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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10–K

(Mark one)

For the fiscal year ended December 31, 2002

OR

For the transition period from                      to                     

Commission File No. 000-27095

AVERY COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

(847) 832-0077

(Issuer’s Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, par value $.01 per share

Title of Class

Indicate by check mark whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES x    NO ¨

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2)    YES ¨    NO x

DOCUMENTS INCORPORATED BY REFERENCE:

None.

PART I

Item 1. Business

General

Avery is a telecommunications service company which operates two lines of business. Through its operating subsidiaries, HBS Billing Services Company and ACI Billing Services, Inc., Avery provides billing and collection services for inter-exchange carriers and long-distance resellers, and through its operating subsidiary, Aelix, Inc., Avery provides intelligent message communication services to the travel, hospitality and trucking sectors. Avery has 67 total employees.

Our stockholders have approved a 1-for-5,000 reverse stock split that, when effected, will result in our no longer being required to file reports with the Securities and Exchange Commission (see Risk Factors).

Local Exchange Carrier Clearinghouse Business

General

Our local exchange carrier billing business consists of HBS Billing Services Company and ACI Billing Services, Inc. Both businesses are third-party billing clearinghouses for the telecommunications industry. Local exchange carrier clearinghouse business customers consist primarily of direct dial long distance telephone companies. These businesses maintain billing arrangements with approximately 1,300 telephone companies that provide access lines to, and collect for services from, end-users of telecommunication services and process transaction records and collect the related end-user charges from these telephone companies for their customers.

The local exchange carrier clearinghouse business customers use us as a billing clearinghouse for processing records generated by their end-users. Although such carriers can bill end-users directly, the local exchange carrier clearinghouse business provides these carriers with a cost-effective means of billing and collecting residential and small commercial accounts.

The local exchange carrier clearinghouse business acts as an aggregator of telephone call records and other transactions from various sources, and, due to its large volume, receives discounted billing costs from the telephone companies and can pass on these discounts to its customers. Additionally, this line of business can provide its services to those long distance resellers that would otherwise not be able to make the investments necessary to meet the minimum fees, systems, infrastructure and volume commitments required to establish and maintain relationships with the telephone companies.

The local exchange carrier clearinghouse business is obligated to pay minimum usage charges over the lifetime of most local exchange carrier billing contracts. Each contract has a minimum usage amount which relates to customers’ sales volume to be processed through the local exchange carrier. The remaining minimum usage for significant contracts at December 31, 2002, totaled $4.7 million through 2005. As a frame of reference, customers’ sales processed by this line of business relating to all contracts in February 2003 were approximately $25 million. A portion of this amount applies to the minimum usage requirements. The billing and collection agreements do not provide for any penalties other than payment of the obligation should the usage levels not be met. This line of business has met all such volume commitments in the past and anticipates exceeding the minimum usage volumes with all of these vendors.

The local exchange carrier clearinghouse business also provides enhanced billing services for transactions related to providers of premium services or products that can be billed through the local telephone companies, such as Internet access, voice mail services, and other telecommunications charges.

Industry Background

Billing clearinghouses in the telecommunications industry developed out of the 1984 breakup of AT&T and the Bell System. In connection with the breakup, the local telephone companies that make up the regional Bell operating companies, Southern New England Telephone, Cincinnati Bell and GTE, were required to provide billing and collection services on a nondiscriminatory basis to all carriers that provided telecommunication services to their end-user customers. Due to both the cost of acquiring and the minimum charges associated with many of the local telephone company billing and collection agreements, only the largest long distance carriers, including AT&T, MCI and Sprint, could afford the option of billing directly through the local telephone companies. Several companies, including our local exchange carrier clearinghouse business, entered into these billing and collection agreements and became aggregators of telephone call records of third-tier long distance companies, thereby becoming “third-party clearinghouses.” Our local exchange carrier clearinghouse business currently provides services to approximately 70 customers in the telecommunications industry.

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Third-party clearinghouses process these telephone call records and other transactions and submit them to the local telephone companies for inclusion in their monthly bills to end-users. Generally, as the local telephone companies collect payments from end-users, they remit them to the third-party clearinghouses that, in turn, remit payments to their customers.

Billing Clearinghouse Services

In general, the local exchange carrier clearinghouse business performs billing clearinghouse services under billing and collection agreements with local telephone companies. The business performs direct dial long distance billing, which is the billing of “1+” long distance telephone calls to individual residential customers and small commercial accounts. In addition, the business performs enhanced billing clearinghouse services for other telecommunication services, such as Internet access, paging services, and voice mail services.

Billing Process

Local telephone company billing relates to billing for transactions that are included in the monthly local telephone bill of the end-user as opposed to a direct bill that the end-user would receive directly from the telecommunications or other services provider.

The local exchange carrier clearinghouse business’s customers submit telephone call record data in batches on a daily to monthly basis, but typically in weekly intervals. The data are submitted electronically.

The local exchange carrier clearinghouse business, through its proprietary software, sets up an account receivable for each batch of call records that it processes and processes the record to determine its validity. The business then submits the relevant billable telephone call records and other transactions to the appropriate local telephone company for billing and collection. The business also monitors and tracks each account receivable by customer and by batch throughout the billing and collection process.

The local telephone companies then include the charges for these telephone call records and other transactions in their monthly local telephone bills, collect the payments and remit the collected funds to the local exchange carrier clearinghouse business for payment to its customers.

The complete cycle can take up to 18 months from the time the records are submitted for billing until all bad debt reserves are “trued up” with actual bad debt experience. However, the billing and collection agreements provide for the local telephone companies to purchase the accounts receivable, with recourse, within a 42- to 90-day period. The payment cycle from the time call records are transmitted to the local telephone companies to the initial receipt of funds by the local exchange carrier clearinghouse business is, on average, approximately 60 days.

The local exchange carrier clearinghouse business accrues for end-user customer service refunds, holdback reserves and certain adjustments charged to it by the local telephone companies. The business reviews the activity of its customer base to detect potential losses. If there is uncertainty with respect to an account in an amount which exceeds its holdback reserve, the business can discontinue paying the customer in order to hold funds to cover future end-user customer service refunds, bad debt and unbillable adjustments. If a customer discontinues doing business with the local exchange carrier clearinghouse operation and there are insufficient funds being held to cover future refunds and adjustments, the only recourse is through legal action.

The local exchange carrier clearinghouse business processes the tax records associated with each customer’s submitted telephone call records and other transactions and files certain federal excise and state and local telecommunications-related tax returns covering such records and transactions for its customers. The business currently submits state and local tax returns for its customers in over 1,000 taxing jurisdictions.

The local exchange carrier clearinghouse business provides end-user customer service for billed telephone records. This service allows end-users to make inquiries regarding transactions for which they were billed directly to the operation’s customer service call centers. The local exchange carrier clearinghouse business’s customer service telephone number is included in the local telephone company bill to the end-user, and its respective customer service representatives are authorized to resolve end-user disputes regarding such transactions.

The local exchange carrier clearinghouse business’s operating revenues consist of a processing fee that is assessed to customers either as a fee charged for each telephone call record or other transaction processed, and a customer service inquiry fee that is assessed to customers as a fee charged for each billing inquiry made by end-users. Any fees charged to the operation by local telephone companies for billing and collection services are also included in revenues and are passed through to the customer.

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Operations

The local exchange carrier clearinghouse business’s billing clearinghouse services are highly automated through its proprietary computer software. The staff required to provide the operation’s billing clearinghouse and information management services is largely administrative and the number of employees is not directly volume sensitive. All of the local exchange carrier clearinghouse business’s customers submit their records to the operation using electronic transmission protocols directly into their electronic bulletin board or over the Internet. These records are automatically accessed by the operation’s proprietary software, processed, and submitted to the local telephone companies. Upon completion of the billing process, the local exchange carrier clearinghouse business provides reports relating to billable records and returns any unbillable records to its customers electronically through the bulletin board or through the Internet.

The local exchange carrier clearinghouse business’s contracts with its customers provide for the billing services required by the customer, specifying, among other things, the services to be provided and the cost and term of the services. Once the customer executes an agreement, the operation updates tables within each of the local telephone companies’ billing systems to control the type of records processed, the products or services allowed by the local telephone companies, and the printing of the customer’s name on the end-user’s monthly bill. While these local telephone company tables are being updated, the local exchange carrier clearinghouse business’s technical support staff tests the customer’s records through its proprietary software to ensure that the records can be transmitted to the local telephone companies.

The local exchange carrier clearinghouse business maintains a relatively small direct sales force and accomplishes most of its marketing efforts through active participation in telecommunications industry trade shows and advertising in trade journals and other industry publications.

Customers

The local exchange carrier clearinghouse business provides billing and information management services to the following categories of telecommunications services providers:

Other customers include suppliers of various forms of telecommunications equipment, Internet services and paging companies.

The Company’s largest customer in 2002 and 2001 was PT-1 Communications, Inc. (“PT-1”), a telecommunications reseller, which accounted for 24% and 47% of revenue in 2002 and 2001, respectively. Since March 9, 2001, PT-1 has been operating under Chapter 11 of the U.S. Bankruptcy Code in connection with the reorganization of its parent company. The bankruptcy filing has not had a material adverse effect on the Company’s relationship with PT-1.

The Company had one other customer in 2002 whose business accounted for more than 10% of total revenue. That customer’s revenue approximated 10.4% of revenue.

Competition

The local exchange carrier clearinghouse business operates in a highly competitive segment of the telecommunications industry. Competition among the clearinghouses is based on the quality of information reporting, program flexibility, collection history, the speed of collections, the price of services and availability of an advanced funding program. All other third-party clearinghouses are either privately held or are part of a larger parent company. Management believes that Billing Concepts, Inc. is presently the largest participant in the third-party clearinghouse industry in the United States, followed by us. Billing Concepts has greater name recognition than HBS Billing Services and ACI Billing Services, and has, or has access to, greater financial and personnel resources than those available to us.

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As a large user of local exchange carrier billing services, the local exchange carrier clearinghouse business enjoys favorable rates and can pass the benefits of its buying power on to its customers. We believe that the business enjoys a good reputation within the industry for the timeliness and accuracy of its collections and disbursements to customers.

Several significant challenges face potential new entrants in the local telephone company billing services industry. The cost to acquire the necessary billing and collection agreements is significant, as is the cost to develop and implement the required systems for processing telephone call records and other transactions. Additionally, most billing and collection agreements require a user to make substantial monthly or annual volume commitments. Given these factors, the average cost of billing and collecting a record could hinder efforts to compete effectively on price until a new entrant could generate sufficient volume. The price charged by most local telephone companies for billing and collection services is based on volume commitments and actual volumes being processed.

Since most customers in the billing clearinghouse industry are under contracts with a minimum term of at least one year, penetration of the existing market will be difficult. In addition, a new entrant must be financially sound and have system integrity because funds collected by the local telephone companies flow through the third-party clearinghouse, which then distributes the funds to the customer whose traffic is being billed.

Insurance

Avery does not maintain errors and omissions insurance for its local exchange carrier clearinghouse business.

Employees

At December 31, 2002, the local exchange carrier clearinghouse business had 51 full-time employees, including 11 sales and marketing personnel, 6 technical and operations personnel, 17 accounting, administrative and support personnel, and 17 customer service representatives and related support personnel. These employees are not represented by a union. We consider relations with our employees to be good.

Intelligent Message Communication Services

General

Through our subsidiary, Aelix, Inc., which we acquired on November 20, 2001, we provide intelligent message communications services to enterprises, notably in the travel, hospitality and trucking sectors. Our services enable users to improve their customer relationships and their supply and demand chain management while reducing expenses. Our services enable secure, real time, bi-directional communications between companies and their customers or other parties through a number of different media and devices worldwide.

Message Delivery and Notification Services for Large Commercial Enterprises

We market our products and services to companies which routinely wish to deliver time-critical information to a large number of customers, employees or other parties. Our focus is on message delivery services as needed and used by large commercial enterprises. We specialize in pro-active message services designed to enhance customer service functions. Examples of the types of services we offer are the following:

We design solutions intended to meet requirements for communication via wireline, wireless, Internet, PC or personal digital assistant devices.

Competition

The electronic message delivery industry is new and rapidly evolving, and there is no dominant competitor. We expect competition to intensify as the market grows.

Industry

The communications industry is undergoing significant change and rapid growth, particularly the emergence of the Internet as a significant communications medium.

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The Internet is rapidly maturing into a global communications medium. It is evolving from passive publishing to an interactive communications and applications environment. It will continue to play an increasingly important role in electronic commerce and become the dominant source of information. We believe it will be the medium of choice for voice, data, and video communications and that our software-based service will position us to participate in this growth by enabling us to offer enhanced services.

Government Regulation

There are few current laws and regulations that apply specifically to access to, or commerce on, the Internet. Due to the increasing popularity and use of the Internet, however, it is possible that laws and regulations with respect to the Internet may be adopted at federal, state, provincial and even local levels, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information security and the convergence of traditional telecommunications services with Internet communications. Such future regulations may have a material adverse effect on our business.

The growth of the Internet, coupled with publicity regarding Internet fraud, may lead to the enactment of more stringent consumer protection laws. If we become subject to claims that we have violated any laws, even if we successfully defend against these claims, our business could suffer. Moreover, new laws that impose restrictions on our ability to follow current business practices or increase our costs of doing business could hurt our business.

Our electronic message delivery business is not currently subject to direct regulation by the Federal Communications Commission or any other governmental agency, other than regulations applicable to businesses in general. In the future, however, we may become subject to regulation by the FCC or another regulatory agency. Our business could suffer depending on the extent to which our activities are regulated or proposed to be regulated.

Employees

At December 31, 2002, the intelligent message business had 9 employees. Our employees are not represented by a union. We consider relations with our employees to be good.

RISK FACTORS

Avery intends to “go private.”

Our stockholders have approved a 1-for-5,000 reverse stock split that, when effected, will result in our going private. This means our stock will no longer be publicly traded and that we will no longer be required to file reports or other documents with the Securities and Exchange Commission. For further information on the pending reverse stock split, you may refer to the Information Statement on Schedule 14C filed by Avery with the Securities and Exchange Commission.

Our ability to acquire other telecommunications services providers faces substantial obstacles. Our failure to overcome any of these obstacles may materially and adversely affect our planned growth.

A key element of our business strategy is to acquire other telecommunications services providers. The success of our acquisition program will depend on our ability to overcome substantial obstacles, such as the availability of acquisition candidates, our ability to compete successfully with other potential acquirers seeking similar acquisition candidates, the availability of funds to finance acquisitions and the availability of management resources to oversee the operation of acquired businesses. We have limited resources, and we can offer no assurance that we will succeed in consummating any additional acquisitions or that we will be able to integrate and manage any acquisitions successfully.

We have no present commitments to acquire other telecommunications service providers.

Our local exchange carrier clearinghouse business is largely dependent on one customer that accounted for approximately 24% of our revenue in 2002. The loss of this customer would materially and adversely affect our results of operations.

This customer filed a voluntary petition for protection under Chapter 11 of the U.S. Bankruptcy Code in connection with the reorganization of its parent company. As of March 22, 2003, the filing has had no material adverse effect on the business’s relationship with this customer, and, based upon conversations between the managements of the two companies, we do not presently anticipate that this filing will materially adversely affect the relationship with this company in the immediate future.

We face substantial competition in the billing clearinghouse industry, and one of our competitors is larger and has more resources than we have. We may not be able to compete successfully with existing or future competitors.

Our major competitor in the local exchange carrier billing clearinghouse industry is Billing Concepts, Inc. Competition among the local exchange carrier billing clearinghouses is based on the quality of information reporting, collection history, the

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speed of collections, the ability to factor a long-distance reseller’s accounts, and the price of services. This competitor has greater name recognition and has, or has access to, substantially greater financial and personnel resources than those available to us.

Our local exchange carrier clearinghouse business is dependent both on the local exchange carriers’ continuing to accept its call records, and continuing to do so on reasonable terms, and its customers’ continuing to need its billing services.

The success of our business to date has been largely attributable to our having contracts with the regional Bell operating companies, Sprint, GTE and other local exchange carriers. This permits us to bill for telecommunications services provided by our customers throughout the United States. If the local exchange carriers were not to renew our existing contracts, or were to terminate our contracts, our ability to bill for our customers on a nation-wide basis could be adversely affected. While we have not received any notice of any local exchange carriers’ intention to refuse renewal or to terminate, periodic publicity about unauthorized transfers of consumers’ long-distance carriers or unauthorized charges on consumers’ local phone bills elevates the visibility of third-party billing through local exchange carriers.

If the local exchange carriers were to increase the costs payable by our customers for including our customers’ charges on the local exchange carrier bills, it could make our customers’ operations less profitable or not profitable. This could result in our customers seeking alternative billing arrangements. Our customers could enter into billing arrangements with companies, other than the local exchange carriers, that would bill their customers directly, or, in some instances, our customers could begin billing directly for their services without the use of any third party. It is also possible that some of our customers could determine that it would be financially beneficial to them to install a direct billing system.

Our common stock trades only sporadically and has experienced in the past, and is expected to experience in the future, significant price and volume volatility, which substantially increases the risk of loss to persons owning our common stock.

Because of the limited trading market for our common stock, and because of the possible price volatility, you may not be able to sell your shares of common stock when you desire to do so. The inability to sell your shares in a rapidly declining market may substantially increase your risk of loss because of such illiquidity and because the price for our common stock may suffer greater declines because of its price volatility.

We are not required to meet or maintain any listing standards for our common stock to be traded on the OTC Bulletin Board.

The OTC Bulletin Board is separate and distinct from The NASDAQ Stock Market. Although the OTCBB is a regulated quotation service operated by The Nasdaq Stock Market that displays real-time quotes, last sale prices, and volume information in over-the-counter equity securities like our common stock, we are not required to meet or maintain any qualitative or quantitative standards for our common stock to be traded on the OTCBB. Our common stock does not presently meet the minimum listing standards for listing on The Nasdaq Stock Market or any national securities exchange.

We are required to pay substantial preferential dividends to holders of our preferred stock.

Holders of our preferred stock are entitled to preferential quarterly dividends before any common stock dividends are declared or paid. The amount of these dividends is presently approximately $493,000 annually. Upon our liquidation, dissolution or winding-up, holders of our preferred stock are each entitled to receive a liquidation distribution, plus any accumulated dividends to date before the holders of common stock receive any distributions.

Item 2. Properties

ACI leases approximately 42,774 square feet of general and administrative office space in Northridge, California. Aelix’s intelligent message communications business shares the space with ACI. HBS Billing Services also conducts its operations in the space leased by ACI. The lease expires on July 31, 2005. Approximately 16,297 square feet of such space are subleased to an unrelated party at a competitive market rate through July 31, 2005. ACI Billing Services’ monthly rent is approximately $33,181 before sublease rental income of approximately $15,645.

We paid Thurston Group $131,179 in 2002 for the rental of office space occupied by our corporate staff in Chicago, Illinois. There is no formal agreement or lease term governing the arrangement. Effective April 1, 2003, we have moved into a new headquarters facility consisting of 6,371 square feet in Glenview, Illinois. The monthly rental, including taxes and operating expenses but net of credits from the landlord for leasehold improvements paid by us, approximates $5,600. The lease expires on June 30, 2008.

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Item 3. Legal Proceedings

We are not party to any material litigation.

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

None.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Our common stock is quoted and traded on a limited and sporadic basis on the OTC Bulletin Board operated by The NASDAQ Stock Market, Inc. under the trading symbol “AVYC.” The limited and sporadic trading does not constitute, nor should it be considered, an established public trading market for our common stock. The following table sets forth the high and low closing bid and asked prices for our common stock for the periods indicated, as reported by Pink Sheets LLC. On December 12, 2001, Avery effected a 1-for-8 reverse stock split. The high and low closing bid and asked prices in the table below have been adjusted to give effect to such stock split by multiplying the actual bid and asked price by eight. At no time prior to the reverse stock split has our common stock traded higher than $5.00 per share. Such quotations reflect inter-dealer prices, without retail mark- up, mark-down or commissions, and may not necessarily represent actual transactions.

As of March 25, 2003, there were approximately 450 holders of record of our common stock.

Dividend Policy

We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we expect to retain any earnings to finance the operation and expansion of our business. We also presently have outstanding preferred stock that requires us to accrue dividends in the amount of approximately $123,000 every quarter. The holders of our outstanding preferred stock are entitled to receive all accrued dividends before we can pay any dividends on our common stock. In addition to the terms of our outstanding preferred stock, it is anticipated that the terms of future debt and/or equity financings may restrict the payment of cash dividends. Therefore, the payment of any cash dividends on the common stock is unlikely.

Item 6. Selected Financial Data

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and related notes and the other financial information included elsewhere in this report.

A Note About Forward-Looking Statements

The statements, other than statements of historical fact, included in this report are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “plan,” “seek,” or “believe.” We believe that the expectations reflected in such forward-looking statements are accurate. However, we cannot assure you that such expectations will occur. Our actual future performance could differ materially from such statements. Factors that could cause or contribute to such differences include, but are not limited to:

You should not unduly rely on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we are not obligated to release publicly any revisions to these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events. Important factors that could cause our actual results to differ materially from our expectations are discussed under “Risk Factors” and elsewhere in this report.

Selected Financial Information Line Item Explanations

The following is a discussion of our consolidated financial condition and audited results of operations for the fiscal years ended December 31, 2002, 2001 and 2000. It should be read in conjunction with our Consolidated Financial Statements, the notes thereto and other financial information included elsewhere in this report.

In August 2000, our Board of Directors approved the distribution of all of the shares of our subsidiary, Primal Solutions, Inc., to our stockholders. We completed the distribution of Primal to our stockholders on February 12, 2001. The results on the “Discontinued operations” line represent the results of operations for Primal to February 12, 2001 (the distribution date) and the loss recorded in connection the distribution. Revenue, cost of revenues, and operating expenses presented in the statements of operations pertain only to continuing operations, which consist of Avery, HBS Billing Services, ACI Billing Services and Aelix.

ACI completed its purchase of certain assets from OAN in August 2001.

Aelix completed its purchase of certain assets from Qorus in November 2001. From the acquisition date through December 31, 2002, revenues from Aelix were not material. Aelix incurred operating losses in 2002 as it developed more services and attempted to attract more customers to purchase such services.

Our revenues are derived primarily from the provision of billing clearinghouse and information management services to direct dial long distance resellers and operator services providers, commonly referred to as “local exchange carrier billing” or “LEC billing.” Revenues are also derived from enhanced billing services provided to companies that offer voice mail, paging and Internet services or other non-regulated telecommunications equipment and services. LEC billing fees charged by us include processing and customer service inquiry fees. Processing fees are assessed to customers either as a fee charged for each telephone call record or other transaction processed or as a percentage of the customer’s revenue that is submitted by us to local telephone companies for billing and collection. Processing fees also include any charges assessed to us by local telephone companies for billing and collection services. Customer service inquiry fees are assessed to customers either as a fee charged for each record processed by us or as a fee charged for each billing inquiry made by end users.

Cost of revenues includes billing and collection fees charged to us by local telephone companies and related transmission costs, as well as all costs associated with the customer service organization, including staffing expenses and costs associated with telecommunications services. Billing and collection fees charged by the local telephone companies include fees that are assessed for each record submitted and for each bill rendered to its end-user customers.

Operating expenses are comprised of sales and marketing costs and general and administrative costs. Sales and marketing costs include salaries and benefits, commissions, advertising and promotional and presentation materials. General and administrative costs consist of general management and support personnel salaries and benefits, information systems costs, legal and accounting fees, travel and entertainment costs and other support costs.

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Advance funding program income and expense consists of income and expenses related to our financing certain customers’ accounts receivable. Typically, 50% to 75% of the amount receivable from the local exchange carrier, or LEC, is advanced to the customer upon acceptance of its call records. When the LEC remits payment of the receivable, we are repaid the advance and receive a financing fee, which generates the “Advance funding program income.” Avery maintains a line of credit to provide the funds to finance the advance funding program. The costs associated with this line of credit are reflected in “Advance funding program expenses.”

Depreciation and amortization expenses are incurred with respect to certain assets, including computer hardware, software, office equipment, furniture, costs incurred in securing contracts with local telephone companies, goodwill and other intangibles. Asset lives range between three and fifteen years.

Since the components of “Other income (expense), net” change on a period-to-period basis, the items included in this line are explained in the analysis below.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and adjustments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to bad debts, technological obsolescence, tax obligations and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The evaluation of these estimates forms the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

We have identified below the accounting policies believed to be the most critical to our business operations as discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results.

Revenue Recognition

Billing Services—We recognize billing services revenue when our customers’ records are accepted by the LEC for billing and collection. Bills are generated by the LECs, the collected funds are remitted to us, and we in turn remit these funds, net of fees and reserves, to our customers. These reserves represent cash withheld from customers to satisfy future obligations on behalf of the customer. The obligations consist of local exchange carrier billing fees, bad debts, and sales and excise taxes. We record trade accounts receivable and service revenue for fees charged for billing services. When we collect the customers’ receivables from the LECs, our trade receivables are reduced by the amount corresponding to our processing fees. The remaining funds are recorded as amounts due to customers and included in deposits and other payables related to customers in the accompanying balance sheets. We also retain a reserve from our customers’ settlement proceeds, calculated to cover amounts that the LECs are unable to collect, including LEC billing fees and sales taxes, and such reserves are included in deposits and other payables related to customers in the accompanying balance sheets.

Advance Funding Programs—We offer participation in advance funding to qualifying customers through our advance payment program. Under the terms of the agreements, we purchase the customer’s accounts receivable for an amount equal to the face amount of the billing records submitted to the LEC, less various items including costs and expenses on previous billing records, financing fees, LEC charges, rejects and other similar items. We typically advance 50% to 75% of the purchased amount. The purchased accounts receivable are recorded at the net amount advanced to customers (as advance payment receivables). Financing charges are assessed until we recoup our initial payment. We record as income an initial non-refundable fee, typically no more than 1%, when funds are advanced to the customer. We also record interest income, typically at four percentage points over prime on outstanding advances. There are no substantial costs incurred in factoring a customer’s receivables, and all costs associated with the receivable are recognized as incurred. The receivables are typically repaid in 60 days.

We believe that three factors reduce the potential exposure to credit losses. First, we advance funds against customer receivables at a level which is usually less than 90% of the expected recovery from the billing LEC. Second, payments from a diversified group of telephone end-users are being passed through a LEC, which has historically been a high quality credit risk. Thirdly, the LECs pay us directly, so that we can deduct any amounts owed us before remitting funds to the customer. In addition, we typically withhold a portion of payments received from LECs before remitting the balance due to our customers which minimizes our exposure to subsequent charges from LECs.

Goodwill and Impairment of Intangibles

        Goodwill results from the difference between the purchase price paid and liabilities assumed over the estimated fair market value of assets acquired, including post-closing increases to goodwill resulting from earn out payments. With respect to the HBS acquisition, initial goodwill was amortized using the straight-line method over 15 years with additional goodwill from earn out payments amortized over the remaining goodwill life. We discontinued amortizing goodwill effective January 1, 2002 in accordance with FAS 142. On an on-going basis, management reviews recoverability and the valuation and amortization of goodwill. As a part of this review, we consider the undiscounted projected future net cash flows in evaluating the goodwill. If the undiscounted future net cash flows were less than the stated value, goodwill would be written down to fair value.

Income Taxes and Deferred Taxes

We utilize the asset and liability approach to accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statements and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to have an effect upon taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

Reserves for Notes Receivable

We regularly assess the collectibility of notes receivable. In making the assessment, management considers the solvency of the party, the perceived intention to pay and the fair value of collateral, if any, which secures the obligation. Bad debt reserves are established whenever, and to the extent, that collectibility appears impaired.

Asset Impairment

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the long-lived assets, the carrying value is reduced to the estimated fair value as measured by the discounted cash flows. We have not experienced any events or changes that would indicate that the carrying amounts of any of our assets may not be recoverable.

Results of Operations

The following table sets forth selected income statement lines in actual dollars. The Statement of Operations Data are derived from Avery’s audited financial statements.

Statement of Operations Data:

Quarterly Statement of Operations

The following table sets forth selected unaudited income statement lines on a quarterly basis for 2002 and 2001:

Restatement of 2001 financial statements (per Note 16)

        We have restated our financial statements for 2001 as the result of a revised accounting treatment of our distribution to our stockholders of all of the common stock of Primal Solutions, Inc. (“PSI”) in February 2001. At that time, we accounted for the distribution as a pro rata distribution which resulted in the net carrying value of PSI’s assets, approximately $7.5 million, being reflected as a distribution within stockholders’ deficit. The Company has revised its accounting treatment of the distribution based on the conclusion that the distribution was not pro rata and accordingly should have been accounted for at fair value. The fair value of PSI’s net assets at the date of the distribution was $1.3 million compared to a carrying value of $7.5 million. The revised accounting treatment resulted in the recognition of a $6.2 million loss, and such loss is reflected in the restated financial statements for 2001. Accordingly, the net loss as reported has increased by approximately $6.2 million which increased the net loss per share by $1.30 for the year ended December 31, 2001. The revised accounting treatment had no impact on aggregate stockholders’ deficit.

2002 compared to 2001

Operating Revenues

Total revenue during 2002 was $40.5 million, down $1.4 million or 3.3% from the $41.9 million of revenue in 2001. Revenue in 2002 included sales of the acquired ACI and Aelix business units, which provided $18.3 million and $0.6 million of revenue, respectively. During 2001, revenue from the acquired ACI business unit was $10.6 million during its five months of operation. During 2002, the Company processed 264 million phone records, compared to 307 million in 2001. The decline in call records processed reflects increased consumer usage of cell phones and prepaid phone cards to make long distance calls. Call records for neither cell phones nor prepaid phone cards are typically processed through a billing clearinghouse. Additionally, some of the local exchange companies have begun to offer long distance service, which reduces the market share of network resellers who typically use clearinghouse services. Excluding revenue generated by ACI and Aelix in both periods, the Company’s revenue would have declined by 30.9%, reflecting a 27.7% decrease in records processed, competitive pricing and sales mix.

The Company is pursuing additional sources of revenue to supplement its LEC billing business. The additional sources of revenue could arise from acquisitions or internal growth. In general, the Company intends to make acquisitions or expand into markets which will leverage the Company’s existing infrastructure.

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Cost of Revenues

Cost of revenues includes billing and collection fees charged to the Company by local telephone companies and related transmission costs, as well as all costs associated with the customer service organization, including staffing expenses and costs associated with telecommunications services. Billing and collection fees charged by the local telephone companies include fees that are assessed for each record submitted and for each bill rendered to its end-user customers. The Company achieves discounted billing costs due to its aggregated volumes and can pass these discounts to its customers. Cost of revenues also includes $0.5 million of costs relating to the Aelix business unit.

The Company’s gross profit margin in 2002 was 32.0%, which was 3.5% better than the 28.5% gross margin earned during 2001. The improved gross profit margin in 2002 largely reflects the higher mix of calls processed by ACI in 2002, due to the inclusion of twelve months’ results from ACI in 2002 compared to 5 months’ results in 2001. ACI has historically achieved a higher gross profit margin level than HBS.

Operating Expenses

Operating expenses are comprised of all selling, marketing and administrative costs incurred in direct support of the business operations of the Company. Operating expenses during 2002 were $16.2 million, compared to $10.4 million in 2001. The $5.8 million increase in operating expenses in 2002 is largely attributable to the inclusion of $4.3 million of additional operating expenses for ACI and $1.1 million for Aelix. The increase in expense level reflected the inclusion of 12 months’ expenses in 2002 for both units, compared to 5 months’ expenses for ACI and one month’s expenses for Aelix in 2001. Excluding the effect of the acquired businesses in both years’ results, operating expenses in 2002 would have been $7.3 million, which would have been $0.4 million higher than operating expenses in 2001. Operating expenses in 2002 were adversely affected by higher legal and consulting fees, personnel expenses and redundancy, travel, severance and similar costs staffing associated with the consolidation of operations into a single facility.

Depreciation and Amortization

Depreciation and amortization expense for 2002 and 2001 was $1.0 million and $0.9 million, respectively. The increase in expense during 2002 was attributable to (i) depreciation and amortization expenses associated with fixed assets of ACI and Aelix offset by (ii) the absence of amortization expense for goodwill during 2002, pursuant to the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

Other Income (Expense), Net

Other income (expense), net was a net expense of $1.8 million in 2002, compared to net expense of $3.2 million in 2001. The principal components during each period are summarized below:

Other expense in 2002 included $1.3 million of charges relating to increases in reserves for notes receivable and stock subscription notes receivable. Substantially all of such notes were non-recourse. The increase in the reserve for non-recourse debt was deemed appropriate in light of a decline in the value of the stock which served as collateral for the non-recourse notes (see Notes 5 and 15 to Consolidated Financial Statements).

The $2.4 million write-off of the investment in an affiliated company occurred in 2001 when the company ceased operations. The $0.9 million increase in reserves for non-recourse receivables in 2001 related principally to notes from former employees who borrowed funds to purchase shares of Avery and Primal stock. The decline in the market value of both securities reduced the likelihood of full recovery under the notes.

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The Company’s $0.1 million interest income in 2002 was substantially less than the $0.3 million of interest income recorded in 2001, and $0.5 million of interest expense in 2002 was substantially more than the $0.1 million of incurred 2001. During 2002, the Company increased borrowings under its line of credit to provide funding for operating losses and changes in working capital. The Company had operated without any interest-bearing loans during the first 11 months of 2001, and it typically invested any periodic excess cash amounts into interest-bearing short-term obligations. The Company typically applied excess cash balances in 2002 to reduce outstanding loans.

Income Taxes

An income tax expense of $0.6 million was recorded during 2002 compared to an expense of $0.2 million (from continuing operations) in 2001. The income tax expense in 2002 differs from the expected income tax benefit primarily because of (i) items permanently not deductible for income tax reporting purposes and (ii) our decision to place a full valuation reserve against accumulated deferred tax assets. Income tax expense in 2001 differs from the expected income tax benefit primarily because of items permanently not deductible for income tax reporting purposes.

Loss from Discontinued Operations

The Company’s loss from discontinued operations, net of tax benefits, was $666,036 in 2001. The loss relates to Primal, which was distributed on February 12, 2001. The Company also recognized a $6,114,255 loss in 2001 from the distribution, which represented the difference between the appraised fair market value of the net assets distributed and the book value of such net assets at the date of the distribution.

2001 compared to 2000

Operating Revenues

Revenues for 2001 increased $5.4 million or 14.9% compared to calendar 2000. The revenue increase is largely attributable to the acquisition of ACI Billing Services in August 2001, offset by a decline in HBS Billing Services’ call record volume. Excluding call records from the acquired company, the volume of call records declined by 27%.

Cost of Revenues

We achieved a 28.5% gross profit margin in 2001, compared to 29.3% in 2000. The decline in margin was largely attributable to a lower level of income arising from volume discounts and an increase in costs in the customer service department.

Operating Expenses

Operating expenses, excluding depreciation and amortization expense, increased from $7.4 million in 2000 to $10.4 million in 2001. The $3.0 million increase resulted principally from $3.0 million of additional expenses associated with acquired businesses, the write-off and/or establishment of $0.4 million of principal and interest owned under non-recourse notes receivable offset by $0.5 million of lower compensation charges and $0.3 million of lower professional fees.

Advance Funding Program Income and Expense

In an effort to reduce the inherent risk involved in advancing customers receivables, we encouraged and participated in placing current customers with significant financing needs with third party financing companies. Although internal advance funding is still available, its scope has been reduced. Advance funding program net income increased to $175,000 in 2001 from $127,000 in 2000.

Depreciation and Amortization

Depreciation and amortization expense was $869,000 and $599,000 in calendar 2001 and 2000, respectively. The increase was due to the acquisitions of Aelix and ACI Billing Services and to a lesser degree from the cumulative effect of capital expenditures in both 2001 and 2000.

Income from Operations

Operating income was $1,521,000 and $3,322,000 for calendar 2001 and 2000, respectively.

Other Income (Expense), Net

Other income (expense), net was a net expense of $3,154,000 during 2001, compared to net income of $315,000 in 2000. The principal components during each period are summarized below:

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The $2.4 million write-off of the investment in an affiliated company occurred when the company ceased operations. The $0.9 million reserve for non-recourse notes receivable relates principally to non-recourse notes from former employees who borrowed funds to purchase shares of Avery and Primal stock. The decline in the market value of both securities reduced the likelihood of full recovery under the notes.

Income Taxes

We recorded an income tax expense from continuing operations of $216,945 in 2001, which was offset by an income tax benefit of $345,000 in discontinued operations. For the year ended December 31, 2001 total income tax benefit differs from expected income benefit primarily because of items permanently not deductible for income tax reporting purposes partially offset by adjustments to prior year income taxes. We recorded an income tax expense from continuing operations of $1,314,000 for calendar 2000, which was offset by an income tax benefit of a $1,430,000 in discontinued operations.

Discontinued Operations

The net loss from discontinued operations was $666,000 for the period from January 1, 2001 through February 12, 2001, net of tax benefit of $345,000, compared to a net loss of $3,700,000 for the year ended December 31, 2000, net of a tax provision of $959,000. Revenues from discontinued operations were $825,000 and $9,516,000 for the period from January 1, 2001 through February 12, 2001 and for the year ended December 31, 2000.

Loss on Non Pro Rata Distribution of Primal Solutions, Inc.

As a result of the non pro rata distribution of Primal in February 2001, the Company recorded a loss of $6.1 million and a reduction of assets by $7.5 million as of the distribution date (see Note 16). The loss represented the difference between the appraised fair market value of the net assets distributed and the book value of such net assets at the date of the distribution.

LIQUIDITY AND CAPITAL RESOURCES

Avery’s cash balance at December 31, 2002 was $4.1 million, compared to $5.4 million at December 31, 2001. Fluctuations in daily cash balances are normal due to the large amount of customer receivables that we collect and process on behalf of our customers. We receive money daily from local exchange carriers, but we ordinarily disburse such collected funds to our customers once each week.

Avery incurred a net loss of $5.7 million during 2002, which included a $1.3 million write-off of notes receivable from related parties and a $1.1 million write down of deferred tax assets. The Company used $3.2 million of cash in operating activities during the same period. The Company is optimistic that it will achieve profitability during 2003, based upon the success of new lines of business and expense reductions realized through consolidation of operations, which was completed during the third quarter of 2002.

Additionally, Avery’s working capital position at December 31, 2002 was a negative $17.0 million, compared to a negative $13.1 million at December 31, 2001. The Company can operate with negative working capital, because a significant portion of its current liabilities do not require payment in the near future. For example, current liabilities at December 31, 2002 include approximately $6.6 million of deposits from customers which are not typically refunded in the ordinary course of business. The customer deposits would be refundable over time, typically over an 18-month period, and only if the customer were to significantly reduce the volume of business done with the Company or terminate its relationship. Most of the Company’s customers have experienced lower call record volumes during 2002, and such volume reductions have reduced certain categories of deposits from customers. Avery has not historically experienced any material loss of customers in its business in any one year.

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The Company also maintains a $9 million line of credit to meet peak cash demands. The credit line includes a $6 million facility for working capital and a $3 million line of credit to provide advance funding to customers. Interest is assessed on outstanding balances at 3% over the prime rate (7.25% at December 31, 2002). The Company’s ability to borrow funds at any point in time is determined by the value of its trade accounts receivable and advances to customers. At December 31, 2002, the Company had $0.4 million available under this credit line.

Cash flow from operating activities. Net cash used in operating activities was $3.2 million during 2002, compared to $1.2 million provided during 2001 (excluding discontinued operations). The $3.2 million of cash used in operating activities during 2002 was principally attributable to a $5.7 million net loss, a $1.6 million decrease in trade accounts payable and accrued liabilities and a $1.5 million increase in receivables related to customer financing offset by a $1.3 million provision for bad debt expense related to notes receivable from related parties, a $1.1 million write down of deferred tax assets, $1.0 million of depreciation and amortization, a $1.0 million increase in deposits and other payables related to customers, a $0.7 million decrease in other receivables and a $0.4 million reduction in deposits with LECs.

The $1.2 million cash provided by operations during 2001 resulted principally from the $6.1 million non-cash loss related to the non pro rata distribution of Primal Solutions, Inc, a $2.4 million write off of an investment in an affiliate, a $1.7 million increase in trade accounts payable and accrued liabilities, a $1.6 million provision for bad debt expense related to notes receivable from related parties, a $1.6 million increase in deposits and other payables related to customers and $0.9 million of depreciation and amortization, offset by a $8.6 million net loss, a $2.4 million increase in other receivables, a $1.7 million increase in trade accounts receivable and a $0.5 million increase in deferred tax assets.

Cash flow from investing activities. Cash used in investing activities was $0.9 million during 2002 compared to $5.0 million used in 2001. During 2002, the Company purchased property and equipment costing $0.6 million and loaned $0.3 million to other entities in exchange for notes receivable. In 2001, investing activities used $5.0 million of cash, principally by the extension of $3.0 million of loans to other entities, the purchase of the ACI assets for $1.6 million (inclusive of acquisition costs) and the purchase of $0.2 million in property and equipment.

Cash flow from financing activities. Cash provided by financing activities was $2.8 million during 2002 compared to $2.2 million in 2001. During 2002, the Company borrowed $3.5 million under its line of credit, and used cash to pay $0.5 million of dividends to preferred stockholders and purchase $0.1 million of treasury stock. In 2001, the Company borrowed $2.6 million under its line of credit, raised $2.0 million from the issuance of common and preferred stock, and used cash to (i) redeem $0.3 million of preferred stock, (ii) purchase $0.2 million of outstanding stock options, (iii) purchase common stock from a related party for $1.2 million, and (iv) pay $0.5 million for preferred stock dividends.

Avery’s operating cash requirements consist principally of working capital requirements, scheduled debt service obligations, payments of preferred dividends and capital expenditures. The Company is expecting improved operating income for 2003, largely as the result of an expense-reducing consolidation of operations, income from newly introduced business services and several expense reduction actions. The Company believes cash flows generated from operations in 2003, together with borrowings under its existing line of credit, will be sufficient to fund working capital needs, debt and dividend payment obligations and capital expenditure requirements for the next twelve months

Deferred Tax Assets

The Company assesses realizability of deferred tax assets based upon the likelihood of earning taxable income in future periods. A majority of the Company’s deferred tax assets relate to items deducted for financial reporting purposes currently but deductible for tax reporting purposes in future periods. Based on the uncertainty of generating future taxable income, the Company has recorded a valuation allowance for all of its net deferred tax asset. The Company has a net operating loss totaling approximately $5 million at December 31, 2002. The net operating loss expires in 2022, if not utilized.

Contractual and Commercial Obligations

The following is a summary of contractual obligations and commercial commitments:

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New Accounting Standards

Statement of Financial Accounting Standards No. 144. Effective January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting for impairment or disposal of long-lived assets and supersedes SFAS No. 121. The adoption of this standard had no impact on the Company’s financial condition, cash flows or results of operations.

In December 2002, FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement is effective for fiscal years ending after December 15, 2002. We have adopted the disclosure requirements of SFAS No. 148 and the adoption of this standard had no material effect on our financial condition, cash flows or results of operations.

Obligations Under Employment Agreements

Avery has employment agreements with its management requiring Avery to pay specified amounts as annual base salaries and certain bonuses. Current aggregate minimum annual cash compensation under the agreements is $462,000, which will be funded from working capital. Additional bonuses are at the sole discretion of Avery’s Board of Directors. Avery also maintains a profit sharing plan for the benefit of its employees.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Avery is exposed to market risk from changes in marketable securities (which consist of certificates of deposit). At December 31, 2002, our marketable securities were recorded at a fair value of approximately $206,000, with an overall weighted average return of approximately 2% and an overall weighted average life of less than one year. The marketable securities held by Avery have exposure to price risk, which is estimated as the potential loss in fair value due to a hypothetical change of 20 basis points (10% of our overall average rate of return) in quoted market prices. This hypothetical change would have an immaterial effect on the recorded value of the marketable securities.

Avery is not exposed to material future earnings or cash flow fluctuations from changes in interest rates on long-term debt since 100% of our long-term debt is at a fixed rate as of December 31, 2002. The fair value of our long-term debt at December 31, 2002 is estimated to be $0.7 million based on the 8% rate of the long-term debt and its maturity of 4 years, which is consistent with market rates currently available for loans of comparable duration and comparable risk.

To date, Avery has not entered into any derivative financial instruments to manage interest rate risk and currently is not evaluating the future use of any such financial instruments.

Avery does not have any exposure to foreign currency transaction gains or losses. Virtually all of our business transactions are in U.S. Dollars.

Item 8. Financial Statements and Supplementary Data

Our consolidated financial statements required to be included in Item 8 are set forth in the Index to Financial Statements set forth on page 24 of this report.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

Omitted pursuant to the Instructions to Item 304 of Regulation S-K.

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PART III

Item 10. Directors and Executive Officers

The following table sets forth certain information with respect to the directors and executive officers of Avery.

Directors hold office until the next annual meeting of stockholders and until their successors are duly elected and qualify.

Patrick J. Haynes, III has served as a director and Chairman of the Board of Avery since November 1995. Mr. Haynes was elected President and Chief Executive Officer of Avery in July 1998, and served in such capacity until December 1, 1998. On May 5, 2000, Mr. Haynes was re-elected as President and Chief Executive Officer of Avery. In 1992, Mr. Haynes founded and became President of American Communications Services, Inc., a start-up, fiber optic, competitive access provider telephone company now known as e.spire Communications, Inc. Mr. Haynes directed development of the strategic plan, put management in place and operated the company on a day-to-day basis for 18 months. He also advised and consulted in connection with the placement of $52 million in equity and $81 million in debt. Mr. Haynes is the Senior Managing Director of the Thurston Group, Inc., a private merchant bank in Chicago. Mr. Haynes and Russell T. Stern, Jr. founded the Thurston Group in 1987. Previously, Mr. Haynes was associated with Merrill Lynch, Oppenheimer & Company, and Lehman Brothers as an investment banker.

Michael J. Labedz has served as a director, President and Chief Operating Officer of Avery since January 2002. Mr. Labedz has also served as President of ACI Billing Services, Inc., a wholly owned subsidiary of Avery, since December 2000. Mr. Labedz has been employed by the Thurston Group, Inc., a private merchant bank in Chicago, since 1998. Previously, he was Vice President of Operations and Chief Financial Officer for a computer services company controlled by Michael Milken’s Knowledge Universe and a management consultant with Deloitte Consulting L.P.

Thomas C. Ratchford has served as a director and Vice President, Chief Financial Officer, Secretary and Treasurer of Avery since January 2002. Prior to joining Avery in November 2001, Mr. Ratchford was the Chief Financial Officer of Qorus.com, Inc. from October 2000. From 1999 to 2000, Mr. Ratchford was the Director of Finance for the Highway Safety Division of Avery Dennison Corporation. From 1993 to 1999, Mr. Ratchford was the Chief Financial Officer of Stimsonite Corporation, a publicly held manufacturer of highway safety products, which was purchased by Avery Dennison Corporation in 1999.

Norman M. Phipps has served as a director of Avery since November 1995. Mr. Phipps has been an independent consultant to us. Until his resignation in August 2001, Mr. Phipps served as a director of LogiMetrics, Inc., a company primarily involved in the manufacture of infrastructure equipment for the wireless broadband telecommunications market. From July 2000 to July 2002, Mr. Phipps has served as Senior Vice President of Administration of LogiMetrics. Mr. Phipps has served as the President and Chief Operating Officer of LogiMetrics from April 1997 until July 2000, and also as interim Chief Financial Officer from March 1998 until July 2000. From May 1996 to April 1997, Mr. Phipps served as Chairman of the Board and Acting President of LogiMetrics. Mr. Phipps has served as a principal of two private investment firms, Phipps, Teman & Company, LLC from January 1994 to December 1997 and CP Capital Partners from January 1991 to December 1993.

J. Alan Lindauer has served as a director of Avery since June 1997. He currently serves as President of Waterside Capital Corporation and has served as President of Waterside Management, Inc., a business consulting firm, since 1986. Mr. Lindauer has also served as a director of Commerce Bank of Virginia since 1986 and serves as chair of its Loan Committee, Norfolk Division, and a member of the Executive, Trust, Marketing, Compensation, and Mergers & Acquisition Committees. Mr. Lindauer served as director of Citizens Trust Bank from 1982 to 1985 as well as a member of its Trust and Loan Committees. Mr. Lindauer founded Minute-Man Fuels in 1963 and managed Minute-Man Fuels until 1985.

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Robert T. Isham, Jr. originally served as a director of Avery from November 1995 to March 1996, and then rejoined the Board in July 1998. Mr. Isham is currently a managing director of the Thurston Group, Inc., a private merchant bank based in Chicago. Previously, he ran his own commercial law practice in Chicago and, before that, he was a partner with the law firm of McDermott, Will & Emery.

Admiral Leighton Smith was elected as a director on January 10, 2002. Admiral Smth retired from the U.S. Navy on October 1, 1996. He is currently serving as a Senior Fellow at the Center for Naval Analysis, is president of his own consulting firm, Leighton Smith Associates, and is Chairman of the Board of Trustees of the U.S. Naval Academy Alumni Association. Admiral Smith was previously the Commander in Chief, U.S. Naval Forces Europe and Commander in Chief Allied Forces Southern Europe (1994-1996).

Compensation of Directors

Each non-employee director receives an annual stipend of $20,000. The non-employee directors of Avery also receive $1,000 for each meeting attended, plus reimbursement of travel expenses. From time to time, the directors have been granted stock options in an amount and at exercise prices approved by the Board at the time of the grant.

Item 11. Executive Compensation

The following table summarizes certain information relating to the compensation paid or accrued by Avery for services rendered during the years ended December 31, 2002, 2001 and 2000 to each person serving as its Chief Executive Officer and each of Avery’s other most highly paid executive officers whose total annual salary and bonus for the years ended December 31, 2002, 2001 and 2000 exceeded $100,000.

Summary Executive Compensation Table

Employment Agreements

Effective November 1, 2001, Mr. Haynes entered into an employment agreement with Avery. Under his employment agreement, Mr. Haynes serves as Chairman of the Board and Chief Executive Officer, subject to the Board of Directors power to elect and remove officers of Avery. The employment agreement expires December 31, 2006. Mr. Haynes’ initial base salary was $420,000 annually. In addition, Mr. Haynes is entitled to receive bonuses based on performance goals as established by the Board of Directors, to receive stock options, to participate in applicable incentive plans established by Avery, to participate in Avery’s hospitalization and major medical plans, or, at his option, to be reimbursed for amounts paid by Mr. Haynes for comparable coverage, and to an automobile of his choice.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires Avery’s directors and executive officers, and persons who own more than 10% of Avery’s common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Directors, executive officers and greater than 10% shareholders are required by SEC regulations to furnish Avery with copies of all Section 16(a) forms they file. Based on a review of such forms, Avery believes that all Section 16(a) filing requirements applicable to its directors and executive officers, and all persons who own more than 10% of Avery’s common stock, were complied with for the year ended December 31, 2002, except that each of Patrick J. Haynes, III, Robert T. Isham, Jr., Norman Phipps and J. Alan Lindauer failed to file one transaction reportable on a Form 4. Each reporting person reported such delinquent transaction on a timely filed Form 5.

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

Beneficial Ownership of Avery’s Voting Securities

On March 25, 2003, Avery had 888,483 shares of common stock, 1,500,000 shares of series d preferred stock, 1,140,126 shares of series g preferred stock, 1,600,000 shares of series h preferred stock and 500,000 shares of series i preferred stock outstanding. The holders of the series d preferred stock are presently entitled to one vote per share on any matters submitted to our stockholders for a vote. The holders of the series g preferred stock are entitled to 0.139525 vote per share on any matter submitted to our stockholders for a vote. The holders of the series h and i preferred stock are entitled to 0.125 vote per share on any matter submitted to our stockholders for a vote. The holders of these securities vote as a single class on all matters submitted to our stockholders for a vote unless a separate vote is otherwise required by law or our certificate of incorporation.

Therefore, as of March 25, 2003, a total of 5,628,609 shares of our voting securities were outstanding, all of which constitute a single class of voting securities having 2,810,059 votes.

The following table sets forth information as of March 25, 2003, for any person who is known to Avery to be the beneficial owner of more than five percent of the votes represented by Avery’s single class of voting securities. A beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares:

All of our voting securities beneficially owned by a person, regardless of the form which such beneficial ownership takes, have been aggregated in calculating the number of shares beneficially owned by such person. In making these calculations, a person is deemed to be the beneficial owner of a security if that person has the right to acquire beneficial ownership of such security within 60 days:

Any securities not outstanding which are subject to such options, warrants, rights or conversion privileges and beneficially owned by a person in the table below are deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person but are not deemed to be outstanding for the purpose of computing the percentage of the class beneficially owned by any other person.

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Security Ownership of Management

The following table sets forth information as of March 25, 2003, as to each class of Avery’s equity securities beneficially owned by each director, by each executive officer, and by all directors and executive officers as a group. In calculating the ownership percentages for Avery’s common stock, we used the 888,483 shares of common stock outstanding on March 25, 2003. Since these calculations do not include the four series of Avery’s voting preferred stock included in the calculations in the preceding table, the beneficial ownership percentages set forth below will differ from those set forth in the preceding table.

Equity Compensation Plan Information

Equity securities have been issued under compensation plans as follows:

Please see Note 12 to the financial statements included in this report for a description of the material features of the compensation plans.

Item 13. Certain Relationships and Related Transactions

During 2000 and 2001, Avery loaned an aggregate of $4,064,000 to Qorus.com, Inc. and its wholly owned subsidiary, Aelix, Inc. The notes evidencing those loans bore interest varying from 10% to 12%. In November 2001, in a transaction approved with the consent of a majority of the stockholders of Qorus, Avery purchased substantially all of the assets comprising the intelligent message communications service business of Qorus and Aelix. We canceled the $4,064,500 of notes payable to us by Qorus and Aelix and agreed to assume certain liabilities of Qorus and Aelix as consideration for the assets. We also agreed to pay to Qorus an

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amount equal to five percent (5%) of the net after-tax income, if any, generated by the acquired intelligent message communications service business for a period of five years following the closing date. Pursuant to an agreement among the parties entered into in March 2002, the parties agreed to eliminate this royalty obligation in exchange for a cash payment in the amount of $100,000, the return of all common shares of Qorus held by Avery or its subsidiaries and the cancellation of all unexercised options to purchase common shares of Qorus held by Avery or its subsidiaries.

Qorus is a publicly held company the securities of which are traded on the OTC Bulletin Board. Patrick J. Haynes, III, a director and the Chairman of the Board and Chief Executive Officer of Avery, beneficially owns approximately 58.1% of Qorus’ common stock, and Robert T. Isham, Jr., a director of Avery, beneficially owns approximately 3.8% of Qorus’ common stock. Mr. Haynes and Mr. Isham are directors of Avery and the sole directors of Qorus. Mr. Haynes is the Chairman of the Board of Directors and Chief Executive Officer and a director of Avery, and the Senior Chairman and Chairman of the Executive Committee of Qorus. Thomas C. Ratchford is the Chief Financial Officer of both Avery and Qorus.

On October 3, 2000, Avery loaned to the following officers and directors of Avery the amount set forth opposite such person’s name in connection with the exercise of certain options and warrants:

Each loan was non-recourse to the borrower, was secured by the common stock purchased, matured in October 2002, and bore interest at the rate of 6.6% per annum. When the notes matured in October 2002, each of the officers and directors elected to surrender the underlying shares of Avery and Primal stock which served as collateral for the loans.

At various times between December 7, 2000 and December 31, 2001, Thurston Communications advanced an aggregate of $1,995,000 to Customer Care & Technology Holdings, Inc. In connection with such advances, Customer Care & Technology Holdings agreed to issue to Avery 1,995,000 shares of its series b senior convertible redeemable preferred stock. Each share of series b preferred stock is convertible at the option of the holder into four shares of the common stock of Customer Care & Technology Holdings. The series b preferred stock pays dividends at the rate of 10% per annum, and is mandatorily redeemable for $1.00 per share on the fifth anniversary of the date of issuance. Patrick J. Haynes, III, a director and the Chairman of the Board, President and Chief Executive Officer of Avery, is the controlling stockholder and the Chairman of the Board of Directors, President and Chief Executive Officer of Customer Care & Technology Holdings. During 2001, this investment became worthless and was written off.

On February 1, 2001, Avery purchased all of the capital stock of Avery held by Franklin Capital Corporation, at the time a beneficial owner of more than five percent (5%) of the common stock of Avery, and all outstanding options and warrants to purchase capital stock of Avery held by Stephen Brown and Spencer Brown. The total purchase price for the transaction was $1,786,851. Included in such total amount were 1,183,938 shares of common stock held by Franklin Capital purchased for $1.02 per share, 350,000 shares of series e preferred stock held by Franklin Capital purchased for $1.00 per share plus accrued and unpaid dividends on the preferred stock in the amount of $14,234, warrants and options to purchase 120,000 shares of common stock of Avery held by Stephen Brown purchased for $120,000, and warrants and options to purchase 95,200 shares of the common stock of Avery held by Spencer Brown purchased for $95,000. In addition, Franklin Capital received 1,533,938 shares of Primal common stock in conjunction with the distribution of Primal’s common stock to Avery’s security holders. Stephen Brown and Spencer Brown control Franklin Capital and are former directors of Avery.

Effective September 4, 2001, Phipps & Company, LLC entered into a consulting agreement with Avery. Norman M. Phipps, a director of Avery, is the sole member of Phipps & Company, LLC Under this consulting agreement, Phipps & Company, LLC serves as an independent contractor. The consulting agreement expired on December 31, 2002, but has been extended on a month-to-month basis. Phipps & Company, LLC receives $20,000 per month during the term of the agreement. In addition, Avery will pay Phipps & Company, LLC an additional, non-accountable expense allowance of $1,000 per month to defray costs of office equipment, rent, secretarial services and other similar expenses. Avery will reimburse Phipps & Company, LLC for all out-of-pocket expenses reasonably incurred by Phipps & Company, LLC, its members, employees, agents and representatives in connection with consulting services, rendered pursuant to the consulting agreement. During 2002, Avery paid Phipps & Company an aggregate of $252,000 pursuant to this consulting agreement.

Effective May 1, 2001, Robert T. Isham, Jr., a director of Avery, entered into a consulting agreement with Avery. Under this consulting agreement, Mr. Isham serves as an independent contractor. The consulting agreement is renewed monthly and may be terminated by either party upon 10 days written notice. Mr. Isham receives $20,000 per month during the term of the agreement. In addition, Avery will reimburse Mr. Isham for all out-of-pocket expenses reasonably incurred by Mr. Isham in connection with

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consulting services rendered pursuant to the consulting agreement. During 2002, Avery paid Mr. Isham an aggregate of $240,000 pursuant to this consulting agreement.

In December 2001, Avery executed and delivered to Waterside Capital Corporation a promissory note in the original principal amount of $680,681. The note bears interest at 8% per annum, provides for quarterly interest payments and matures on December 31, 2006. Avery issued the note to Waterside in exchange for the cancellation of a prior promissory note payable to Waterside in the amount of $350,000 which was otherwise due to mature on December 12, 2002. In addition, Waterside agreed to surrender for cancellation 54,396 shares of Avery’s common stock, warrants to purchase for $10.00 per share up to 15,000 shares of Avery’s common stock and warrants to purchase for $12.00 per share up to 5,105 shares of Avery’s common stock. Alan J. Lindauer, a director of Avery, is a director and the President and Chief Executive Officer of Waterside.

We paid Thurston Group $131,179 in 2002 for the rental of office space occupied by our corporate staff in Chicago, Illinois. Patrick J. Haynes, III, a director and the Chairman of the Board, President and Chief Executive Officer of Avery, is a principal and the Senior Managing Director of Thurston Group. In 2001, we paid Thurston Group $96,070 for rental of office space.

Item 14. Controls and Procedures

Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Avery’s disclosure controls and procedures are effective in timely alerting them to material information relating to Avery required to be included in our periodic SEC filings.

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

The exhibits required to be furnished pursuant to Item 15(a) are listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated herein by reference.

None

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: April 18, 2003

In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates stated.

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CERTIFICATION BY CHIEF EXECUTIVE OFFICER

I, Patrick J. Haynes, III, Chief Executive Officer of Avery Communications, Inc. (the “Company”), certify that:

Date: April 18, 2003

    /s/    PATRICK J. HAYNES, III            

Patrick J. Haynes, III,

Chief Executive Officer

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CERTIFICATION BY CHIEF FINANCIAL OFFICER

I, Thomas C. Ratchford, Chief Financial Officer of Avery Communications, Inc. (the “Company”), certify that:

Date: April 18, 2003

    /s/    THOMAS C. RATCHFORD            

Thomas C. Ratchford,

Chief Financial Officer

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AVERY COMMUNICATIONS, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of

    Avery Communications, Inc.

We have audited the accompanying consolidated balance sheets of Avery Communications, Inc., and subsidiaries as of December 31, 2002 and 2001 and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the three year period ended December 31, 2002. We did not audit the financial statements of Primal Solutions, Inc., a consolidated subsidiary for the year ended December 31, 2000, which statements reflect total revenue of $9,515,805. This statement was audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for Primal Solutions, Inc., is based solely on the report of the other auditors. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, based on our report and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avery Communications, Inc. and subsidiaries as of December 31, 2002 and 2001 and the results of their operations and their cash flows for each of the years in the three year period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.