**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**
| **x**                                                                                                                                                                                                                      | ** ** | **Quarterly Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                       |       |                                                                                                    |
| **For the quarterly period ended June 30, 2007**                                                                                                                                                                           |
|                                                                                                                                                                                                                       |       |                                                                                                    |
| **OR**                                                                                                                                                                                                                     |
| ** **                                                                                                                                                                                                                 | ** ** | ** **                                                                                              |
| **o**                                                                                                                                                                                                                      | ** ** | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
|                                                                                                                                                                                                                       |       |                                                                                                    |
| **For the  transition period  from               to               ** |

 

**Commission File Number: 0-24081**

**EVOLVING SYSTEMS, INC.**

(Exact name of registrant as specified in its charter)
| **Delaware**                                                    | ** ** | **84-1010843**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or  organization) | ** ** | (I.R.S. Employer Identification No.) |
| ** **                                                      | ** ** | ** **                           |
| **9777 Pyramid Court, Suite 100 Englewood,  Colorado**     | ** ** | **80112**                            |
| (Address of principal executive offices)                        | ** ** | (Zip Code)                           |
|                                                            |       |                                 |
| **(303) 802-1000**                                         |
| (Registrant’s telephone number, including area code)       |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x No o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition ofaccelerated filer and large accelerated filer: in Rule 12b-2 of the ExchangeAct. (Check one):
| Large accelerated filer  ̈ | Accelerated filer  ̈ | Non-accelerated filer x |
|-------------------------------------|-------------------------------|------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).   Yes  ̈  No x

As of July 31, 2007 therewere 17,685,969 shares outstanding of Registrant’s Common Stock (par value$0.001 per share).

 

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**EVOLVING SYSTEMS, INC.**

**Quarterly Report on Form 10-Q**

**June 30, 2007**

**Table of Contents**
| **PART I – FINANCIAL INFORMATION**   |   |
|-------------------------------------------|--------|
| Item 1                                    |   | Financial Statements |   |
|                                      |   | Condensed Consolidated  Balance Sheets as of June 30, 2007 and December 31, 2006 (Unaudited) |   |
|                                      |   | Condensed  Consolidated Statements of Operations for the Three and Six Months Ended June  30, 2007 and 2006 (Unaudited) |   |
|                                      |   | Condensed  Consolidated Statements of Changes In Stockholders’ Equity and Comprehensive  Income for the Six Months Ended June 30, 2007 (Unaudited) |   |
|                                      |   | Condensed  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007  and 2006 (Unaudited) |   |
|                                      |   | Notes to  Unaudited Condensed Consolidated Financial Statements |   |
| Item 2                                    |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
| Item 3                                    |   | Quantitative  and Qualitative Disclosures About Market Risk |   |
| Item 4                                    |   | Controls and  Procedures |   |
|                                      |   |
| **PART II– OTHER  INFORMATION** |   |
| Item 1                                    |   | Legal Proceedings |   |
| Item 1A                                   |   | Risk Factors |   |
| Item 2                                    |   | Unregistered  Sales of Equity Securities and Use of Proceeds |   |
| Item 3                                    |   | Defaults  upon Senior Securities |   |
| Item 4                                    |   | Submission  of Matters to a Vote of Security Holders |   |
| Item 5                                    |   | Other Information |   |
| Item 6                                    |   | Exhibits |   |
|                                      |   |   |   |
| Signature                                 |   |

 

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**PART I — FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**EVOLVING SYSTEMS, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands except share data)**

**(unaudited)**
| ** **                                                                                                                                                                                             | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                             |       |                    |       |                        |       |
| Current assets:                                                                                                                                                                                        |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                             |       | $                       | 9,898      |                        | $          | 5,076 |   |
| Current portion  of restricted cash                                                                                                                                                                    |       | —                  |       | 300                         |       |
| Contract  receivables, net of allowance of $71 at June 30, 2007 and $70 at December 31,  2006                                                                                                          |       | 4,780                   |       | 9,206                       |       |
| Unbilled  work-in-progress                                                                                                                                                                             |       | 971                     |       | 1,064                       |       |
| Deferred foreign  income taxes                                                                                                                                                                         |       | —                  |       | 15                          |       |
| Prepaid and  other current assets                                                                                                                                                                      |       | 1,702                   |       | 1,686                       |       |
| Total current  assets                                                                                                                                                                                  |       | 17,351                  |       | 17,347                      |       |
| Property and equipment,  net                                                                                                                                                                           |       | 1,016                   |       | 1,349                       |       |
| Amortizable intangible  assets, net                                                                                                                                                                    |       | 5,481                   |       | 6,155                       |       |
| Goodwill                                                                                                                                                                                               |       | 26,492                  |       | 26,027                      |       |
| Long-term restricted  cash                                                                                                                                                                             |       | 100                     |       | —                      |       |
| Other long-term assets                                                                                                                                                                                 |       | 374                     |       | 460                         |       |
| Total assets                                                                                                                                                                                           |       | $                       | 50,814     |                        | $          | 51,338 |   |
|                                                                                                                                                                                                   |       |                    |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                         |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                                                                   |       |                    |       |                        |       |
| Current portion  of capital lease obligations                                                                                                                                                          |       | $                       | 19         |                        | $          | 37 |   |
| Current portion  of long-term debt                                                                                                                                                                     |       | 2,250                   |       | 2,000                       |       |
| Accounts payable  and accrued liabilities                                                                                                                                                              |       | 4,482                   |       | 4,428                       |       |
| Deferred foreign  income taxes                                                                                                                                                                         |       | 51                      |       | —                      |       |
| Unearned revenue                                                                                                                                                                                       |       | 9,472                   |       | 10,079                      |       |
| Total current  liabilities                                                                                                                                                                             |       | 16,274                  |       | 16,544                      |       |
| Long-term liabilities:                                                                                                                                                                                 |       |                    |       |                        |       |
| Capital lease  obligations, net of current portion                                                                                                                                                     |       | 90                      |       | 34                          |       |
| Other long-term  obligations                                                                                                                                                                           |       | 1,092                   |       | 749                         |       |
| Long-term debt,  net of current portion                                                                                                                                                                |       | 9,936                   |       | 11,370                      |       |
| Deferred foreign  income taxes                                                                                                                                                                         |       | 1,097                   |       | 1,202                       |       |
| Total  liabilities                                                                                                                                                                                     |       | 28,489                  |       | 29,899                      |       |
|                                                                                                                                                                                                   |       |                    |       |                        |       |
| Commitments and  contingencies (Note 10)                                                                                                                                                               |       |                    |       |                        |       |
|                                                                                                                                                                                                   |       |                    |       |                        |       |
| Series B convertible  redeemable preferred stock                                                                                                                                                       |       | 5,892                   |       | 11,281                      |       |
|                                                                                                                                                                                                   |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                             |       |                    |       |                        |       |
| Preferred stock,  $0.001 par value; 2,000,000 shares authorized; 504,915 and 966,666 shares of  Series B issued and outstanding as of June 30, 2007 and December 31, 2006,  respectively (shown above) |       | —                  |       | —                      |       |
| Common stock,  $0.001 par value; 40,000,000 shares authorized; 17,676,716 and 16,233,646  shares issued and outstanding as of June 30, 2007 and December 31, 2006,  respectively                       |       | 18                      |       | 16                          |       |
| Additional  paid-in capital                                                                                                                                                                            |       | 74,648                  |       | 68,825                      |       |
| Accumulated  other comprehensive income                                                                                                                                                                |       | 2,170                   |       | 1,466                       |       |
| Accumulated  deficit                                                                                                                                                                                   |       | (60,403                 | )          | (60,149                     | )          |
| Total  stockholders’ equity                                                                                                                                                                       |       | 16,433                  |       | 10,158                      |       |
| Total liabilities and  stockholders’ equity                                                                                                                                                       |       | $                       | 50,814     |                        | $          | 51,338 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

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**EVOLVING SYSTEMS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(in thousands except per share data)**

**(unaudited)**
| ** **                                                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| **REVENUE**                                                                  | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| License fees and  services                                                   |       | $                                               | 4,742      |                                          | $          | 3,966 |   | $ | 8,733 |   | $ | 7,865 |   |
| Customer support                                                             |       | 4,380                                           |       | 4,274                                         |       | 8,850 |   | 8,503 |   |
| Total revenue                                                                |       | 9,122                                           |       | 8,240                                         |       | 17,583 |   | 16,368 |   |
|                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| **COSTS OF REVENUE AND OPERATING  EXPENSES**                                 | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Costs of license  fees and services, excluding depreciation and amortization |       | 1,941                                           |       | 1,657                                         |       | 3,865 |   | 3,532 |   |
| Costs of  customer support, excluding depreciation and amortization          |       | 1,716                                           |       | 1,551                                         |       | 3,209 |   | 3,177 |   |
| Sales and  marketing                                                         |       | 2,186                                           |       | 2,241                                         |       | 4,225 |   | 4,796 |   |
| General and  administrative                                                  |       | 1,648                                           |       | 1,381                                         |       | 3,199 |   | 2,788 |   |
| Product  development                                                         |       | 358                                             |       | 799                                           |       | 907 |   | 1,546 |   |
| Depreciation                                                                 |       | 252                                             |       | 283                                           |       | 540 |   | 576 |   |
| Amortization                                                                 |       | 392                                             |       | 893                                           |       | 780 |   | 1,790 |   |
| Impairment of  goodwill and intangible assets                                |       | —                                          |       | 16,516                                        |       | — |   | 16,516 |   |
| Restructuring  and other expense (recovery)                                  |       | —                                          |       | (9                                            | )          | (1 | ) | (23 | ) |
| Total costs of revenue  and operating expenses                               |       | 8,493                                           |       | 25,312                                        |       | 16,724 |   | 34,698 |   |
|                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Income (loss) from  operations                                               |       | 629                                             |       | (17,072                                       | )          | 859 |   | (18,330 | ) |
|                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Other income  (expense):                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Interest income                                                              |       | 81                                              |       | 36                                            |       | 145 |   | 74 |   |
| Interest expense                                                             |       | (451                                            | )          | (496                                          | )          | (915 | ) | (1,005 | ) |
| Gain on  extinguishment of debt                                              |       | —                                          |       | —                                        |       | 42 |   | — |   |
| Foreign currency  exchange loss                                              |       | (104                                            | )          | (29                                           | )          | (162 | ) | (30 | ) |
| Other expense,  net                                                          |       | (474                                            | )          | (489                                          | )          | (890 | ) | (961 | ) |
|                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Income (loss) before  income taxes                                           |       | 155                                             |       | (17,561                                       | )          | (31 | ) | (19,291 | ) |
|                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Income tax  expense (benefit)                                                |       | 83                                              |       | (1,375                                        | )          | 223 |   | (1,454 | ) |
|                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Net income (loss)                                                            |       | $                                               | 72         |                                          | $          | (16,186 | ) | $ | (254 | ) | $ | (17,837 | ) |
|                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Basic and diluted  income (loss) per common share                            |       | $                                               | 0.00       |                                          | $          | (0.85 | ) | $ | (0.01 | ) | $ | (0.93 | ) |
|                                                                         |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average basic  shares outstanding                                   |       | 19,180                                          |       | 19,090                                        |       | 19,167 |   | 19,078 |   |
| Weighted average diluted shares outstanding                                  |       | 19,604                                          |       | 19,090                                        |       | 19,167 |   | 19,078 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

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**EVOLVINGSYSTEMS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY**

**ANDCOMPREHENSIVE INCOME**

**(inthousands, except share data)**

**(unaudited)**
| ** **                                                        | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** **             | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------|------------|-----------------|------------|------------------------|------------|------------|------------|
| ** **                                                        | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Other**       | ** ** | ** **             | ** ** | **Total**  | ** ** |
| ** **                                                        | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Comprehensive** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                                        | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Income**      | ** ** | **Deficit**            | ** ** | **Equity** | ** ** |
| **Balance  at December 31, 2006**                                 |       | 16,233,646            |       | $           | 16         |              | $          | 68,825          |       | $                      | 1,466      |       | $          | (60,149 | ) | $ | 10,158 |   |
| Stock option  exercises                                           |       | 19,688                |       | —      |       | 19                |       | —          |       | —                 |       | 19         |       |
| Common stock  issued pursuant to the Employee Stock Purchase Plan |       | 38,129                |       | 1           |       | 35                |       | —          |       | —                 |       | 36         |       |
| Stock-based  compensation expense                                 |       | —                |       | —      |       | 381               |       | —          |       | —                 |       | 381        |       |
| Preferred stock  conversion                                       |       | 1,385,253             |       | 1           |       | 5,388             |       | —          |       | —                 |       | 5,389      |       |
| Comprehensive  income:                                            |       |                  |       |        |       |              |       |            |       |                   |       |       |       |
| Net loss                                                          |       | —                |       | —      |       | —            |       | —          |       | (254                   | )          |       |       |
| Foreign currency translation adjustment                           |       | —                |       | —      |       | —            |       | 704             |       | —                 |       |       |       |
| Comprehensive  income                                             |       |                  |       |        |       |              |       |            |       |                   |       | 450        |       |
| **Balance  at June 30, 2007**                                     |       | 17,676,716            |       | $           | 18         |              | $          | 74,648          |       | $                      | 2,170      |       | $          | (60,403 | ) | $ | 16,433 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

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**EVOLVING SYSTEMS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(in thousands)**

**(unaudited)**
| ** **                                                                       | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                       |       |                                          |       |   |   |
| Net loss                                                                         |       | $                                             | (254       | ) | $ | (17,837 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                                          |       |   |   |
| Depreciation                                                                     |       | 540                                           |       | 576 |   |
| Amortization of  intangible assets                                               |       | 780                                           |       | 1,790 |   |
| Amortization of  debt issuance costs                                             |       | 125                                           |       | 134 |   |
| Equity  compensation                                                             |       | 381                                           |       | 443 |   |
| Impairment of  goodwill and intangible assets                                    |       | —                                        |       | 16,516 |   |
| Gain on disposal  of property and equipment                                      |       | (1                                            | )          | (20 | ) |
| Gain on  extinguishment of debt                                                  |       | (42                                           | )          | — |   |
| Foreign currency  transaction losses, net                                        |       | 162                                           |       | 30 |   |
| Benefit from  foreign deferred income taxes                                      |       | (65                                           | )          | (1,832 | ) |
| Change in  operating assets and liabilities:                                     |       |                                          |       |   |   |
| Contract  receivables                                                            |       | 4,502                                         |       | 5,115 |   |
| Unbilled  work-in-progress                                                       |       | 109                                           |       | 57 |   |
| Prepaid and  other current assets                                                |       | (16                                           | )          | (384 | ) |
| Accounts payable  and accrued liabilities                                        |       | 197                                           |       | (732 | ) |
| Unearned revenue                                                                 |       | (657                                          | )          | (636 | ) |
| Other                                                                            |       | 343                                           |       | — |   |
| Net cash  provided by operating activities                                       |       | 6,104                                         |       | 3,220 |   |
|                                                                             |       |                                          |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                       |       |                                          |       |   |   |
| Purchases of  property and equipment                                             |       | (322                                          | )          | (223 | ) |
| Proceeds from  sale of property and equipment                                    |       | 1                                             |       | 20 |   |
| Earnout payments  from business combinations                                     |       | (24                                           | )          | (151 | ) |
| Net cash used in  investing activities                                           |       | (345                                          | )          | (354 | ) |
|                                                                             |       |                                          |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                       |       |                                          |       |   |   |
| Capital lease  payments                                                          |       | (12                                           | )          | (17 | ) |
| Principal  payments on long-term debt                                            |       | (1,141                                        | )          | (500 | ) |
| Reduction in  restricted cash                                                    |       | 200                                           |       | — |   |
| Proceeds from  issuance of common stock                                          |       | 55                                            |       | 86 |   |
| Net cash used in  financing activities                                           |       | (898                                          | )          | (431 | ) |
|                                                                             |       |                                          |       |   |   |
| Effect of  foreign exchange rate changes on cash                                 |       | (39                                           | )          | 124 |   |
|                                                                             |       |                                          |       |   |   |
| Net increase in  cash and cash equivalents                                       |       | 4,822                                         |       | 2,559 |   |
| Cash and cash  equivalents at beginning of period                                |       | 5,076                                         |       | 3,883 |   |
| Cash and cash  equivalents at end of period                                      |       | $                                             | 9,898      |   | $ | 6,442 |   |
|                                                                             |       |                                          |       |   |   |
| Supplemental disclosure  of other cash and non-cash transactions:                |       |                                          |       |   |   |
| Interest paid                                                                    |       | $                                             | 460        |   | $ | 551 |   |
| Income taxes  paid                                                               |       | $                                             | 27         |   | $ | 499 |   |
| Conversion of preferred  stock into common stock                                 |       | $                                             | 5,389      |   | $ | — |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

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**EVOLVINGSYSTEMS, INC.**

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1 –BASIS OF PRESENTATION**

**Organization–**We are a global provider of software solutions and servicesto the wireless, wireline and IP carrier market. We maintain long-standingrelationships with many of the largest wireline, wireless and IP communicationscarriers worldwide. Our customers rely on us to develop, deploy, enhance,maintain and integrate complex, highly reliable software solutions for a rangeof Operations Support Systems (“OSS”). We offer software products and solutions in three core areas:  service activation solutions used toactivate complex bundles of voice, video and data services for traditional andnext generation wireless and wireline networks; numbering solutions thatenable carriers to comply with government-mandated requirements regardingnumber portability as well as providing phone number management and assignmentcapabilities; and mediation solutions supporting data collection forboth service assurance and billing applications.

**Interim Consolidated Financial Statements**– The accompanying unaudited condensed consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States of America (“GAAP”) and in conformity with the instructionsto Form 10-Q and Article 10 of Regulation S-X and the related rules andregulations of the Securities and Exchange Commission (“SEC”).  Accordingly, certain information and notedisclosures normally included in financial statements prepared in accordancewith GAAP have been condensed or omitted pursuant to such rules andregulations. However, we believe that the disclosures included in thesefinancial statements are adequate to make the information presented notmisleading. The unaudited condensed consolidated financial statements includedin this document have been prepared on the same basis as the annualconsolidated financial statements, and in our opinion, reflect all adjustments,which include normal recurring adjustments necessary for a fair presentation inaccordance with GAAP and SEC regulations for interim financial statements. Theresults for the six months ended June 30, 2007 are not necessarily indicativeof the results that we will have for any subsequent period.  These unaudited condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and the notes to those statements for theyear ended December 31, 2006 included in our Annual Report on Form 10-K.

**Use of Estimates –**The preparation offinancial statements in conformity with accounting principles generallyaccepted in the U.S. requires us to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities, at the date of the financial statements, as well as thereported amounts of revenue and expenses during the reporting period. We madeestimates with respect to revenue recognition for estimated hours to completeprojects accounted for using the percentage of completion method, allowance fordoubtful accounts, income tax valuation allowance, fair values of long-livedassets, valuation of intangible assets and goodwill, useful lives for property,equipment and intangible assets, business combinations, capitalization ofinternal software development costs and fair value of stock-based compensationamounts.  Actual results could differfrom these estimates.

**ForeignCurrency Translation –**Our functional currency is the U.S.dollar.  The functional currency of ourforeign operations, generally, is the respective local currency for eachforeign subsidiary.  Assets andliabilities of foreign operations denominated in local currencies aretranslated at the spot rate in effect at the applicable reporting date.  Our consolidated statements of operations aretranslated at the weighted average rate of exchange during the applicableperiod.  The resulting unrealizedcumulative translation adjustment, net of applicable income taxes, is recordedas a component of accumulated other comprehensive income (loss) in stockholders’equity.  Realized and unrealizedtransaction gains and losses generated by transactions denominated in acurrency different from the functional currency of the applicable entity arerecorded in other income (loss) in the period in which they occur.

**Principlesof Consolidation –**The consolidated financial statementsinclude the accounts of Evolving Systems and subsidiaries, all of which arewholly owned.  All significantintercompany transactions and balances have been eliminated in consolidation.

**Goodwill –**Goodwillis the excess of acquisition cost of an acquired entity over the fair value ofthe identifiable net assets acquired. Goodwill is not amortized, but tested for impairment annually orwhenever indicators of impairment exist. These indicators may include asignificant change in the business climate, legal factors, operatingperformance indicators, competition, sale or disposition of a significantportion of the business or other factors. For purposes of the goodwillevaluation, we compare the fair value of each of our reporting units to itsrespective carrying amount. If the carrying value of a reporting unit were toexceed its fair value, we would then compare the fair value of the reportingunit’s goodwill to its carrying amount, and any excess of the carrying amountover the fair value would be charged to operations as an impairment loss.

**Intangible Assets –**Amortizable intangible assets consistprimarily of purchased software and licenses, customer contracts andrelationships, trademark and tradenames, and business partnerships acquired inconjunction with our purchases of CMS Communications, Inc. (“CMS”), TelecomSoftware Enterprises, LLC (“TSE”) and Tertio Telecoms Ltd. (“Evolving SystemsU.K.”).  These finite life assets areamortized using the straight-line method over their estimated lives.

We assess the impairment ofidentifiable intangibles if events or changes in circumstances indicate thatthe carrying value of the asset may not be recoverable. Factors that weconsider significant which could trigger an impairment analysis include thefollowing:

7

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·                  Significant under-performance relative tohistorical or projected future operating results;

·                  Significant changes in the manner of use of theacquired assets or the strategy of the overall business;

·                  Significant negative industry or economic trends;and/or

·                  Significant decline in our stock price for asustained period.

If, as a result of the existenceof one or more of the above indicators of impairment, we determine that thecarrying value of intangibles and/or long-lived assets may not be recoverable,we compare the estimated undiscounted cash flows expected to result from theuse of the asset and its eventual disposition to the asset’s carrying amount.If an amortizable intangible or long-lived asset is not deemed to berecoverable, we will recognize an impairment loss representing the excess ofthe asset’s carrying value over its estimated fair value.

**Revenue Recognition –**Werecognize revenue from two primary sources: license fees and services, andcustomer support, in accordance with Statement of Position (“SOP”) 97-2, “SoftwareRevenue Recognition,” as amended and interpreted by SOP 98-9, “Modification ofSOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.”  Staff Accounting Bulletin (“SAB”)No. 104, “Revenue Recognition,” provides further interpretive guidance forpublic companies on the recognition, presentation and disclosure of revenue infinancial statements.  In addition to thecriteria described below, we generally recognize revenue when an agreement issigned, the fee is fixed or determinable and collectibility is reasonablyassured.

Themajority of our license fees and services revenue is generated from fixed-pricecontracts, which provide for licenses to our software products and services tocustomize such software to meet our customers’ use.   Generally, when the services are determinedto be essential to the functionality of the delivered software, we recognizerevenue using the percentage-of-completion method of accounting, in accordancewith SOP 97-2 and SOP 81-1, “Accounting for Long-Term Construction TypeContracts.”  The percentage of completionfor each contract is estimated based on the ratio of direct labor hoursincurred to total estimated direct labor hours. Since estimated direct labor hours, and changes thereto, can have asignificant impact on revenue recognition, these estimates are critical and arereviewed regularly.  Amounts billed inadvance of services being performed are recorded as unearned revenue. Unbilledwork-in-progress represents revenue earned but not yet billable under the termsof the fixed-price contracts. All such amounts are expected to be billed andcollected within 12 months.

We mayencounter budget and schedule overruns on fixed price contracts caused byincreased labor or overhead costs. Adjustments to cost estimates are made inthe periods in which the facts requiring such revisions become known. Estimatedlosses, if any, are recorded in the period in which current estimates of totalcontract revenue and contract costs indicate a loss.

Inarrangements where the services are not essential to the functionality of the software,we recognize license revenue upon delivery. To the extent that Vendor-Specific Objective Evidence (“VSOE”) of thefair value of undelivered elements exists, fees from multiple elementarrangements are unbundled and recorded as revenue as the elements aredelivered.  If VSOE for the undeliveredelements does not exist, fees from such arrangements are deferred until theearlier of the date that VSOE does exist on the undelivered elements or all ofthe elements have been delivered.

Servicesrevenue from fixed-price contracts is generally recognized using theproportional performance method of accounting, which is similar to thepercentage of completion method described above. Revenue from professionalservices provided pursuant to time-and-materials based contracts and trainingservices are recognized as the services are performed, as that is when ourobligation to our customers under such arrangements is fulfilled.

Customersupport, including maintenance revenue, is generally recognized ratably over theservice contract period. When maintenance is bundled with a license feearrangement, its fair value, based upon VSOE, is deferred and recognized duringthe periods when services are provided.

**Stock-based Compensation –**We account for stock-based compensation under Statement of Financial AccountingStandards No. 123(Revised), “Share-Based Payment” (“SFAS 123R”).  This statement replaced SFAS No. 123, “Accountingfor Stock-Based Compensation” (“SFAS 123”) and superseded APB Opinion No. 25, “Accountingfor Stock Issued to Employees.”  UnderSFAS 123R, we apply a fair-value-based measurement method to account forshare-based payment transactions with employees and directors and recordcompensation cost for all stock awards granted after January 1, 2006 and awardsmodified, repurchased, or cancelled after that date. In addition, we recordcompensation costs associated with the vesting of unvested options outstandingat January 1, 2006 using the guidance under SFAS 123.  Stock-based compensation is a non-cash expensebecause we settle these obligations by issuing shares of our common stockinstead of settling such obligations with cash payments.  Compensation cost for options is recognizedon a straight-line basis over the vesting period using an estimated forfeiturerate.   Effective January 1, 2006, stockoption grants and employee stock purchase plan purchases were accounted forunder SFAS 123R.  We used theBlack-Scholes model to estimate the fair value of each option grant on the dateof grant.  This model requires the use ofestimates for expected term of the options and expected volatility of the priceof our common stock.

**Recent Accounting Pronouncements –**InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair ValueOption for Financial Assets and Financial 

8

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Liabilities -Including an Amendment of FASB Statement No. 115” (“SFAS 159”).  SFAS 159 permits entities to choose tomeasure eligible items at fair value at specific election dates (the ‘‘fairvalue option’’). Unrealized gains and losses on items for which the fair valueoption has been elected shall be reported in earnings at each subsequentreporting period. This accounting standard is effective for us beginningJanuary 1, 2008. We are currently assessing the impact of SFAS 159.

InSeptember 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS157”). SFAS 157 defines fair value, establishes a framework for measuring fairvalue under generally accepted accounting principles, and expands disclosuresabout fair value measurements. SFAS 157 is effective for financial statementsissued for fiscal years and interim periods beginning after November 15, 2007.We have not completed our evaluation of the impact of this standard on ourconsolidated financial statements or our future estimates of fair value.

**NOTE 2 –GOODWILL AND INTANGIBLE ASSETS**

We recorded goodwill as a resultof three acquisitions which occurred over the period from November 2003 toNovember 2004. We acquired CMS in November 2003, TSE in October 2004 andEvolving Systems U.K. in November 2004.

Changesin the carrying amount of goodwill by reporting unit were as follows (inthousands):
|                                                        | ** ** | **License and Services** | ** ** | **Customer Support** | ** ** | **Total** | ** ** |
|--------------------------------------------------------|------------|------------------------------------|------------|---------------------------|------------|-----------|------------|
| ** **                                             | ** ** | **U.S.**                           | ** ** | **U.K.**                  | ** ** | **U.S.**  | ** ** | **U.K.** | ** ** | **Goodwill** | ** ** |
| Balance as of December 31, 2006                        |       | $                                  | —     |                      | $          | 8,944     |       | $ | 6,033 |   | $ | 11,050 |   | $ | 26,027 |   |
| Effects of changes in foreign currency exchange  rates |       | —                             |       | 208                       |       | —    |       | 257 |   | 465 |   |
| Balance as of June 30, 2007                            |       | $                                  | —     |                      | $          | 9,152     |       | $ | 6,033 |   | $ | 11,307 |   | $ | 26,492 |   |

 

Weconducted our annual goodwill impairment test as of July 31, 2006, and wedetermined that goodwill was not impaired as of the test date.  From July 31, 2006 through June 30, 2007, noevents have occurred that we believe may have impaired goodwill.

Identifiableintangible assets are amortized on a straight-line basis over estimated livesranging from one to seven years and include the cumulative effects of foreigncurrency exchange rates.  As of June 30,2007 and December 31, 2006, identifiable intangibles were as follows (inthousands):
| ** **                | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** | **Weighted-** | ** ** |
|---------------------------|------------|-----------------------------|------------|---------------------------------|------------|---------------|------------|
| ** **                | ** ** | ** **                  | ** ** | ** **                      | ** ** | **Net**       | ** ** | ** ** | ** ** | ** ** | ** ** | **Net** | ** ** | **Average** | ** ** |
| ** **                | ** ** | **Gross**                   | ** ** | **Accumulated**                 | ** ** | **Carrying**  | ** ** | **Gross** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** | **Amortization** | ** ** |
| ** **                | ** ** | **Amount**                  | ** ** | **Amortization**                | ** ** | **Amount**    | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Period** | ** ** |
| Purchased software        |       | $                           | 2,078      |                            | $          | 472           |       | $ | 1,606 |   | $ | 2,038 |   | $ | 237 |   | $ | 1,801 |   | 4.7 yrs |   |
| Purchased licenses        |       | 227                         |       | 97                              |       | 130           |       | 227 |   | 49 |   | 178 |   | 2.3 yrs |   |
| Trademarks and tradenames |       | 899                         |       | 128                             |       | 771           |       | 879 |   | 63 |   | 816 |   | 7.0 yrs |   |
| Business partnerships     |       | 147                         |       | 29                              |       | 118           |       | 143 |   | 14 |   | 129 |   | 5.0 yrs |   |
| Customer relationships    |       | 3,717                       |       | 861                             |       | 2,856         |       | 3,657 |   | 426 |   | 3,231 |   | 5.6 yrs |   |
|                      |       | $                           | 7,068      |                            | $          | 1,587         |       | $ | 5,481 |   | $ | 6,944 |   | $ | 789 |   | $ | 6,155 |   | 5.4 yrs |   |

 

Amortization expense ofidentifiable intangible assets was $0.4 million and $0.8 million for the threeand six months ended June 30, 2007, respectively, and $0.9 million and$1.8 million for the three and six months ended June 30, 2006.  As Evolving Systems U.K. uses theGreat British pound as its functional currency, the amount of futureamortization actually recorded will be based upon exchange rates in effect atthat time. Expected future amortizationexpense related to identifiable intangibles based on our carrying amount as ofJune 30, 2007 was as follows (in thousands):
| Twelve months ending June 30, | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|------------|------------|
| 2008                                              |       | $          | 1,544      |   |
| 2009                                              |       | 1,133      |       |
| 2010                                              |       | 904        |       |
| 2011                                              |       | 891        |       |
| 2012                                              |       | 505        |       |
| Thereafter                                        |       | 504        |       |
|                                              |       | $          | 5,481      |   |

 

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**NOTE 3 –EARNINGS PER COMMON SHARE**

Basicearnings per share (“EPS”) is computed by dividing net income or loss availableto common stockholders by the weighted average number of shares outstandingduring the period, including common stock issuable under participatingsecurities, such as the Series B Convertible Redeemable Preferred Stock (“SeriesB Preferred Stock”). Diluted EPS is computed using the weighted average numberof shares outstanding, including participating securities, plus all potentiallydilutive common stock equivalents. Common stock equivalents consist of stockoptions and shares held in escrow. The following is the reconciliation of thedenominator of the basic and diluted EPS computations (in thousands):
|                                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Weighted average  common shares outstanding         |       | 17,665                                          |       | 16,190                                        |       | 17,180 |   | 16,178 |   |
| Participating  securities                           |       | 1,515                                           |       | 2,900                                         |       | 1,987 |   | 2,900 |   |
| Basic weighted  average shares outstanding          |       | 19,180                                          |       | 19,090                                        |       | 19,167 |   | 19,078 |   |
| Effect of  dilutive securities                      |       | 424                                             |       | —                                        |       | — |   | — |   |
| Diluted weighted  average common shares outstanding |       | 19,604                                          |       | 19,090                                        |       | 19,167 |   | 19,078 |   |

 

Weightedaverage options to purchase 1.1 million shares of common stock were excludedfrom the dilutive stock calculation for the six months ended June 30, 2007, astheir effect would have been anti-dilutive as a result of the net loss for theperiod.  Weighted average options topurchase 2.3 million and 2.9 million shares of common stock were excluded fromthe dilutive stock calculation for the three and six months ended June 30, 2007because their exercise prices were greater than the average fair value of ourcommon stock for the period.

Weightedaverage options to purchase 0.6 million and 1.2 million shares of common stockwere excluded from the dilutive stock calculation for the three and six monthsended June 30, 2006, respectively, as their effect would have beenanti-dilutive as a result of the net loss for the periods.   Weighted average options to purchase 3.6million and 3.0 million shares of common stock were excluded from the dilutivestock calculation for the three and six months ended June 30, 2006,respectively, because their exercise prices were greater than the average fairvalue of our common stock for the period.

**NOTE 4 –SHARE-BASED COMPENSATION**

Weadopted SFAS 123R effectiveJanuary 1, 2006 using the modified prospective method.  We previously applied theintrinsic-value-based method in accounting for the recognition of stock-basedcompensation arrangements and the fair value method only for disclosurepurposes.  Our statements of operationsfrom January 1, 2006 forward include charges for stock-based compensation.  We recognized $132,000, or $0.01 per share,and $381,000, or $0.02 per share, of compensation expense in the statement ofoperations for the three and six months ended June 30, 2007, respectively withrespect to our stock-based compensation plans. We recognized $207,000, or $0.01 per share, and $443,000, or $0.02 pershare, of compensation expense in the statement of operations for the three andsix months ended June 30, 2006, respectively with respect to our stock-basedcompensation plans.  The following tablesummarizes stock-based compensation expenses recorded in the consolidatedstatements of operations (in thousands):
|                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cost of license  fee and services, excluding depreciation and amortization |       | $                                               | 12         |                                          | $          | 15 |   | $ | 34 |   | $ | 32 |   |
| Cost of customer  support, excluding depreciation and amortization         |       | 1                                               |       | 2                                             |       | (1 | ) | 4 |   |
| Sales and  marketing                                                       |       | 29                                              |       | 51                                            |       | 67 |   | 106 |   |
| General and  administrative                                                |       | 84                                              |       | 128                                           |       | 268 |   | 279 |   |
| Product  development                                                       |       | 6                                               |       | 11                                            |       | 13 |   | 22 |   |
|                                                                       |       | $                                               | 132        |                                          | $          | 207 |   | $ | 381 |   | $ | 443 |   |

 

Thenegative amount in the table above for the six months ended June 30, 2007resulted from the true-up of estimated forfeitures to actual forfeitures.

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**StockOption Plan**

In January 1996, ourstockholders approved “The Amended and Restated Stock Option Plan” (the “OptionPlan”).  Initially, 3,150,000 shares werereserved for issuance under the Option Plan. Subsequently, the Option Plan was amended, as approved by thestockholders, to increase the number of shares available for issuance to8,350,000.Options issued under theOption Plan were at the discretion of the Board of Directors, including thevesting provisions of each stock option granted. Options were granted with anexercise price equal to the closing price of our common stock on the date ofgrant, generally vest over four years and expire no more than ten years fromthe date of grant. The Option Plan terminated on January 18, 2006; optionsgranted before that date were not affected by the plan termination.

In March 2007 upon the hiring ofour Vice President of World Wide Sales and Marketing, in accordance with NASDAQMarketplace Rule 4350(i)(1)(a)(iv)the board of directors approved an inducement award under a stand-alone equityincentive plan.  We granted 100,000non-qualified options to purchase shares of our common stock at an exerciseprice equal to the closing price of our common stock on the date of grant.  The options vest over four years and expireten years from the date of grant.

In June 2007, our stockholdersapproved the “2007 Stock Incentive Plan” (the “2007 Stock Plan”).  A maximum of 2,000,000 shares may be issuedunder the 2007 Stock Plan.  Awards permittedunder the 2007 Stock Plan include:  StockOptions, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units,Performance Awards and Other Stock-Based Awards.  Awards issued under the 2007 Stock Plan areat the discretion of the Board of Directors. As applicable, awards are granted with an exercise price equal to theclosing price of our common stock on the date of grant, generally vest overfour years and expire no more than ten years from the date of grant.

The fair value of each option grantis estimated on the date of grant using the Black-Scholes model.  The Black-Scholes model uses four assumptionsto calculate the fair value of each option grant.  The expected term of share options granted isderived using the simplified method prescribed by the SEC Staff AccountingBulletin 107, “Share-Based Payment.”  Therisk-free interest rate is based upon the rate currently available onzero-coupon U.S. Treasury instruments with a remaining term equal to theexpected term of the stock options.  Theexpected volatility is based upon historical volatility of our common stockover a period equal to the expected term of the stock options.  The expected dividend yield is zero and isbased upon historical and anticipated payment of dividends.  The weighted-average assumptions used in thefair value calculations are as follows:  
|                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **               | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected term  (years)   |       | 6.3                                             |       | *                                             |       | 6.2 |   | 6.1 |   |
| Risk-free  interest rate |       | 5.03                                            | %          | *                                             |       | 4.71 | % | 4.35 | % |
| Expected  volatility     |       | 108.1                                           | %          | *                                             |       | 108.0 | % | 121.14 | % |
| Expected dividend yield  |       | 0                                               | %          | *                                             |       | 0 | % | 0 | % |

 

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*   None granted.

The following is a summary of stock optionactivity under the three stock incentive plans for the six months ended June 30,2007: 
|                                           | ** ** | **Number of  Shares  (in  thousands)** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term  (Years)** | ** ** | **Aggregate  Intrinsic  Value  (in thousands)** | ** ** |
|-------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Options  outstanding at December 31, 2006 |       | 4,058                                       |       | $                                       | 3.14       |                                                          |       |                                                 |       |   |
| Options granted                           |       | 170                                         |       | $                                       | 1.98       |                                                          |       |                                                 |       |   |
| Less options forfeited                    |       | (16                                         | )          | $                                       | 2.15       |                                                          |       |                                                 |       |   |
| Less options expired                      |       | (48                                         | )          | $                                       | 3.80       |                                                          |       |                                                 |       |   |
| Less options exercised                    |       | (20                                         | )          | $                                       | 0.98       |                                                          |       |                                                 |       |   |
| Options  outstanding at June 30, 2007     |       | 4,144                                       |       | $                                       | 3.10       |                                                          | 6.14       |                                                 | $          | 1,062 |   |
|                                      |       |                                        |       |                                    |       |                                                          |       |                                                 |       |
| Options exercisable at  June 30, 2007     |       | 3,302                                       |       | $                                       | 3.34       |                                                          | 5.49       |                                                 | $          | 936 |   |

 

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The weighted-average grant-datefair value of stock options granted during the three and six months ended June30, 2007 was $1.99 and $1.67, respectively.

As of June 30, 2007, there wereapproximately $1.2 million of total unrecognized compensation costs related tounvested stock options.  These costs areexpected to be recognized over a weighted average period of 1.3 years.

The total intrinsic value ofstock option exercises for the three months ended June 30, 2007 and 2006 was$23,000 and $0, respectively.  The totalfair value of stock options vested during the three months ended June 30, 2007and 2006 was $0.2 million and $0.1 million, respectively.

The total intrinsic value ofstock option exercises for the six months ended June 30, 2007 and 2006 was$23,000 and $13,000, respectively.  Thetotal fair value of stock options vested during both of the six months endedJune 30, 2007 and 2006 was $0.3 million.

The deferred income tax benefitsfrom stock option expense related to Evolving Systems U.K. totaledapproximately $8,000 and $7,000 for the three months ended June 30, 2007 and2006, respectively.  The deferred incometax benefits from stock option expense related to Evolving Systems U.K. totaledapproximately $19,000 and $14,000 for the six months ended June 30, 2007 and2006, respectively.

Cash received from stock optionexercises for the three months ended June 30, 2007 and 2006 was $19,000 and $0,respectively.  Cash received from stockoption exercises for the six months ended June 30, 2007 and 2006 was $19,000and $13,000, respectively.

**Employee Stock PurchasePlan**

Under the Employee Stock PurchasePlan (“ESPP”), we are authorized to issue up to 1,100,000 shares of our commonstock to full-time employees, nearly all of whom are eligible to participate.Under the terms of the ESPP, employees may elect to have up to 15% of theirgross compensation withheld through payroll deduction to purchase our commonstock, capped at $25,000 annually. The purchase price of the stock is 85% ofthe lower of the closing price on the first day or the last day of eachthree-month participation period. As of June 30, 2007, there were 315,000shares available for purchase.  For thethree and six months ended June 30, 2007, we recorded compensation expense of$5,000 and $11,000, respectively, and for the three and six months ended June30, 2006, we recorded compensation expense of $10,000 and $25,000,respectively, associated with grants under the ESPP which includes the fairvalue of the look-back feature of each grant as well as the 15% discount on thepurchase price.  This expense fluctuateseach period based upon employee participation.

The fair value of each grant madeunder our ESPP is estimated on the date of grant using the Black-Scholesmodel.  The Black-Scholes model uses fourassumptions to calculate the fair value of each option grant.  The expected term of each grant is based uponthe three-month participation period of each grant.  The risk-free interest rate is based upon therate currently available on zero-coupon U.S. Treasury instruments with aremaining term equal to the expected term of each grant.  The expected volatility is based uponhistorical volatility of our common stock. The expected dividend yield is based upon historical and anticipatedpayment of dividends.  The weightedaverage assumptions used in the fair value calculations are as follows: 
|                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **               | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected term  (years)   |       | 0.25                                            |       | 0.25                                          |       | 0.25 |   | 0.25 |   |
| Risk-free  interest rate |       | 5.0                                             | %          | 5.17                                          | %          | 5.1 | % | 4.98 | % |
| Expected  volatility     |       | 70.1                                            | %          | 78.36                                         | %          | 70.1 | % | 82.3 | % |
| Expected dividend yield  |       | 0                                               | %          | 0                                             | %          | 0 | % | 0 | % |

 

Cash received from employee stockplan purchases for the three months ended June 30, 2007 and 2006 wasapproximately $19,000 and $35,000, respectively.  Cash received from employee stock planpurchases for the six months ended June 30, 2007 and 2006 was approximately$36,000 and $73,000, respectively.

**NOTE 5 – CONCENTRATION OF CREDIT RISK**

Forthe three and six months ended June 30, 2007, two significant customers(defined as contributing at least 10%) accounted for 37% (22% and 15%) and 36%(22% and 14%), respectively, of total revenue. These customers are largetelecommunications operators located in the U.S. and U.K., respectively.  For the three and six months ended June 30,2006, two significant customers accounted for 24% (13% and 11%) and 25% (13%and 12%), respectively, of total revenue.  These customers are large telecommunicationsoperators located in the U.S. and U.K., respectively.

As ofJune 30, 2007, three significant customers accounted for approximately 36%(15%, 11% and 10%) of contract receivables. These customers are large telecommunications operators located inthe U.K., Germany and U.S., respectively.  At 

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December 31, 2006, two significant customersaccounted for approximately 51% (40% and 11%) of contract receivables.  These customers are largetelecommunications operators located in the U.S. and Luxembourg,respectively.

**NOTE 6 – LONG-TERM DEBT**

Notespayable consist of the following (in thousands):
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Senior note  payable to financial institution, interest at one-month London InterBank  Offered Rate (“LIBOR”) plus a margin of 6.25%; however, the LIBOR rate cannot  be less than 3.75%; interest rate was 11.57% at June 30, 2007 and 11.60%  at December 31, 2006, respectively; interest payments are due monthly,  principal installments are due quarterly with final maturity on November 14,  2010. The margin of 6.25% can be reduced to 5.25% if we meet and maintain  certain financial requirements (not met as of June 30, 2007 or December 31,  2006). The loan is secured by substantially all of our assets and a pledge of  the stock of our subsidiaries. |       | $                 | 5,419      |                  | $          | 6,500 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |                  |       |
| $4.5 million  senior revolving credit facility payable to financial institution, interest  at one-month LIBOR plus 4.0%; however, the LIBOR rate cannot be less than  3.75%; interest rate was 9.32% at June 30, 2007 and 9.35% at December 31,  2006, respectively; interest payments are due monthly with final maturity on  November 14, 2010. Loan is secured by substantially all of the assets of  Evolving Systems U.K.                                                                                                                                                                                                                                                             |       | 2,000             |       | 2,000                 |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       |              |       |                  |       |
| Long-term  unsecured subordinated notes payable, interest ranges from 11-14% with a  weighted average rate of 12.82% at June 30, 2007 and 12.84% at December 31,  2006, accrued interest and principal are due in full May 16, 2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                  |       | 4,767             |       | 4,870                 |       |
| Total notes  payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |       | 12,186            |       | 13,370                |       |
| Less current  portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |       | (2,250            | )          | (2,000                | )          |
| Long-term debt,  excluding current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |       | $                 | 9,936      |                  | $          | 11,370 |   |

 

Inaccordance with the terms of our senior note payable agreement, we made anExcess Cash Flow payment (as defined in the agreement) to our senior lender inthe amount of $81,000 during March 2007.

InMarch 2007, we paid $77,000 to retire $119,000 of subordinated debt and relatedaccrued interest held by one of our subordinated note holders.  The retirement included principal of $103,000and accrued interest of $16,000.  The$42,000 gain on extinguishment of this debt was reflected within other income(expense) on the consolidated statement of operations.

Thesenior note payable and senior revolving credit facility subject us to certainfinancial covenants.  We were incompliance with these covenants as of June 30, 2007.

**NOTE 7 –INCOME TAXES**

Weadopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109”(“FIN 48”) effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income tax benefitsrecognized in an enterprise’s financial statements in accordance with SFAS 109.  FIN 48 also prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn.  In addition, FIN 48 providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition.

Uponadoption of FIN 48, no adjustment to the Consolidated Financial Statementswas required. As of the date of adoption, we had an unrecognized domestic taxbenefit of approximately $0.4 million which did not change significantly duringthe six months ended June 30, 2007.  Theapplication of FIN 48 would have resulted in a decrease to retained earnings of$0.4 million, except that the decrease was fully offset by the application of avaluation allowance.  In addition, futurechanges in the unrecognized tax benefit will have no impact on the effectivetax rate while the valuation allowance exists. We expect that the unrecognized tax benefit will not changesignificantly within the next twelve months.

Wefile our tax returns as prescribed by the tax laws of federal as well asvarious state and foreign jurisdictions in which we operate.  We may be subject to examination by theInternal Revenue Service (“IRS”) for calendar years 2003 through 2006 and HM 

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Revenue and Customs in the U.K. for calendar years2005 and 2006.  Additionally, anydomestic net operating losses that were generated in prior years and utilizedin these years may also be subject to examination by the IRS.

EffectiveApril 2007, our Indian subsidiary is subject to a 10% minimum alternativetax.  This tax did not have a materialeffect on our results for the three and six months ended June 30, 2007 and wedo not expect this tax to have a material impact on future results.

Werecorded income tax expense of $0.1 million for the three months ended June 30,2007 and income tax benefit of $1.4 million for the three months ended June 30,2006.  The net income tax expense duringthe three months ended June 30, 2007 consisted of current foreign income taxexpense of $72,000 and a deferred foreign tax expense of $11,000, of which allis related to our UK-based operations, with the exception of $7,000 of currentforeign income tax expense related to our India-based operations.  The net income tax benefit during the threemonths ended June 30, 2006 consisted of current foreign income tax expense of$290,000 and a deferred foreign tax benefit of $1.6 million both of which arerelated to our UK-based operations.

Werecorded income tax expense of $0.2 million for the six months ended June 30,2007 and income tax benefit of $1.5 million for the six months ended June 30,2006.  The net income tax expense duringthe six months ended June 30, 2007 consisted of current foreign income taxexpense of $262,000 and a deferred foreign tax benefit of $39,000 of which allis related to our UK-based operations, with the exception of $7,000 of currentforeign income tax expense related to our India-based operations.  The net income tax benefit during the sixmonths ended June 30, 2006 consisted of current foreign income tax expense of$374,000 and a deferred foreign tax benefit of $1.8 million both of which arerelated to our UK-based operations.

Inconjunction with the acquisition of Evolving Systems U.K., we recorded certainidentifiable intangible assets.  Sincethe amortization of these identifiable intangibles is not deductible for incometax purposes, we established a long-term deferred tax liability of $4.6 millionat the acquisition date for the expected difference between what would beexpensed for financial reporting purposes and what would be deductible forincome tax purposes. As of June 30, 2007 and December 31, 2006, this deferredtax liability was $1.1 million and $1.5 million, respectively.  This deferred tax liability relates toEvolving Systems U.K., and has no impact on our ability to recover U.S.-baseddeferred tax assets.  This deferred taxliability will be recognized as a reduction of deferred income tax expense asthe identifiable intangibles are amortized.

As ofJune 30, 2007 and December 31, 2006, we continued to maintain a fullvaluation allowance on our domestic net deferred tax asset as we determined itwas more likely than not that we will not realize our domestic deferred taxassets.  Such assets primarily consist ofnet operating loss carryforwards.  Weassessed the realizability of our domestic deferred tax assets using allavailable evidence.  In particular, weconsidered both historical results and projections of profitability for reasonablyforeseeable future periods.  We arerequired to reassess conclusions regarding the realization of deferred taxassets at each financial reporting date. A future evaluation could result in aconclusion that all or a portion of the valuation allowance is no longernecessary which could have a material impact on our results of operations andfinancial position.

**NOTE 8 –STOCKHOLDERS’ EQUITY**

On March 15, 2007, holders of 441,377 shares of Series BPreferred Stock with a carrying value of $5.1 million, or approximately 46% ofthe outstanding preferred stock, converted their shares of preferred stock into1,324,131 shares of our common stock in accordance with the conversionprovisions of the Series B Preferred Stock. As we previously included the Series B Preferred Stock as aparticipating security for basic EPS purposes, this conversion did not changeour basic or diluted EPS calculations.

On April 13, 2007, holders of 20,374 shares of Series BPreferred Stock with a carrying value of $0.2 million, or approximately 4% ofthe outstanding shares, converted their shares of preferred stock into 61,122shares of our common stock in accordance with the conversion provisions of theSeries B Preferred Stock.  Because wepreviously included the Series B Preferred Stock as a participating securityfor basic EPS purposes, this conversion did not change our basic or diluted EPScalculations.

**NOTE 9 –SEGMENT INFORMATION**

Inaccordance with SFAS No. 131, “Disclosures about Segments of an Enterpriseand Related Information,” we define operating segments as components of anenterprise for which separate financial information is reviewed regularly bythe chief operating decision-making group to evaluate performance and to makeoperating decisions. We have identified our Chief Executive Officer and ChiefFinancial Officer as our chief operating decision-makers (CODM). These chiefoperating decision makers review revenues by segment and review overall resultsof operations.

Wecurrently operate our business as two operating segments based on revenuetype:  license fees and services revenueand customer support revenue (as shown on the consolidated statements ofoperations).  License fees and services (L&S)revenue represents the fees received from the license of software products andthose services directly related to the delivery of the licensed products, aswell as fees for custom development, integration services and time andmaterials work.  Customer support (CS)revenue includes annual support fees, recurring maintenance fees, fees formaintenance upgrades and warranty services. Warranty services that are similar to software maintenance services aretypically bundled with a license sale. Total assets by segment have not beendisclosed as the information is not available to the CODM.

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Segmentinformation is as follows (in thousands):
|                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                        | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenue**                                                                |       |                                            |       |                                                |       |   |   |   |   |
| License fees and services                                                  |       | $                                               | 4,742      |                                                | $          | 3,966 |   | $ | 8,733 |   | $ | 7,865 |   |
| Customer support                                                           |       | 4,380                                           |       | 4,274                                               |       | 8,850 |   | 8,503 |   |
|                                                                       |       | 9,122                                           |       | 8,240                                               |       | 17,583 |   | 16,368 |   |
|                                                                       |       |                                            |       |                                                |       |   |   |   |   |
| **Revenue  less cost of revenue, excluding depreciation and amortization** |       |                                            |       |                                                |       |   |   |   |   |
| License fees and services                                                  |       | 2,801                                           |       | 2,309                                               |       | 4,868 |   | 4,333 |   |
| Customer support                                                           |       | 2,664                                           |       | 2,723                                               |       | 5,641 |   | 5,326 |   |
|                                                                       |       | 5,465                                           |       | 5,032                                               |       | 10,509 |   | 9,659 |   |
|                                                                       |       |                                            |       |                                                |       |   |   |   |   |
| **Unallocated  costs**                                                     |       |                                            |       |                                                |       |   |   |   |   |
| Other operating expenses                                                   |       | 4,192                                           |       | 4,421                                               |       | 8,331 |   | 9,130 |   |
| Depreciation and amortization                                              |       | 644                                             |       | 1,176                                               |       | 1,320 |   | 2,366 |   |
| Impairment of goodwill and intangible assets                               |       | —                                          |       | 16,516                                              |       | — |   | 16,516 |   |
| Restructuring and other                                                    |       | —                                          |       | (9                                                  | )          | (1 | ) | (23 | ) |
| Interest income                                                            |       | (81                                             | )          | (36                                                 | )          | (145 | ) | (74 | ) |
| Interest expense                                                           |       | 451                                             |       | 496                                                 |       | 915 |   | 1,005 |   |
| Gain on debt extinguishment                                                |       | —                                          |       | —                                              |       | (42 | ) | — |   |
| Foreign currency exchange loss                                             |       | 104                                             |       | 29                                                  |       | 162 |   | 30 |   |
| **Income (loss) before income  taxes**                                     |       | $                                               | 155        |                                                | $          | (17,561 | ) | $ | (31 | ) | $ | (19,291 | ) |

 

***Geographic Regions***

We are headquartered in Englewood, a suburb ofDenver, Colorado.  We use customerlocations as the basis for attributing revenues to individual countries.  We provide products and services on a globalbasis through our headquarters and our London-based Evolving Systems U.K.subsidiary.  Additionally, personnel inBangalore, India provide software development services to our globaloperations.  Financial informationrelating to operations by geographic region, as reviewed by the CODM, is asfollows (in thousands):
|                                      | ** ** | **Three Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **L&S**                                         | ** ** | **CS** | ** ** | **Total** | ** ** | **L&S** | ** ** | **CS** | ** ** | **Total** | ** ** |
| **Revenue**                          |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Americas                             |       | $                                                   | 1,626      |   | $ | 2,560 |   | $ | 4,186 |   | $ | 704 |   | $ | 2,661 |   | $ | 3,365 |   |
| Europe, Middle East, Africa and Asia |       | 3,116                                               |       | 1,820 |   | 4,936 |   | 3,262 |   | 1,613 |   | 4,875 |   |
| Total Revenue                        |       | $                                                   | 4,742      |   | $ | 4,380 |   | $ | 9,122 |   | $ | 3,966 |   | $ | 4,274 |   | $ | 8,240 |   |

 
|                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **L&S**                                       | ** ** | **CS** | ** ** | **Total** | ** ** | **L&S** | ** ** | **CS** | ** ** | **Total** | ** ** |
| **Revenue**                          |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Americas                             |       | $                                                 | 2,648      |   | $ | 5,214 |   | $ | 7,862 |   | $ | 1,449 |   | $ | 5,367 |   | $ | 6,816 |   |
| Europe, Middle East, Africa and Asia |       | 6,085                                             |       | 3,636 |   | 9,721 |   | 6,416 |   | 3,136 |   | 9,552 |   |
| Total Revenue                        |       | $                                                 | 8,733      |   | $ | 8,850 |   | $ | 17,583 |   | $ | 7,865 |   | $ | 8,503 |   | $ | 16,368 |   |

 

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|                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **Long-lived  assets, net**          |       |              |       |                  |       |
| Americas                             |       | $                 | 7,462      |                  | $          | 7,903 |   |
| Europe, Middle East, Africa and Asia |       | 25,527            |       | 25,628                |       |
| Total long-lived  assets, net        |       | $                 | 32,989     |                  | $          | 33,531 |   |

 

Financialinformation relating to product groupings was as follows (in thousands):
|                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|---------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **          | ** ** | **2007**                                        | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenue**         |       |                                            |       |                                                |       |   |   |   |   |
| Activation          |       | $                                               | 4,905      |                                                | $          | 4,341 |   | $ | 9,478 |   | $ | 8,551 |   |
| Numbering solutions |       | 3,279                                           |       | 2,588                                               |       | 6,081 |   | 5,332 |   |
| Mediation           |       | 938                                             |       | 1,311                                               |       | 2,024 |   | 2,485 |   |
|                |       | $                                               | 9,122      |                                                | $          | 8,240 |   | $ | 17,583 |   | $ | 16,368 |   |

 

**NOTE10 – COMMITMENTS AND CONTINGENCIES**

**(a)****          Lease Commitments**

During the three months endedJune 30, 2007, we entered into a lease amendment for our headquarters locationin Englewood, Colorado.  This amendmentextended the term of our existing agreement for an additional 65 month period,reduced our rentable square footage and reduced our monthly rent obligation.

During the three months ended June30, 2007, we also terminated our existing capital lease agreement for certainassets at our headquarters location and replaced it with a new capital leaseagreement.

Future minimum commitments underthese new agreements are:
|                                                     | ** ** | **Operating  Leases** | ** ** | **Capital  Leases** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| 2007                                                |       | $                     | 78         |                | $          | 15 |   |
| 2008                                                |       | 470                   |       | 30                  |       |
| 2009                                                |       | 482                   |       | 30                  |       |
| 2010                                                |       | 494                   |       | 30                  |       |
| 2011                                                |       | 506                   |       | 30                  |       |
| Thereafter                                          |       | 430                   |       | 11                  |       |
| Total minimum  lease payments                       |       | $                     | 2,460      |                | 146        |   |
| Less: Amount  representing interest                 |       |                  |       | (37                 | )          |
| Principal  balance of capital lease obligations     |       |                  |       | 109                 |       |
| Less: Current  portion of capital lease obligations |       |                  |       | (19                 | )          |
| Long-term portion of  capital lease obligations     |       |                  |       | $                   | 90         |   |

 

**(b)****          Other Commitments**

Aspermitted under Delaware law, we have agreements with officers and directorsunder which we agree to indemnify them for certain events or occurrences whilethe officer or director is, or was serving, at our request in this capacity.The term of the indemnification period is indefinite. There is no limit on theamount of future payments we could be required to make under theseindemnification agreements; however, we maintain Director and Officer insurancepolicies, as well as an Employment Practices Liability Insurance Policy, thatmay enable us to recover a portion of any amounts paid. As a result of ourinsurance policy coverage, we believe the estimated fair value of theseindemnification agreements is minimal. Accordingly, there were no liabilitiesrecorded for these agreements as of June 30, 2007 and December 31, 2006.

Fromtime to time, we enter into standard indemnification terms with customers andsuppliers, in the ordinary course of business. As we may subcontract the development of deliverables under customercontracts, we could be required to indemnify 

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customers for work performed by subcontractors.Depending upon the nature of the customer indemnification, the potential amountof future payments we could be required to make under these indemnificationagreements may be unlimited. We may be able to recover damages from a subcontractorif the indemnification to customers results from the subcontractor’s failure toperform. To the extent we are unable to recover damages from a subcontractor,we could be required to reimburse the indemnified party for the full amount. Wehave never incurred costs to defend lawsuits or settle claims relating toindemnification arising out of subcontractors’ failure to perform. As a result,we believe the estimated fair value of these agreements is minimal.Accordingly, there were no liabilities recorded for these agreements as of June30, 2007 and December 31, 2006.

Ourstandard license agreements contain product warranties that the software willbe free of material defects and will operate in accordance with the statedrequirements for a limited period of time. The product warranty provisions require us to cure any defects throughany reasonable means.  We believe theestimated fair value of the product warranty provisions in the licenseagreements in place with our customers is minimal.  Accordingly, there were no liabilitiesrecorded for these product warranty provisions as of June 30, 2007 andDecember 31, 2006.

Oursoftware arrangements generally include a product indemnification provisionwhereby we will indemnify and defend a customer in actions brought against thecustomer for claims that our products infringe upon a copyright, trade secret,or valid patent. We have not historically incurred any significant costsrelated to product indemnification claims. Accordingly, there were noliabilities recorded for these indemnification provisions as of June 30, 2007and December 31, 2006.

Inrelation to the acquisitions of Evolving Systems U.K., TSE and CMS, we agreedto indemnify certain parties from any losses, actions, claims, damages orliabilities (or actions in respect thereof) resulting from any claim raised bya third party.  We do not believe thatthere will be any claims related to these indemnifications. Accordingly, therewere no liabilities recorded for these agreements as of June 30, 2007 andDecember 31, 2006.

During the fourth quarter of2006, a previous software vendor filed a complaint in the Superior Court of NewJersey against us asserting we breached certain provisions of a licenseagreement.  While the outcome of thismatter is uncertain, we believe we have paid all fees due under our licenseagreement and we are vigorously defending this claim.

We are involved in various otherlegal matters arising in the normal course of business.  Losses were recorded for these matters to theextent they were probable of loss and the amount of loss could be reasonablyestimated.

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

**SPECIAL NOTE ABOUT FORWARD-LOOKINGSTATEMENTS**

*This Quarterly Report on Form 10-Q containsforward-looking statements that have been made pursuant to the provisions ofthe Private Securities Litigation Reform Act of 1995.  These forward-looking statements are based oncurrent expectations, estimates, and projections about Evolving Systems’industry, management’s beliefs, and certain assumptions made by management.  Forward-looking statements include ourexpectations regarding product, services, and maintenance revenue, annualsavings associated with the organizational changes effected in prior years, andshort- and long-term cash needs.  In somecases, words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “estimates,”variations of these words, and similar expressions are intended to identifyforward-looking statements.  Thestatements are not guarantees of future performance and are subject to certainrisks, uncertainties, and assumptions that are difficult to predict; therefore,actual results may differ materially from those expressed or forecasted in anyforward-looking statements.  Risks anduncertainties of our business include those set forth in our Annual Report onForm 10-K for the year ended December 31, 2006 under “Item 1A. Risk Factors” aswell as additional risks described in this Form 10-Q.  Unless required by law, we undertake noobligation to update publicly any forward-looking statements, whether as aresult of new information, future events, or otherwise.  However, readers should carefully review therisk factors set forth in other reports or documents we file from time to timewith the Securities and Exchange Commission, particularly the Quarterly Reportson Form 10-Q and any Current Reports on Form 8-K.*

**OVERVIEW**

We are a providerof software solutions and services to the wireless, wireline and IP carriermarket. We maintain long-standing relationships with many of the largestwireline, wireless and IP communications carriers worldwide. Our customers relyon us to develop, deploy, enhance, maintain and integrate complex, highlyreliable software solutions for a range of Operations Support Systems (“OSS”).  Our activation solution is a leading packagedsolution for service activation in the wireless industry.

We recognize revenue inaccordance with the prescribed accounting standards for software revenuerecognition under generally accepted accounting principles.  Our license fees and services revenuesfluctuate from period to period as a result of the timing of revenuerecognition on existing projects.

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**RESULTSOF OPERATIONS**

The following table presents the unauditedconsolidated statements of operations reflected as a percentage of totalrevenue.
|                                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                        | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **REVENUE**                                                                  | ** ** | ** **                                      | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| License fees and services                                                    |       | 52                                              | %          | 48                                                  | %          | 50 | % | 48 | % |
| Customer support                                                             |       | 48                                              | %          | 52                                                  | %          | 50 | % | 52 | % |
| Total revenue                                                                |       | 100                                             | %          | 100                                                 | %          | 100 | % | 100 | % |
|                                                                         |       |                                            |       |                                                |       |   |   |   |   |
| **COSTS  OF REVENUE AND OPERATING EXPENSES**                                 | ** ** | ** **                                      | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Costs of license fees and services, excluding  depreciation and amortization |       | 21                                              | %          | 20                                                  | %          | 22 | % | 22 | % |
| Costs of customer support, excluding depreciation  and amortization          |       | 19                                              | %          | 19                                                  | %          | 18 | % | 19 | % |
| Sales and marketing                                                          |       | 24                                              | %          | 27                                                  | %          | 24 | % | 29 | % |
| General and administrative                                                   |       | 18                                              | %          | 17                                                  | %          | 18 | % | 17 | % |
| Product development                                                          |       | 4                                               | %          | 10                                                  | %          | 5 | % | 9 | % |
| Depreciation                                                                 |       | 3                                               | %          | 3                                                   | %          | 3 | % | 4 | % |
| Amortization                                                                 |       | 4                                               | %          | 11                                                  | %          | 5 | % | 11 | % |
| Impairment of goodwill and intangible assets                                 |       | —                                          | %          | 200                                                 | %          | — | % | 101 | % |
| Restructuring and other                                                      |       | —                                          | %          | —                                              | %          | — | % | — | % |
| Total costs of  revenue and operating expenses                               |       | 93                                              | %          | 307                                                 | %          | 95 | % | 212 | % |
|                                                                         |       |                                            |       |                                                |       |   |   |   |   |
| Income (loss)  from operations                                               |       | 7                                               | %          | (207                                                | )%         | 5 | % | (112 | )% |
|                                                                         |       |                                            |       |                                                |       |   |   |   |   |
| Interest income                                                              |       | 1                                               | %          | —                                              | %          | 1 | % | — | % |
| Interest expense                                                             |       | (5                                              | )%         | (6                                                  | )%         | (5 | )% | (6 | )% |
| Gain on debt extinguishment                                                  |       | —                                          | %          | —                                              | %          | — | % | — | % |
| Foreign currency exchange loss                                               |       | (1                                              | )%         | —                                              | %          | (1 | )% | — | % |
| Other expense,  net                                                          |       | (5                                              | )%         | (6                                                  | )%         | (5 | )% | (6 | )% |
|                                                                         |       |                                            |       |                                                |       |   |   |   |   |
| Income (loss)  before income taxes                                           |       | 2                                               | %          | (213                                                | )%         | (0 | )% | (118 | )% |
|                                                                         |       |                                            |       |                                                |       |   |   |   |   |
| Income tax expense (benefit)                                                 |       | 1                                               | %          | (17                                                 | )%         | 1 | % | (9 | )% |
|                                                                         |       |                                            |       |                                                |       |   |   |   |   |
| Net income (loss)                                                            |       | 1                                               | %          | (196                                                | )%         | (1 | )% | (109 | )% |

 

***Revenue***

Revenue is comprised of license fees/services andcustomer support.  License fees andservices revenue represent the fees we receive from the licensing of oursoftware products and those services directly related to the delivery of thelicensed product as well as integration services and time and materialswork.  Customer support revenue includes annual support,recurring maintenance, maintenance upgrades and warranty services.  Warranty services consist of maintenanceservices and are typically bundled with a license sale and the related revenue,based on Vendor-Specific Objective Evidence (VSOE), is deferred and recognizedratably over the warranty period.  The following table presents our revenue byproduct group (in thousands):

|                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **          | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Activation          |       | $                                               | 4,905      |                                          | $          | 4,341 |   | $ | 9,478 |   | $ | 8,551 |   |
| Numbering solutions |       | 3,279                                           |       | 2,588                                         |       | 6,081 |   | 5,332 |   |
| Mediation           |       | 938                                             |       | 1,311                                         |       | 2,024 |   | 2,485 |   |
|                |       | $                                               | 9,122      |                                          | $          | 8,240 |   | $ | 17,583 |   | $ | 16,368 |   |

 

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**License Fees and Services**

License fees and servicesrevenue increased 20%, or $0.7 million, to $4.7 million for the three monthsended June 30, 2007 from $4.0 million for the three months ended June 30,2006.  This increase in license fees andservices revenue was composed of an increase of $0.8 million in revenue fromour number solutions products and an increase of $0.4 million in revenue fromour activation products offset by a decrease of $0.5 million in revenue fromour mediation products.  These resultsare consistent with our focus on our core activation and numbering solutionsproducts.

License fees and servicesrevenue increased 11%, or $0.8 million, to $8.7 million for the six monthsended June 30, 2007 from $7.9 million for the six months ended June 30,2006.  This increase in license fees andservices revenue was composed of an increase of $1.0 million in revenue fromour numbering solutions products and an increase of $0.5 million in revenuefrom our activation products offset by a decrease of $0.7 million in revenuefrom our mediation products.  Theseresults are consistent with our focus on our core activation and numbering solutionsproducts.

**CustomerSupport**

Customer support revenueincreased $0.1 million, or 2%, to $4.4 million for the three months ended June30, 2007 from $4.3 million for the three months ended June 30, 2006.  The increase in customer support revenue resultedfrom an increase of $0.1 million in our activation products and an increase of$0.1 million in mediation customer support revenue which were offset by adecrease of $0.1 million from our numbering solutions products.

Customer support revenueincreased $0.3 million, or 4%, to $8.8 million for the six months ended June30, 2007 from $8.5 million for the six months ended June 30, 2006.  The increase in customer support revenueresulted from an increase of $0.4 million in our activation products and anincrease of $0.1 million in mediation customer support revenue which wereoffset by a decrease of $0.2 million from our numbering solutionsproducts.  The increase in activationcustomer support revenue was a result of ourincreased installed base.  Thedecrease in numbering solutions customer support revenue was due to one of ourproducts reaching its end of life.

***Costs of Revenue, Excluding Depreciation and Amortization***

Costs of revenue,excluding depreciation and amortization, consist primarily of personnel costsand other direct costs associated with these personnel, facilities costs, costof third-party software and partner commissions.  Costs of revenue, excluding depreciation andamortization, were $3.7 million and $3.2 million for the three months ended June30, 2007 and 2006, respectively. Costs of revenue, excluding depreciation andamortization, were $7.1 million and $6.7 million for the six months ended June30, 2007 and 2006, respectively.   Thesecosts are discussed further below.

**Costs ofLicense Fees and Services, Excluding Depreciation and Amortization**

Costs of license fees andservices, excluding depreciation and amortization, were $1.9 million and $1.7million for the three months ended June 30, 2007 and 2006, respectively.  The increase in costs is attributed toincreased labor necessary to support the increase in license fees and servicesrevenue.  As a percentage of license feesand services revenue, costs of license fees and services, excluding depreciationand amortization, decreased to 41% for the three months ended June 30, 2007from 42% for the three months ended June 30, 2006.

Costs of license fees andservices, excluding depreciation and amortization, were $3.9 million and $3.5million for the six months ended June 30, 2007 and 2006, respectively.  The increase in costs is attributed toincreased labor necessary to support the increase in license fees and servicesrevenue.  As a percentage of license feesand services revenue, costs of license fees and services, excludingdepreciation and amortization, decreased to 44% for the six months ended June30, 2007 from 45% for the six months ended June 30, 2006.

**Costs of Customer Support, Excluding Depreciationand Amortization**

Costs of customersupport, excluding depreciation and amortization, increased $0.1 million, or11%, to $1.7 million for the three months ended June 30, 2007 from$1.6 million for the three months ended June 30, 2006.  As a percentage of customer support revenue,costs of customer support revenue, excluding depreciation and amortization,increased to 39% for the three months ended June 30, 2007 from 36% for thethree months ended June 30, 2006.  Theseincreases are due to higher support costs for recent numbering solutions andactivation releases.

Costs of customer support,excluding depreciation and amortization, remained constant at $3.2 millionfor each of the six months ended June 30, 2007 and June 30, 2006.  As a percentage of customer support revenue,costs of customer support revenue, excluding depreciation and amortization,decreased to 36% for the six months ended June 30, 2007 from 37% for the sixmonths ended June 30, 2006.

***Sales and Marketing***

Sales and marketingexpenses primarily consist of compensation costs, including bonuses andcommissions, travel expenses, advertising, marketing and facilitiesexpenses.  Sales and marketing expensesremained constant at $2.2 million for each of the three 

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month periodsended June 30, 2007 and June 30, 2006. As a percentage of total revenue, sales and marketing expenses decreasedto 24% for the three months ended June 30, 2007 from 27% for the three monthsended June 30, 2006. The flat cost base on increased revenues is the result ofdecreased headcount in mature markets, offset by increases in incentivecompensation resulting from increased revenues.

Sales and marketingexpenses primarily consist of compensation costs, including bonuses andcommissions, travel expenses, advertising, marketing and facilitiesexpenses.  Sales and marketing expensesdecreased $0.6 million, or 12%, to $4.2 million for the six months ended June30, 2007 from $4.8 million for the six months ended June 30, 2006.  As a percentage of total revenue, sales andmarketing expenses decreased to 24% for the six months ended June 30, 2007 from29% for the six months ended June 30, 2006. These decreases are the result oftransitioning sales force headcount from mature markets to emerging markets.

***General and Administrative***

General andadministrative expenses consist principally of employee related costs andprofessional fees for the following departments: facilities, finance, legal,human resources, and certain executive management.  General and administrative expenses increased$0.2 million, or 19%, to $1.6 million from $1.4 million for the threemonths ended June 30, 2007 and 2006, respectively.  As a percentage of total revenue, general andadministrative expenses for the three months ended June 30, 2007 and 2006,increased to 18% from 17%, respectively. These increases were a result of increased professional fees, as well ashigher incentive compensation earned due to the improved results fromoperations.

General andadministrative expenses consist principally of employee related costs andprofessional fees for the following departments: facilities, finance, legal,human resources, and certain executive management.  General and administrative expenses increased$0.4 million, or 15%, to $3.2 million from $2.8 million for the six monthsended June 30, 2007 and 2006, respectively. As a percentage of total revenue, general and administrative expensesfor the six months ended June 30, 2007 and 2006, increased to 18% from 17%,respectively.  These increases were aresult of increased professional fees, as well as higher incentive compensationearned due to the improved results from operations.

***Product Development***

Product developmentexpenses consist primarily of employee related costs and subcontractorexpenses.  Product development expensesdecreased $0.4 million, or 55%, to $0.4 million from $0.8 million for the threemonths ended June 30, 2007 and 2006, respectively.  As a percentage of revenue, productdevelopment expenses for the three months ended June 30, 2007 and 2006,decreased to 4% from 10%, respectively. These decreases were due to the completion of certain product releaseenhancements as well as the completion of the “internationalization” of ourNumeriTrack® product, which were under production during the three months endedJune 30, 2006.

Product developmentexpenses consist primarily of employee related costs and subcontractorexpenses.  Product development expensesdecreased $0.6 million, or 41%, to $0.9 million from $1.5 million for the sixmonths ended June 30, 2007 and 2006, respectively.  As a percentage of revenue, product developmentexpenses for the six months ended June 30, 2007 and 2006, decreased to 5% from9%, respectively.  These decreases weredue to the completion of certain product release enhancements as well as thecompletion of the “internationalization” of our NumeriTrack® product, whichwere under production during the six months ended June 30, 2006.

***Amortization***

Amortization expenseconsists of amortization of identifiable intangible assets acquired through ouracquisitions of CMS, TSE and Evolving Systems U.K.  Amortization expense was $0.4 million and$0.9 million for the three months ended June 30, 2007 and 2006, respectively,and $0.8 million and $1.8 million for the six months ended June 30, 2007 and2006, respectively.  The decreases inamortization expense of $0.5 million and $1.0 million, or 56% in each period,for the three and six months ended June 30, 2007, respectively, were primarilythe result of the impairment of certain intangible assets at June 30, 2006.

***Interest Expense***

Interest expense includesinterest expense on our long-term debt and capital lease obligations as well asamortization of debt issuance costs.  Interestexpense was $451,000 and $496,000 for the three months ended June 30, 2007 and2006, respectively, and interest expense was $915,000 and $1,005,000 for thesix months ended June 30, 2007 and 2006, respectively.  These decreases of $45,000 and $90,000, forthe three and six months ended June 30, 2007, respectively, were primarilyrelated to reduced levels of debt.

***Gain on Debt Extinguishment***

In March 2007, wepaid $77,000 to retire $119,000 of subordinated debt and related accruedinterest held by one of our subordinated note holders.  The retired debt included principal of$103,000 and accrued interest of $16,000.

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***Foreign Currency Exchange Loss***

Foreign currencytransaction losses resulted from transactions denominated in a currency otherthan the functional currency of the respective subsidiary and were $104,000 and$29,000 for the three months ended June 30, 2007 and 2006, respectively, and$162,000 and $30,000 for the six months ended June 30, 2007 and 2006,respectively.  The losses were generatedprimarily through the remeasurement of certain non-functional currencydenominated financial assets and liabilities of our Evolving Systems U.K.subsidiary.

***Income Taxes***

We recorded income taxexpense of $0.1 million for the three months ended June 30, 2007 and income taxbenefit of $1.4 million for the three months ended June 30, 2006.  The net income tax expense during the threemonths ended June 30, 2007 consisted of current foreign income tax expense of$72,000 and a deferred foreign tax expense of $11,000, of which all is relatedto our UK-based operations, with the exception of $7,000 of current foreignincome tax expense related to our India-based operations.  The net income tax benefit during the threemonths ended June 30, 2006 consisted of current foreign income tax expense of$290,000 and a deferred foreign tax benefit of $1.6 million both of which arerelated to our UK-based operations.

We recorded income taxexpense of $0.2 million for the six months ended June 30, 2007 and income taxbenefit of $1.5 million for the six months ended June 30, 2006.  The net income tax expense during the sixmonths ended June 30, 2007 consisted of current foreign income tax expense of$262,000 and a deferred foreign tax benefit of $39,000 of which all is relatedto our UK-based operations, with the exception of $7,000 of current foreignincome tax expense related to our India-based operations.  The net income tax benefit during the sixmonths ended June 30, 2006 consisted of current foreign income tax expense of$374,000 and a deferred foreign tax benefit of $1.8 million both of which arerelated to our UK-based operations.

In conjunction with the acquisitionof Evolving Systems U.K., we recorded certain identifiable intangibleassets.  Since the identifiableintangible amortization is not deductible for income tax purposes weestablished, a long-term deferred tax liability of $4.6 million at the acquisitiondate for the expected difference between what would be expensed for financialreporting purposes and what would be deductible for income tax purposes. As ofJune 30, 2007 and December 31, 2006, this deferred tax liability was $1.1million and $1.5 million, respectively. This deferred tax liability is carried on the books of our UnitedKingdom subsidiary, and has no impact on our ability to recover our U.S.-baseddeferred tax assets.  The aforementioneddeferred tax liability will be recognized as a reduction of deferred income taxexpense as the identifiable intangibles are amortized.

**FINANCIALCONDITION**

Our working capital position increased $0.3 million to$1.1 million as of June 30, 2007 from a $0.8 million as of December 31,2006.  The increase in our workingcapital position is attributable to the decrease in current liabilities,primarily in unearned revenue resulting from ratable revenue recognition onannual maintenance contracts, partially offset by an increase in the currentportion of long-term debt, in accordance with the repayment schedule associatedwith our senior debt.

**CONTRACTUAL OBLIGATIONS**

During the three months ended June 30, 2007, we enteredinto a lease amendment for our headquarters location in Englewood,Colorado.  This amendment extended theterm of our existing agreement for an additional 65 month period, reduced ourrentable square footage and reduced our monthly rent obligation.

During the three months endedJune 30, 2007, we also terminated our existing capital lease agreement forcertain assets at our headquarters location and replaced it with a new capitallease agreement.

Future minimum commitments underthese new agreements are:
|                                                     | ** ** | **Operating Leases** | ** ** | **Capital Leases** | ** ** |
|-----------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| 2007                                                |       | $                         | 78         |                    | $          | 15 |   |
| 2008                                                |       | 470                       |       | 30                      |       |
| 2009                                                |       | 482                       |       | 30                      |       |
| 2010                                                |       | 494                       |       | 30                      |       |
| 2011                                                |       | 506                       |       | 30                      |       |
| Thereafter                                          |       | 430                       |       | 11                      |       |
| Total minimum  lease payments                       |       | $                         | 2,460      |                    | 146        |   |
| Less: Amount  representing interest                 |       |                      |       | (37                     | )          |
| Principal  balance of capital lease obligations     |       |                      |       | 109                     |       |
| Less: Current  portion of capital lease obligations |       |                      |       | (19                     | )          |
| Long-term portion of  capital lease obligations     |       |                      |       | $                       | 90         |   |

 

Therehave been other no material changes to the contractual obligations as disclosedin our 2006 Annual Report on Form 10-K.

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**LIQUIDITY AND CAPITAL RESOURCES**

Wehave historically financed operations through cash flows from operations andequity transactions.  At June 30, 2007,our principal source of liquidity was $9.9 million in cash and cash equivalentsas well as $2.5 million available under our revolving line of credit.  The following table summarizes our statementsof cash flows (in thousands):

|                                      | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Cash provided  (used) by:            |       |                                          |       |   |   |
|   Operating  activities         |       | $                                             | 6,104      |   | $ | 3,220 |   |
|   Investing activities     |       | (345                                          | )          | (354 | ) |
|   Financing  activities         |       | (898                                          | )          | (431 | ) |
|   Effect of exchange rates |       | (39                                           | )          | 124 |   |
| Net cash  provided                   |       | $                                             | 4,822      |   | $ | 2,559 |   |

 

Net cash provided byoperating activities for the six months ended June 30, 2007 and 2006 was $6.1million and $3.2 million, respectively. Net loss plus non-cash operating adjustments was $1.6 million for thesix months ended June 30, 2007 compared to a negative $0.2 million for the sixmonths ended June 30, 2006.  Changes inoperating assets and liabilities reflected a net increase in cash fromoperating activities of $4.5 million for the six months ended June 30, 2007 ascompared to a net increase in cash of $3.4 million for the six months endedJune 30, 2006.  This fluctuation wasprimarily attributable to accounts payable and accrued liability payments,including certain 2006 payments that did not recur in 2007 related toprofessional fees.

Net cash used byinvesting activities during the six months ended June 30, 2007 and 2006 was$0.3 million and $0.4 million.  The cashused for the six months ended June 30, 2007 related primarily to purchases ofproperty and equipment of $0.3 million. The cash used for the six months ended June 30, 2006 related primarilyto purchases of property and equipment of $0.2 million and acquisition relatedearnout payments of $0.2 million.

Financing activities inthe six months ended June 30, 2007 and 2006 consisted primarily of principalpayments on notes payable.  During thesix months ended June 30, 2007 and 2006, we paid $1.1 million and $0.5 million,respectively, in principal payments on notes payable.  We paid $81,000 in Excess Cash Flow payments(as defined in our senior loan agreement) to our senior lender during the sixmonths ended June 30, 2007.  In addition,of the $77,000 we paid during the six months ended to retire subordinated debtand accrued interest held by one of our subordinated note holders, $61,000 wasapplied to principal and $16,000 to accrued interest.

We believe that ourcurrent cash and cash equivalents, together with anticipated cash flow fromoperations and availability under our revolving line of credit, will besufficient to meet our working capital, capital expenditure and financingrequirements for at least the next twelve months. In making this assessment weconsidered the following:

·                  Our cash andcash equivalents balance at June 30, 2007 of $9.9 million.

·                  The availabilityunder our revolving credit facility of $2.5 million at June 30, 2007.

·                  Our demonstratedability to generate positive cash flows from operations.

·                  Our backlog asof June 30, 2007 of approximately $15.1 million, including $5.5 million inlicense fees and services and $9.6 million in customer support.

·                  Our plannedcapital expenditures.

·                  Our cashforecast which indicates that we will have sufficient liquidity to coveranticipated operating costs and capital expenditures as well as debt servicepayments.

We are exposed to foreigncurrency rate risks which impact the carrying amount of our foreignsubsidiaries and our consolidated equity, as well as our consolidated cashposition due to translation adjustments. For the six months ended June 30, 2007, the effect of exchange ratechanges resulted in a $39,000 decrease to consolidated cash.  During the six months ended June 30, 2006,the effect of exchange rate changes resulted in a $124,000 increase inconsolidated cash.  We do not currentlyhedge our foreign currency exposure, but we monitor rate changes and may hedgeour exposures if we see significant negative trends in exchange rates.

**OFF-BALANCESHEET ARRANGEMENTS**

We have no off-balance sheet arrangements that have amaterial current effect or that are reasonably likely to have a material futureeffect on our financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capitalresources.

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**ITEM 3. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES**

In the ordinary course ofbusiness, we are exposed to certain market risks, including changes in interestrates and foreign currency exchange rates. Uncertainties that are eithernon-financial or non-quantifiable such as political, economic, tax, otherregulatory, or credit risks are not included in the following assessment ofmarket risks.

***Interest Rate Risks***

Our cash balances are subject tointerest rate fluctuations and as a result, interest income amounts mayfluctuate from current levels.  We areexposed to interest rate risk related to our senior secured term note and oursenior revolving credit facility entered into in November 2005.  These obligations are variable interest ratenotes based on short-term LIBOR. Fluctuations in LIBOR affect our interest rates.  Assuming no change in the amountsoutstanding, a hypothetical 10% increase in our existing variable interest rateswould increase our annual interest expense by approximately $0.1 million.

***ForeignCurrency Risk***

We are exposed to favorable and unfavorablefluctuations of the U.S. dollar (our functional currency) against thecurrencies of our operating subsidiaries. Any increase (decrease) in thevalue of the U.S. dollar against any foreign currency that is the functionalcurrency of one of our operating subsidiaries will cause the parent company toexperience unrealized foreign currency translation losses (gains) withrespect to amounts already invested in such foreign currencies.  In addition, we and our operatingsubsidiaries are exposed to foreign currency risk to the extent that we enterinto transactions denominated in currencies other than our respective functionalcurrencies, such as accounts receivable (including intercompany amounts) thatare denominated in a currency other than their own functional currency. Changesin exchange rates with respect to these items will result in unrealized (basedupon period-end exchange rates) or realized foreign currency transaction gainsand losses upon settlement of the transactions. In addition, we are exposed toforeign exchange rate fluctuations related to our operating subsidiaries’monetary assets and liabilities and the financial results of foreignsubsidiaries and affiliates when their respective financial statements aretranslated into U.S. dollars for inclusion in our consolidated financialstatements. Cumulative translation adjustments are recorded in accumulated othercomprehensive income (loss) as a separate component of equity. As a resultof foreign currency risk, we may experience economic loss and a negative impacton earnings and equity with respect to our holdings solely as a result offoreign currency exchange rate fluctuations.

The relationship betweenthe Great British pound, Indian rupee and the U.S. dollar, which is ourfunctional currency, is shown below, per one U.S. dollar:
| Spot rates:     | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Great British  Pound |       | 0.49910                     |       | 0.51069                         |       |
| Indian Rupee         |       | 40.73320                    |       | 44.11116                        |       |

 
|                         | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **Average rates:** | ** ** | **June 30, 2007**      | ** ** | **June 30, 2006**    | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
| Great British  Pound    |       | 0.50386                          |       | 0.54819                        |       | 0.50782 |   | 0.55952 |   |
| Indian Rupee            |       | 41.28346                         |       | 45.27345                       |       | 42.64969 |   | 44.75756 |   |

 

At the present time, we do not hedgeour foreign currency exposure or use derivative financial instruments that aredesigned to reduce our long-term exposure to foreign currency exchange risk. To the extent that translation and transaction gain and losses becomesignificant, we will consider various options to reduce this risk.

**ITEM 4. CONTROLS AND PROCEDURES**

*Evaluation of disclosure controlsand procedures.*  Wemaintain “disclosure controls and procedures,” as such term is defined inRule 13a-15(e) under the Securities Exchange Act of 1934 (the “ExchangeAct”), that are designed to provide reasonable assurance that informationrequired to be disclosed by us in reports that we file or submit under theExchange Act is recorded, processed, summarized, and reported within the timeperiods specified in Securities and Exchange Commission rules and forms,and that such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure.

Our management, including our Chief Executive Officerand Chief Financial Officer, has evaluated the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by this QuarterlyReport on Form 10-Q.  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer have concluded that our disclosure controlsand procedures were effective as of the end of such period.

In designing and evaluating our disclosure controlsand procedures, management recognized that disclosure controls and procedures,no matter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the disclosure controls andprocedures are met.  Additionally, in designing disclosure controls and 

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procedures,our management necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible disclosure controls and procedures. Thedesign of any disclosure controls and procedures also is based in part uponcertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions.

*Changes in internal control over financialreporting. *During the three months ended June 30,2007, there were no changes in our internal controls over financial reportingor in other factors that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

**PART II — OTHER INFORMATION**

**ITEM 1.  LEGAL PROCEEDINGS**

During the fourth quarter of2006, a previous software vendor filed a complaint in the Superior Court of NewJersey against us asserting we breached certain provisions of a licenseagreement.  While the outcome of thismatter is uncertain, we believe we have paid all fees due under our licenseagreement and we are vigorously defending this claim.

We are involved in various otherlegal matters arising in the normal course of business.  Losses were recorded for these matters to theextent they were probable of loss and the amount of loss could be reasonablyestimated.

**ITEM1A.  RISK FACTORS**

This Quarterly Report onForm 10-Q should be read in conjunction with the risk factors defined in ourAnnual Report on Form 10-K for the year ended December 31, 2006 under “Item 1A.Risk Factors.”

**ITEM2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

None

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

None

**ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

We held our Annual Meeting of Stockholders onJune 15, 2007. According to the final proxy tally received from theCompany’s transfer agent, the results of the voting on Proposals 1, 2, 3and 4, as described in the Company’s Proxy Statement, were as follows:

**Proposal#1:  Election of Directors**

Stephen K. Gartside, Jr.was re-elected to serve a three-year term until 2010.

For 16,090,185

Withheld 837,939

Philip M. Neches wasre-elected to serve a three-year term until 2010.

For 15,995,281

Withheld 932,843

**Proposal#2:  ApprovalOf An Amendment To Certificate Of Incorporation To Increase The Number OfAuthorized Shares Of Common Stock**

For 16,112,237

Against 796,089

Abstain19,796

**Proposal#3:  Approval of the Evolving Systems,Inc. 2007 Stock Incentive Plan**

For 5,672,324

Against 2,830,067

Abstain213,197

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**Proposal#4:  Ratification of IndependentRegistered Public Accounting Firm**

Grant Thornton LLP was ratified as the independentregistered public accounting firm for the year ending December 31, 2007.

For 16,515,114

Against 401,123

Abstain 11,886

**ITEM 5. OTHER INFORMATION**

None

**ITEM6.  EXHIBITS**

(a)          Exhibits

Exhibit3(ii)(1) – Amended and Restated Bylaws of Evolving Systems, Inc.

Exhibit 31.1 – Certification pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 – Certification pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 – Certification pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2 –Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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**SIGNATURE**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
| Date: August 8, 2007 |   | /s/ BRIAN R. ERVINE                          |   |
|----------------------|--------|----------------------------------------------|--------|
|                 |   | Brian R. Ervine                              |
|                 |   | Executive Vice President, Chief              |
|                 |   | Financial and Administrative Officer,        |
|                 |   | Treasurer and Assistant Secretary            |
|                 |   | (Principal Financial and Accounting Officer) |

 

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