of the Company's common stock following completion of the Company’s wind-down.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

OVERVIEW

In November 2008, the Company executed a transition agreement (the "Transition Agreement") with Time Warner Cable Inc. ("TWCI"). TWCI is the assignee of Time Warner Cable Information Services (Maine) LLC (collectively, "Time Warner"), with whom the Company has a contractual relationship under the original Master Software and License Agreement, as amended (the "Master Agreement"). Pursuant to the Master Agreement, the Company provided software and services to help Time Warner manage its digital phone services. The Transition Agreement provides written notice of Time Warner's intent to terminate all services covered under the Master Agreement on February 28, 2009. Pursuant to the terms of the Transition Agreement, the Company will provide transition assistance from the Company’s software platform to Time Warner's alternative product and platform through February 28, 2009. Additionally, the Company will be responsible for the decommission and removal of the hardware owned by Time Warner. The Master Agreement also covers an affiliate of Time Warner (the "Time Warner Affiliate"). The Company and the Time Warner Affiliate are currently in discussions concerning the terms and duration of any services that may be provided by the Company to the Time Warner Affiliate under a new stand-alone contract. Total revenue from Time Warner for the three and nine months ended September 30, 2008 was $1.3 million and $3.5 million, respectively. Total revenue from the Time Warner Affiliate for the three and nine months ended September 30, 2008 was $288,000 and $797,000, respectively. Management does not expect the Transition Agreement and the new stand-alone contract with the Time Warner Affiliate to provide sufficient revenues to support the Company’s continuing operations.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

	Three months ended September 30,						Increase/(Decrease)						Nine months ended September 30,						Increase/(Decrease)
	2008			2007			$			%			2008			2007			$			%

Net revenue	$	1,680,000		$	1,541,000		$	139,000			9	%	$	4,817,000		$	4,760,000		$	57,000			(1	)%

Cost of revenue		355,000			440,000			(85,000	)		(19	)%		1,057,000			1,328,000			(271,000	)		(20	)%
Research and development		395,000			363,000			32,000			9	%		1,298,000			1,108,000			190,000			17	%
Selling, general & administrative		474,000			560,000			(86,000	)		(15	)%		1,863,000			1,947,000			(84,000	)		(4	)%
Goodwill impairment loss		435,000			—			435,000			100	%		435,000			—			435,000			100	%
Total costs		1,659,000			1,363,000			296,000			22	%		4,653,000			4,383,000			270,000			6	%

Operating income		21,000			178,000			(157,000	)		(88	)%		164,000			377,000			(213,000	)		(56	)%
Gain from debt extinguishment		—			—			—			—			1,082,000			—			1,082,000			100	%
Interest and other expenses, net		(35,000	)		(224,000	)		(189,000	)		(84	)%		(420,000	)		(648,000	)		(228,000	)		(35	)%
(Loss) income before income tax		(14,000	)		(46,000	)		(32,000	)		(70	)%		826,000			(271,000	)		1,097,000			405	%
Income tax provision		—			—			—			—			3,000			3,000			—			—
Net (loss) income	$	(14,000	)	$	(46,000	)	$	(32,000	)		(70	)%	$	823,000		$	(274,000	)	$	1,097,000			400	%

Supplemental Information
Stock-based compensation	$	23,000		$	35,000		$	(12,000	)		(34	)%	$	311,000		$	107,000		$	204,000			191	%

REVENUE

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

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Total revenues of $1,680,000 for the three months ended September 30, 2008 increased by $139,000 compared to $1,541,000 for the same period in 2007. There was an increase of $251,000 in recurring subscription fees as the subscriber base of our customers increased for the quarter ended September 30, 2008 when compared to the same period in 2007. This was offset with the decrease in the two other sources of revenue. Total revenue from our current largest customer, Time Warner, represented approximately 74.5% and 72.2%, respectively, of total revenue for the three months ended September 30, 2008 and 2007. Total revenues for the nine months ended September 30, 2008 were $4.82 million, an increase of $57,000, or 3%, from $4.76 million for the same period in 2007. There was an increase of $752,000 in the recurring subscription fees as the subscriber base of our customers increased for the nine months ended September 30, 2008 when compared to the same period in 2007. This was offset with the decrease in the two other sources of revenue. Total revenue from Time Warner represented approximately 73.2% and 64.9%, respectively, of total revenue for the nine months ended September 30, 2008 and 2007.

Subscription Revenue

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

For the three months ended September 30, 2008, subscription revenue was $1.4 million, 85% of total revenue, an increase of $251,000 from $1.2 million, 76% of total revenue, for the same period in 2007. The increase was primarily the result of an increase in subscriber count base from our existing customers of approximately 43% for the quarter ended September 30, 2008, compared to the quarter ended September 30, 2007.

For the nine months ended September 30, 2008, subscription revenue was $4.1 million, 85% of total revenue, an increase of $752,000 from $3.3 million, 70% of total revenue, for the same period in 2007. The increase was primarily the result of an increase in subscriber count base from our existing customers of approximately 43% for the nine months ended September 30, 2008, compared to nine months ended September 30, 2007.

Upfront Software License and Related Maintenance Revenue

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

For the three and nine months ended September 30, 2008, upfront software license and related maintenance revenue represented 6% and 7%, respectively, of total revenue, compared to 9% and 12%, respectively, of total revenue for the same period in 2007. This decrease was due to the growing contribution by subscription-based customers to total revenue, the nonrenewal of legacy maintenance agreements during 2007, and the absence of any new upfront license fees during the three and nine months ended September 30, 2008. The Company expects to continue to support existing customers but will not actively seek new sales contracts under this upfront software license pricing model.

Professional Services and Other Revenue

Professional services revenue is comprised of fees associated with implementation services, consulting, customization projects as well as training. Professional services revenue is nonrecurring in nature and can fluctuate with the volume of new customer sales as well as customization projects of existing customers.

Professional services revenue was $161,000, or 10% of total revenue, for the three months ended September 30, 2008, as compared to $176,000, or 11% of total revenue, for the same period last year. Professional services revenue was $380,000, or 8% of total revenue, for the nine months ended September 30, 2008, as compared to $698,000, or 15% of total revenue, for the same period last year. The overall decline was attributed to one-time implementation revenue recognized during the respective period in 2007 for the then-new customers as well as a decrease in total revenue contributed from customization projects for existing customers. The Company expects customization revenue to track at the current trend for the remainder of the year.

Other revenue consists of sales of third-party software and hardware which are not material in amount or frequency. There was no other revenue for the three months ended September 30, 2008 compared to $61,000 for the three months ended September 30, 2007. For the nine months ended September 30, 2008, other revenue was $15,000, compared to $141,000 for the nine months ended September 30, 2007.

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Concentration Risk

For the three months ended September 30, 2008, we had two customers, Time Warner and the Time Warner Affiliate, that individually accounted for more than 10% of our total revenue in the amount of $1.3 million and $288,000, respectively. In the same period last year, those two customers individually accounted for more than 10% of our total revenue in the amount of $1.1 million and $214,000, respectively. For the nine months ended September 30, 2008, those two customers individually accounted for more than 10% of our total revenue in the amount of $3.5 million and $797,000, respectively. In the same period last year, those two customers individually accounted for more than 10% of our total revenue in the amount of $3.1 million and $629,000, respectively.

EXPENSES

During the nine months ended September 30, 2008, we continued our focus on managing our costs in an effort to keep them in line with expected revenues. For the three months ended September 30, 2008 and 2007, including the non-cash stock-based compensation cost of $23,000 and $35,000, respectively, the Company incurred total operating expenses of $1,224,000 and $1,363,000, respectively. For the nine months ended September 30, 2008 and 2007, including the noncash stock-based compensation cost of $311,000 and $107,000, respectively, the Company incurred total operating expenses of $4,218,000 and $4,383,000, respectively. As a result of cost-reduction measures taken in 2007, we experienced a 19% reduction in overall headcount for the nine months ended September 30, 2008 when compared to the same period in 2007. Additionally, in connection with the reverse stock split and the stock option amendment in June 2008, there was an increase during the second quarter of 2008 in legal and other professional costs. We also incurred noncash stock-based compensation expense of $242,000 pursuant to the modified terms of stock option amendment in June 2008. We recognized a gain of $1.1 million resulting from the extinguishment of the CyberSource Note in April 2008 and the Spieker Obligation in February 2008.

Cost of Revenues

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

The cost of revenue decreased $85,000 to $355,000, or 21% of total revenue, for the three months ended September 30, 2008, as compared to $440,000, or 29% of total revenue, for the three months ended September 30, 2007. For the nine months ended September 30, 2008, cost of revenue was $1.1 million, or 22% of total revenue, a decrease of $271,000 from $1.3 million, or 28% of total revenue, for the nine months ended September 30, 2007. The decrease for both periods was a direct result of the cross-product training program for our technical staff that began in 2006. The cross-training allows more flexibility to meet shifting customer and market demands around our products and services as well as overall efficiency of available labor resources.

Research and Development

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

Research and development expenses increased $32,000 to $395,000 for the three months ended September 30, 2008, as compared to $363,000 for the three months ended September 30, 2007. Total research and development expenses for the nine months ended September 30, 2008 increased $190,000 to $1.3 million from $1.1 million for the nine months ended September 30, 2007. The increase during both periods in 2008 over the previous year primarily resulted from increased labor costs connected to the Company's continued investment in our IPC platform and associated analytics capabilities which is part of our product roadmap, a key element to our growth strategy.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of public company related expenses, professional service fees, travel related costs as well as labor related expenses for executive, finance, administrative, sales, and marketing personnel. Selling, general and administrative expenses for the three months ended September 30, 2008 was $474,000, a decrease of $86,000 from $560,000 for the same period in 2007. For the nine months ended September 30, 2008, selling, general and administrative expenses were $84,000 lower than the same period in 2007 at $1.86 million compared to $1.94 million.

During the first half of 2008, the Company incurred higher legal and other professional costs related to the debt extinguishment and modification of three outstanding obligations, the reverse stock split, and the stock option amendment. Additionally, the Company recognized $206,000 of stock-based compensation costs connected to the stock option amendment during the second quarter of 2008 as well as $11,000 for stock options granted to the Board of Directors in January 2008. Marketing-related costs increased $8,000 and $31,000 for the three and nine months ended September 30, 2008, respectively, compared to the same period in 2007 as we focused on increasing the Company's visibility in the marketplace through sponsorship and attendance at industry tradeshows and conferences as well as revamping our website and circulating the Company's new quarterly electronic newsletter. These aggregate increases were offset with a 25% decrease in administrative headcount for the nine months ended September 30, 2008 compared to the same period in 2007.

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Goodwill Impairment Loss

At the end of the third quarter of 2008, the Company conducted its annual impairment review of its goodwill. The goodwill relates to the Company's legacy software platform. The Company has expanded its capabilities beyond this legacy software solution, but continues to generate revenue from this reporting unit. The Company determined that the carrying amount of this reporting unit exceeded the estimated fair value and accordingly, the Company recognized an impairment loss of $435,000 during the quarter ended September 30, 2008.

Gain from Debt Extinguishment

At the end of the first quarter of 2008, the Company held a junior secured note in the amount of $982,000, payable to CyberSource Corporation ("CyberSource"), the successor by way of merger to Authorize.Net Holdings, Inc. (formerly Lightbridge, Inc., which succeeded to Corsair by way of merger). The note held a security interest in substantially all the property and equipment originally acquired from Corsair. This obligation was subordinated to the $1.5 million secured convertible notes issued to Special Situations Fund III, QP, L.P. and four related funds (“SSF”) in connection with the Company's private placement in March 2006. Interest accrued at 8.0%. At the end of the first quarter of 2008, the principal and interest payments of $22,000 per month for July 2007 through March 2008 remained outstanding.

On April 15, 2008, the Company paid $100,000 to CyberSource in full settlement of this debt obligation, including accrued interest. For the quarter ended June 30, 2008, the Company recognized a gain of $945,000 for this debt extinguishment.

In 2007, the Company held an unsecured note in the amount of $200,000, payable to Spieker, its then landlord. This obligation was a result of an amendment to the Company's lease agreement. Interest accrued at an interest rate of 9.0% and compounded monthly. The principal and accrued interest balance was due on April 30, 2007, the end of the lease term. During 2007, the office building was sold to a new owner and in May 2007, the Company moved its corporate office to another office building that is not owned or managed by the same landlord. In February 2008, the Company agreed to and remitted a one-time payment of $200,000 as final settlement of the Company's total obligation of $337,000, which included accrued interest, to its former landlord. For the quarter ended March 31, 2008, the Company recognized a gain of $137,000 for this debt extinguishment.

Interest and Other Expense, Net

Interest and other expense generally consist of interest income, interest expense and any gain or loss on the sale or disposal of assets. Interest expense also includes the amortization of the debt discount resulting from the warrants issued in connection with the 2006 Private Placements, the amortization of the beneficial conversion feature, and the amortization of debt issuance costs.

For the three months ended September 30, 2008, interest and other expenses, net was $35,000, a decrease of $189,000, as compared to $224,000 for the three months ended September 30, 2007. The amortization charges related to the 2006 Private Placements ended on March 31, 2008, contributing to the decrease in the third quarter of 2008. The Company also recognized lower interest expense as a direct result of the debt extinguishment during the first half of 2008 and the paydown of outstanding obligations in December 2007 and in April 2008. This decrease was offset with a higher interest expense for the senior convertible debt based on the amended terms effective March 31, 2008.

For the nine months ended September 30, 2008, interest and other expenses, net was $420,000, a decrease of $228,000, as compared to $648,000 for the nine months ended September 30, 2008. The amortization charges related to the 2006 Private Placements ended on March 31, 2008, contributing $293,000 to the decrease in 2008 compared to a full nine months’ of amortization in 2007. The Company also recognized lower interest expense as a direct result of the debt extinguishment during the first half of and the paydown of outstanding obligations in December 2007 and in April 2008. This decrease was offset with a higher interest expense for the senior convertible debt based on the amended terms effective March 31, 2008. Additionally, during the second quarter of 2008, the Company recognized a non-cash loss of $104,000 for the write-off of fixed assets based on a recent physical count of assets on hand.

Income Tax Provision

The income tax provision for the three and nine months ended September 30, 2008 and 2007 consisted of the minimum state taxes for the related years.

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LIQUIDITY AND CAPITAL RESOURCES

	September 30,			December 31,			Increase/(Decrease)
	2008			2007			$			%
Cash and cash equivalents	$	606,000		$	524,000		$	82,000			15.6	%
Accounts receivable		139,000			137,000			2,000			1.5	%
Cash, cash equivalents and accounts receivable		745,000			661,000			84,000			12.7	%
Current assets		806,000			805,000			1,000			0.1	%

Accounts payable and accrued expenses		473,000			965,000			(492,000	)		(51.0	)%
Current portion notes payable		23,000			632,000			(609,000	)		(96.4	)%
Deferred revenue		180,000			172,000			8,000			4.7	%
Current portion of senior convertible debt, net of discount		695,000			1,323,000			(628,000	)		(47.5	)%
Current liabilities		1,371,000			3,092,000			(1,721,000	)		(55.7	)%
Noncurrent liabilities		748,000			764,000			(16,000	)		(2.1	)%

Working capital deficit		(565,000	)		(2,287,000	)		(1,722,000	)		(75.3	)%

Overview

Whether or not such arrangement is consummated, given the Company’s outstanding senior secured convertible debt obligation (the "Notes"), the Company believes it is unlikely there will be any remaining value available for distribution to the holders of the Company's common stock following completion of the Company’s wind-down. As of December 10, 2008, the outstanding balance for the Notes was $1.3 million of principal and $27,000 of accrued interest. As of September 30, 2008, the Company had a working capital deficit of $565,000. Historically, our sources of liquidity primarily have been cash from operations and financing activities. With the loss of Time Warner as a customer at the end of February 2009, we believe that existing cash balances along with cash generated from existing contracts will not be sufficient to support our current working capital requirements through the next twelve months. For the nine months ended September 30, 2008, Time Warner and the Time Warner Affiliate accounted for $3.5 million and $797,000, respectively, of total revenue. The Company must maintain adequate resources to continue to provide all services stipulated under the current contracts with existing customers. The Company believes that the net cash flow from the Transition Agreement through February 2009 and any other revenue contracts with existing customers, as well as any consideration for the arrangement currently in negotiations discussed above will not be sufficient to pay the Notes in full. Because the Notes are senior to the other obligations of the Company, the Company believes it is unlikely there will be any remaining value available for distribution to the holders of the Company's common stock following completion of the Company’s wind-down.

Cash and Accounts Receivable

Cash, cash equivalents and accounts receivable collectively increased by $84,000 at September 30, 2008 from $661,000 at December 31, 2007, primarily due to the $685,000 in cash provided by operations for the nine months ended September 30, 2008, offset by the significant paydown of outstanding debt obligations totaling $582,000 in 2008. Non-recurring payments against outstanding debt included the debt settlement of $300,000 related to the Spieker Obligation and the CyberSource Note and the paydown of the liquidated damages obligation of $119,000.

Liabilities

The overall decrease in liabilities from December 31, 2007 is mainly due to the paydown or settlement of three outstanding note obligations, totaling $1.3 million in outstanding principal on December 31, 2007.

Pursuant to the registration rights agreement relating to the private placement in March 2006, the Company owed liquidated damages because the registration statement had not been declared effective by the agreed-upon date. As of December 31, 2007, the five related unsecured adjustable promissory notes to SSF in the aggregate principal amount of $119,000 remained outstanding as a current liability. On April 1, 2008, we paid the outstanding aggregate principal balance plus the related accrued interest in full.

As of December 31, 2007, the outstanding principal balance of the note held by CyberSource was $982,000, with $330,000 classified as a current liability. On April 15, 2008, we entered into a settlement agreement with CyberSource and paid $100,000 in full settlement of the outstanding note.

As of December 31, 2007, the total outstanding principal and accrued interest balance related to the Spieker Obligation was $337,000 and was classified as a current liability. In February 2008, we paid $200,000 in full settlement of this outstanding obligation.

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Effective March 31, 2008, we amended the $1.5 million senior convertible notes payable to SSF, amending the payment terms and extending the maturity date to December 31, 2009 from March 31, 2008. Pursuant to the amended terms of the notes, the interest rate changed to 10% from 5% per annum, and we are required to make quarterly principal and interest payments, beginning in June 2008. The first two quarterly payments in the aggregate amount of $185,000 was paid in the third quarter of 2008. The senior convertible debt, net of discount, was reflected as a current liability at December 31, 2007. As of September 30, 2008, $695,000 of the total outstanding balance was classified as noncurrent, based on the amended payment terms.

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

Accounts payable and accrued expenses decreased by $492,000 to $473,000 at September 30, 2008 from $965,000 at December 31, 2007 largely due to disbursements of $527,000 against accrued wages made during the nine months ended September 30, 2008 as well as the timing of payments of outstanding invoices and other accruals. This was offset with the increase in accruals for legal and other professional costs connected to the reverse stock split during the second quarter of 2008.

Deferred revenue at September 30, 2008 increased slightly by $8,000, or 5%, to $180,000, as compared to $172,000 on December 31, 2007. Deferred revenue represents all invoice billings that have been collected from the customer but cannot yet be recognized as revenue, including maintenance renewals and nonrecurring services. The increase during the nine months ended September 30, 2008 is attributed to the timing of the payment of customer maintenance renewal agreements.

Cash Flows

Net cash provided by operating activities of $685,000 for the nine months ended September 30, 2008 resulted primarily from net income of $1.3 million that included non-cash expenses for stock-based compensation of $311,000, goodwill impairment loss of $435,000, non-cash expenses of $203,000 related to the 2006 Private Placements as well as the gain on debt extinguishment of $1.1 million. Net cash used by operating activities of $165,000 for the nine months ended September 30, 2007 resulted primarily from a net loss of $274,000 that included non-cash expenses for stock-based compensation of $107,000 and non-cash expenses of $497,000 related to the 2006 Private Placements, coupled with an increase in current assets and a decrease in current liabilities.

For the nine months ended September 30, 2008 and 2007, net cash used by investing activities totaled $21,000 and $22,000, respectively and was primarily due to the acquisition of capital equipment.

Net cash used in financing activities for the nine months ended September 30, 2008 was primarily due to the settlement of the Spieker Obligation and the CyberSource Note in the aggregate amount of $300,000 plus the paydown of the liquidated damages notes, totaling $119,000. Additionally, during the third quarter of 2008, the Company made the first two quarterly payments in the aggregate amount of $185,000, $111,000 of which was applied against the outstanding principal balance of the senior secured convertible debt obligation. The change from the net cash used in financing activities for the nine months ended September 30, 2007 was primarily due to the paydown of the First Regional Bank promissory note in the amount of $100,000 which was offset with the release of the restricted cash held as collateral plus the accrued interest. Also, repayments on remaining notes payable and capital lease obligations totaled $62,000 during the nine months ended September 30, 2007, as compared to $52,000 during the nine months ended September 30, 2008.

2006 Private Placements

In 2006, the Company completed two separate private placements, one in March 2006 and the other in April 2006 (collectively, the “2006 Private Placements”). The private placement in March 2006 involved $1.5 million in aggregate principal amount of its 5% Senior Secured Convertible Notes (the “Notes”) along with warrants to purchase 214,288 shares of the Company's common stock (the “March 2006 Private Placement”) to Special Situations Fund III, Q.P., L.P. and four related funds (“SSF”). As part of the private placement in April 2006 (the “April 2006 Private Placement”), the Company received $175,000 in exchange for 50,001 of common stock and 25,001 warrants to purchase shares of the Company's common stock, issued to two accredited investors, one of which is currently a member of the Company's Board of Directors (“Director Investor”).

Pursuant to the separate registration rights agreement entered into as part of the March 2006 Private Placement and the April 2006 Private Placement, the Company filed a registration statement, registering for the resale of the shares of common stock and the shares of common stock issuable upon conversion of the Notes and exercise of the warrants on May 1, 2006. The registration statement was declared effective on December 22, 2006. Because the registration statement was not declared effective by the agreed-upon date of July 16, 2006, the Company owed aggregate liquidated damages of $123,000 to SSF and the non-director investor of the April 2006 Private Placement. The Company paid $4,000 in liquidated damages plus accrued interest payable to the non-director investor in October 2007. On April 1, 2008, the Company paid the aggregate outstanding principal and accrued interest of $126,000 related to these five unsecured promissory notes in full. In addition, the Company is required to maintain and update the registration statement as necessary in order to keep it current so that these shares of common stock are freely tradable. If the Company does not keep such registration statement current, the Company may be required to pay additional liquidated damages to SSF and the non-director investor.

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[Back to Index]

RISK FACTORS

We have commenced wind-down of our continuing operations. Investing in our common stock involves a high degree of risk. You should carefully consider the material risk factors listed below and all other information contained in this Form 10-Q before making investment decisions with respect to our common stock. You should also keep these risk factors in mind when you read the forward-looking statements. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or that we currently deem immaterial, also may become important factors that affect us.

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

Risks Related to Our Business and Our Marketplace

We have commenced wind-down of our continuing operations and expect to cease operations in 2009.

In November 2008, the Company executed a transition agreement (the "Transition Agreement") with Time Warner Cable Inc. ("TWCI"). TWCI is the assignee of Time Warner Cable Information Services (Maine) LLC (collectively, "Time Warner"), with whom the Company has a contractual relationship under the original Master Software and License Agreement, as amended (the "Master Agreement"). The Transition Agreement provides written notice of Time Warner's intent to terminate all services covered under the Master Agreement on February 28, 2009. Pursuant to the terms of the Transition Agreement, the Company will provide transition assistance from the Company’s software platform to Time Warner's alternative product and platform through February 28, 2009. The Master Agreement also covers an affiliate of Time Warner (the "Time Warner Affiliate"). The Company and the Time Warner Affiliate are currently in discussions concerning the terms and duration of any services that may be provided by the Company to the Time Warner Affiliate under a new stand-alone contract. Management does not expect the Transition Agreement and this new stand-alone contract to provide sufficient revenues to support the Company’s continuing operations. Time Warner and the Time Warner Affiliate are the Company's two largest customers. Total revenue from Time Warner for the nine months ended September 30, 2008 and fiscal year ended December 31, 2007 was $3.5 million and $3.1 million, respectively. Total revenue from the Time Warner Affiliate for the nine months ended September 30, 2008 and the fiscal year ended December 31, 2007 was $797,000 and $629,000, respectively.

Special Situations Fund III QP, L.P., Special Situations Fund III, L.P., Special Situations Private Equity Fund, L.P., Special Situations Technology Fund, L.P. and Special Situations Fund II, L.P. (collectively "SSF") could accelerate payment of all principal and interest owed under the 10% Senior Secured Convertible Notes due December 31, 2009 (the "Notes") and foreclose on all of the Company's assets.

As of December 10, 2008, there is $1.3 million of principal and $27,000 of accrued interest outstanding under the Notes, which were amended effective March 31, 2008 to change the payment terms, increase the interest rate from 10% to 5% per annum and extend the maturity date. Pursuant to the amended terms of the Notes, we are required to make quarterly principal and interest payments which began on June 30, 2008. The last payment is due on December 31, 2009.

We do no expect to have sufficient cash to meet our credit obligations to SSF through 2009. In the event that we fail to pay any amount due under the Notes within five days of the scheduled payment dates, or we fail to make any required principal payment on indebtedness of $100,000 or more within 10 days of when due, SSF may elect to declare all unpaid principal and accrued interest under the Notes immediately due and payable. In the event SSF elects to accelerate payments under the Notes, we will not have sufficient cash to make such payments. The Notes are secured by a first priority security interest in all of the Company's assets and failure to make payments under the Notes when due would allow SSF to foreclose on all our assets, resulting in the likely loss of your investment.

The Company believes there is not likely to be any value available for distribution to you following completion of the Company's wind-down.

As of December 10, 2008, there is $1.3 million of principal and $27,000 of accrued interest outstanding under the Notes. As of September 30, 2008, the Company had a stockholders' deficit of $978,000. Because the Notes are a senior secured interest, outstanding amounts due under the Notes will be paid prior to any distribution to the shareholders. Management believes that cash from operations, including the Transition Agreement with Time Warner, will not be sufficient to put the Company in a position to pay the Notes in full. Accordingly, the Company believes it is unlikely there will be any remaining value available for distribution to you following completion of the Company's wind-down.

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We could face additional liability in the event we are unable to provide acceptable transition services in a reasonable timeframe from our software solution to our existing customer base.

Our existing customer contracts require us to provide uninterrupted service and transition assistance. In an effort to put Company in a position do so, management has offered retention agreements to key personnel to incent them to remain with the Company through the wind-down. In our current situation, it would be difficult to attract qualified replacements. If we are unable to retain sufficient personnel to transition existing customers from our software solution in accordance with our agreements, those customers could assert breach of contract claims against us. Management believes the Transaction will mitigate the liability, but there can be no assurance that the Transaction will be consummated in the near-term or at all, or that if consummated, the Transaction will eliminate the potential liability to customers.

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

Unauthorized use or misappropriation of our intellectual property could seriously harm our business. Copyrights and patents are important to the protection of our software, and our trademarks are important to the protection of our company and product name. These copyrights, patents and trademarks discourage unauthorized use of our software and our company and product names and provide us with a way to enforce our rights in the event that this unauthorized use occurs. Despite this protection, third parties may infringe upon our intellectual property rights, and we may be unable to detect this unauthorized use or effectively enforce our rights. Furthermore, the laws of certain countries in which we sell or license our products do not protect our software products and intellectual property rights to the same extent, as do the laws of the United States. In addition, any legal action that we may bring to protect our intellectual property rights could be expensive and could adversely impact our ability to provide transition services to customers and the likelihood of the consummation of the Transaction.

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

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

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

Third parties may claim that our current or future software solutions or technology infringe their proprietary rights. An infringement claim against us could be costly even if the claim is invalid, and could distract our management from the operation of our business. Furthermore, a judgment against us could require us to pay substantial damages and could also include an injunction or other court order that could prevent us from selling our outsourced software solutions. If we faced a claim relating to proprietary technology or information, we might seek to license technology or information, or develop our own, but we might not be able to do so. Our failure to obtain the necessary licenses or other rights or to develop non-infringing technology could prevent us from selling our outsourced software solutions and could adversely impact our ability to provide transition services to customers and the likelihood of the consummation of the Transaction.

Because we use open source software in some of our outsourced software solutions, we may incur expenses in defending claims that we did not abide by the open source software license. If we are not successful in defending against such claims, we may be subject to monetary damages or be required to remove the open source software from our solutions. Such events could adversely impact our ability to provide transition services to customers and the likelihood of the consummation of the Transaction.

Risks Related to Owning Our Stock

SSF is in a position to exercise substantial control over our wind-down and other affairs and may have interests that conflict with the interest of our other stockholders.

SSF currently owns 39% of our outstanding common stock, beneficially owns approximately 54% of our outstanding common stock and holds the Company's senior secured convertible debt obligation. Accordingly, SSF will be able to exercise a controlling influence over all matters requiring approval of our stockholders, including the election and removal of directors and approval of the Transaction (if any). Additionally, under the provisions of the Notes, SSF has the right to designate one person for election to our Board of Directors. At this time, SSF does not have a representative on our Board.

Because SSF holds the Notes, its interest in recouping the maximum amount due under the Notes may conflict with the interests of our other stockholders. For example, SSF may elect to foreclose on our assets under the terms of the Notes, which would leave no value in the Company for distribution to you following the wind-down.

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

A significant number of shares of our common stock are freely tradable. If any of our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall.

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

There was no market for our common stock prior to our initial distribution in 2001. Because of the limited trading market for our common stock, and because of the possible price volatility, you may not be able to sell your shares of common stock when you desire to do so. The inability to sell your shares in a rapidly declining market may substantially increase your risk of loss because of such illiquidity and because the price for our common stock may suffer greater declines because of its price volatility.

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

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

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

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

Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the Securities and Exchange Commission (“SEC”). Penny stocks generally are equity securities with a price of less than $5.00 per share. The penny stock rules require a broker-dealer, prior to a purchase or sale of a penny stock not otherwise exempt from the rules, to deliver to the customer a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules.

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Item 4T. Controls and Procedures

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

Our management, with the participation of our Chief Executive Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2008, the end of the period covered by this report. Based on this evaluation, our management has concluded that our disclosure controls and procedures were effective as of September 30, 2008.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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

PART II - OTHER INFORMATION

Item 6. Exhibits

Exhibit Number		Description of Document
2.1		Primal Solutions, Inc. Preliminary Distribution Agreement, dated July 31, 2000, by and among Avery Communications, Inc., a Delaware corporation, Primal Solutions, Inc., a Delaware corporation, John Faltys, Joseph R. Simrell, David Haynes, Mark J. Nielsen, Arun Anand, Murari Cholappadi, Sanjay Gupta, Thurston Group, Inc., a Delaware corporation, Patrick J. Haynes, III and Scot M. McCormick (filed as Exhibit 2.1 to the Company's registration Statement on Form SB-2 filed July 30, 2004 and incorporated by reference herein)
3.1		Certificate of Correction to the Certificate of Amendment of the Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company's registration Statement on Form SB-2 filed July 30, 2004 and incorporated by reference herein)
3.2		Second Amended and Restated Bylaws (filed as Exhibit 3.3 to the Company's quarterly report on Form 10-QSB filed on August 14, 2002 and incorporated by reference herein)
3.3		Certificate of Amendment to the Company's Certification of Incorporation, as filed with the Secretary of State of the State of Delaware, effective June 19, 2008 (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed June 19, 2008 and incorporated by reference herein)
10.1	^	Transition Agreement by and between Time Warner Cable Inc., a Delaware corporation, and Primal Solutions, Inc. a Delaware corporation, dated November 20, 2008 (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed December 17, 2008 and incorporated by reference herein)
31.1	*	Certification pursuant to Section 302 of the Sarbanes-Oxley Act
32.1	*	Certification pursuant to Section 906 of the Sarbanes-Oxley Act

* Filed herewith

^ Portions omitted pursuant to a request for confidential treatment

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PRIMAL SOLUTIONS, INC.
	(Registrant)


	/s/ Joseph R. Simrell
	Joseph R. Simrell
	Chief Executive Officer, President, and Chief Financial Officer

	December 23, 2008

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PRIMAL SOLUTIONS INC 10-Q