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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|ý                                                             | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934    
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|For the fiscal year ended December 31, 2004                  
|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(State or other jurisdiction of
incorporation or organization)                          |  | 84-1010843(IRS Employer
Identification Number)
|----------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|9777 Mount Pyramid Court, Suite 100 Englewood, Colorado(Address of principal executive offices) |  | 80112(Zip Code)                               
|(303) 802-1000(Registrant's telephone number)                                                  

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

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

Common Stock, par value $0.001 per share(Title of class)

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

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

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

The approximate aggregate market value of the Common Stock held by non-affiliates of the registrant, based upon the last sale price of the Common
Stock reported on the National Association of Securities Dealers Automated Quotation National Market System was approximately $71.6 million as of June 30, 2004.

The
number of shares of Common Stock outstanding was 16,024,102 as of March 18, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference to portions of the registrant's definitive
proxy statement for the 2005 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the 2004 year.



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EVOLVING SYSTEMS, INC.
Annual Report on Form 10-K
December 31, 2004
Table of Contents



|         |  |                                                                                      
|-------- |  | -------------------------------------------------------------------------------------
|PART I  
|Item 1   |  | Business Overview                                                                    
|         |  | Risk Factors                                                                         
|Item 2   |  | Properties                                                                           
|Item 3   |  | Legal Proceedings                                                                    
|Item 4   |  | Submission of Matters to a Vote of Security Holders                                  
|PART II 
|Item 5   |  | Market for Registrant's Common Equity and Related Stockholder Matters                
|Item 6   |  | Selected Financial Data                                                              
|Item 7   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations
|Item 7A  |  | Quantitative and Qualitative Disclosures About Market Risk                           
|Item 8   |  | Consolidated Financial Statements and Supplementary Data                             
|Item 9   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|Item 9A  |  | Controls and Procedures                                                              
|Item 9B  |  | Other Information                                                                    
|PART III
|Item 10  |  | Directors and Executive Officers of the Registrant                                   
|Item 11  |  | Executive Compensation                                                               
|Item 12  |  | Security Ownership of Certain Beneficial Owners and Management                       
|Item 13  |  | Certain Relationships and Related Transactions                                       
|Item 14  |  | Principal Accounting Fees and Services                                               
|PART IV 
|Item 15  |  | Exhibits and Financial Statement Schedule                                            
|         |  | Signatures                                                                           
|         |  | Report of Independent Registered Public Accounting Firm                              
|         |  | Report of Independent Registered Public Accounting Firm                              
|         |  | Consolidated Balance Sheets                                                          
|         |  | Consolidated Statements of Operations                                                
|         |  | Consolidated Statements of Changes in Stockholders' Equity                           
|         |  | Consolidated Statements of Cash Flows                                                
|         |  | Notes to Consolidated Financial Statements                                           

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Except for the historical information contained in this document, the following discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to those discussed in this
section, in the sections entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors."

PART I

Item 1. Business Overview

Introduction

Evolving Systems, Inc. ("we", "our", "us") is a provider of mission critical software products and services to communications carriers. We maintain
long-standing relationships with many of the largest wireline, wireless and cable communications carriers worldwide. Our customers rely on us to develop, deploy, enhance, maintain and
integrate complex, highly reliable software solutions for a range of Operations Support Systems ("OSS") and Network Support Systems ("NSS"). Included among our more than 50 customers are four of the
largest wireline carriers in North America and three of the world's 10 largest wireless carriers. We offer software products and solutions in three core areasnumbering solutions that
enable carriers to comply with government-mandated requirements regarding number portability and phone number conservation; mediation solutions supporting data collection for both service assurance
and billing applications; and a service activation solution that is used to activate complex bundles of voice, video and data services. Historically, our products have been used to support traditional
telephony capabilities; however, during the year, a large communications carrier began using our products to support its Voice over Internet Protocol ("VoIP") offerings.

The
core Evolving Systems portfolio that included ordering and provisioning solutions for Local Number Portability ("LNP"), as well as a number inventory and assignment platform, has
recently been expanded, as a result of three acquisitions the company made over a period of 12 months from November of 2003 to November of 2004. Through the acquisition of CMS
Communications, Inc. ("CMS") in November 2003 we acquired a network mediation and service assurance solution to add to our product portfolio. Additionally, with the acquisition of
Telecom Software Enterprises, LLC ("TSE") on October 15, 2004 we added LNP and Wireless Number Portability ("WNP") number ordering and provisioning testing products which provide new OSS system
integration capabilities. Most recently, on November 2, 2004, we acquired Tertio Telecoms Ltd. ("Tertio"), a privately held supplier of OSS software solutions to communication carriers
throughout Europe, the Middle East, Africa and Asia, expanding our markets beyond North America. Tertio's activation solutionProvident,and mediation solutionEvident, strengthen our overall product portfolio. Our significantly expanded product and service capabilities now
enable us to address a larger portion of our customer's application needs. As a result, we have become a company with global reach and a customer base that includes many of the world's leading
communications carriers. We are positioned as a provider of OSS, NSS and comprehensive systems integration capabilities. These complementary competencies enable us to address and implement solutions
across much of a customer's back office.

Company Background

Founded in 1985, we initially focused on providing custom software development and professional services to a limited number of telecommunications companies in
the United States. In 1996, concurrent with the passage of the Telecommunications Act of 1996 ("the Telecom Act"), we made a strategic decision to add software products to our established professional
services offerings. Since that time we have built a strong product portfolio, of which we are best known for, our LNP and service activation solutions.

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Historically,
we have helped our customers integrate our products into their existing business process and OSS environments. In 2002, we initiated a restructuring plan, which, in
addition to significant operational cost reductions and greater leverage of offshore development, included the reengineering of our business model to a solutions strategy. The solutions business model
reflects a more balanced mix of services and products, as well as integration and product enhancements for our customers' back office to meet the specific requirements of each customer. This customer
specific effort is complementary to product development investments driven by more traditional marketing efforts. Solutions which include our products as well as product extensions and integration,
are typically licensed to our customers and supported by us. In 2004, our sales reach was expanded to include both direct and indirect sales. New partnerships with network equipment providers and
system integrators to extend our reach to new geographical regions as well as helping us further penetrate our existing territories were achieved during the year. We have also created packaged
products with our channel partners, where we provide the underlying product and our partner provides some or most of the integration services.

Recent Developments



In October 2004, we acquired TSE. TSE'sVeriPortand Verifyproducts are sold to United States of America ("U.S.") wireline and wireless carriers, and provide for simulation of the nation's
centralized Number Portability Administration Center ("NPAC") and a testing environment for critical back office systems that carriers use for enabling number portability. Other products in the TSE
portfolio are used for enhanced integration between back office OSS systems. TSE has installed its products at several of the leading wireless and wireline carriers in North America. By acquiring TSE,
we have expanded our customer base and extended the set of solutions we offer our numbering solutions customers.



In November 2004, we acquired Tertio, our third acquisition in a twelve month period. By acquiring Tertio we became a global company with a customer base
that includes many of the world's largest communication carriers. Tertio's activation and mediation solutions, Provident and Evident, fit well with elements of our product portfolio, enabling us to
provide activation solutions and strengthening our current mediation and service assurance offerings.

In
2005, we changed Tertio's name to Evolving Systems Limited. We also renamed the Provident activation solution to "Tertio", to build on the strong recognition of the Tertio brand in
the service activation market. The name changes have not been reflected in this filing.



In February 2004, we formed Evolving Systems Networks India Private Limited, a wholly owned subsidiary of Evolving Systems ("Evolving Systems India"). For
several years, offshore development, through a subcontractor, had been a key aspect of our low-cost, accelerated-deployment strategy. With the formation of Evolving Systems India we now
have more control and flexibility and lower costs than with our previous outsourced development, which used an offshore third party contractor. As of December 31, 2004, we had approximately 46
employees in our Indian office with plans for further expansion as demand dictates.



In January 2005, we announced the launch ofLsmsXpressa product targeted for
carriers looking to reduce the total cost of ownership for their number portability routing requirements. The

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LsmsXpress
solution is a full function, small footprint Local Service Management System ("LSMS") that provides the interface between the NPAC and the network elements that route calls. It is designed
to meet the needs of carriers who want to manage core LNP functions in-house rather than using a service bureau.

A
vendor independent solution, LsmsXpress is designed to enable carriers to implement the LNP provisioning process cost-effectively and efficiently. We also offer a suite of
services for carriers looking to transition from the service bureau environment to an in-house LSMS solution. This product is the result of integrating product assets gained from our
acquisition of TSE with our experience in delivering number portability solutions. The first deployment of LsmsXpress occurred in December 2004.

Industry Background

Historically, telecommunications carriers have operated in a highly regulated environment. Deregulation in many countries around the globe has increased the
number of telecommunications carriers and consequently stimulated competition. This increase in competition coupled with the
emergence of new telecommunications technologies, such as fiber optics, packet-data networks, digital and wireless telephony as well as Internet-based services has created an industry that
is in the midst of significant change. Traditional wireline customers are migrating with an increasing frequency to wireless and broadband services requiring network operators to make large capital
expenditures in the areas of broadband and wireless infrastructure. In response to these market changes, we have broadened our product portfolio through internal product development activities,
customer-funded initiatives and the acquisition of key new products and technologies.

The
U.S. long distance market was opened to competition in the early 1970s. More recently, the Telecom Act provided for competition in local telephone service, allowing long distance,
wireless and other carriers to enter local telephone markets. The Telecom Act, among other things, requires carriers to offer LNP, which allows customers to retain their local phone numbers regardless
of the carrier providing local telephone service. While LNP is a key application for enabling such competition, in 2001 the North American market saw a reversal of the previous trend of new
telecommunication carriers entering the market. The North American wireline and wireless landscape today is dominated by a relatively small number of large carriers. Consolidation has played some role
in creating the largest wireline and wireless carriers, a trend that appears to be continuing.

Operations Support Systems ("OSS")

OSS encompasses a broad array of software and systems that perform critical functions for telecommunications carriers, including but not limited to ordering,
inventory, provisioning, activation, service assurance, repair and billing. Ordering systems collect customer information, retrieve current service information, capture and validate new service
requests, verify the availability of selected services and transmit completed orders to one or more provisioning OSS. Inventory systems maintain both physical and logical views of all the
telecommunications assets required to turn up a service. Carriers use activation systems to turn on services for new customers and to change or add services for existing customers. Service assurance
systems allow carriers to perform the testing, monitoring and reporting necessary to maintain appropriate network availability and feed operational data to other business systems. Repair and dispatch
systems set up, track and report on service conditions or outages for the large craft force that works for a carrier. Carriers use billing systems to collate, manage and report usage information for
customer billing. OSS typically operate on a 24x7 basis to support the real-time communications network that is the backbone of the carriers' service offerings.

Traditionally,
as carriers have added new services, such as wireless or Internet-based services, they have developed multiple, distinct OSS. These legacy, proprietary OSS in place at
carriers often utilize

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incompatible
hardware, operating systems, communications protocols, application software and other technologies, making interoperability among systems difficult. These OSS are further strained by the
many incremental changes that have been made in order to accommodate new technologies, such as client/server technology and advancements in data networking to allow for the proliferation of value-
added services, such as call waiting, call forwarding and voice mail, broadband data and video and to comply with government or regulatory mandates that in some cases change how systems and processes
are required to work. Despite these difficulties, the carriers have been unable to completely replace existing OSS due to the large investment and vast amounts of historical data contained in these
systems. As a result, carriers continue to make incremental modifications to these OSS, thereby further increasing their complexity and making it more difficult for the systems to interoperate
successfully.

Product Portfolio



Evolving Systems' Numbering Solutions product line includes our LNP and WNP products as well as our NumeriTrack®number
inventory and assignment solution.



Our Number Portability software solution enables carriers to comply with U.S. mandates in the Telecom Act and subsequent Federal Communications Commission ("FCC")
regulations implementing LNP and WNP. For traditional wireline, wireless networks, as well as Internet Protocol ("IP") networks, this requires service providers to allow customers the ability to
retain, or "port", their phone numbers when changing from one service provider to another. Our LNP software for ordering, provisioning, reporting, testing and exchanging information between carriers
is widely used by wireline service providers and is involved in approximately 50 percent of all porting transactions in the United States each year. In addition, we developed the initial custom
software used by all eight regional NPACs in North America to control the porting process. This software receives ported telephone number
information from carriers as changes occur and distributes the data to all subscribing carriers in the region. Our software was provided under contract to NeuStar, Inc., formerly a division of
Lockheed Martin IMS. Over time, we have expanded our Number Portability product features and developed other Number Portability related OSS software products for the wireline and wireless markets.
Today, our WNP software is used by five wireless carriers and two service bureaus. It is estimated that approximately 30 percent of wireless customers change carriers at least once per year.
Our full LNP and WNP product line comprises the following collection of products:OrderPath®order entry; NumberManager®network
provisioning;LNP DataServerdata warehousing;PortExchangeInter-carrier Communications Processor ("ICP") pre-porting; VeriPort NPAC testing; VeriCommICP testing;ServiceLinkautomated ICP System
forWNP; and Verify product suite for monitoring carriers' application communications for optimum service assurance.



We developed our NumeriTrack solution in response to the FCC mandated number conservation and number pooling regulations for both wireline and wireless carriers.
These regulations, implemented in 2003, resulted from the FCC's concern that the U.S. was running out of 10-digit telephone numbers, were designed to extend the life of the
10-digit numbering plan well into the 21st century by changing the way phone numbers are allocated to carriers, specifying rules regarding the assignment and classification
of those numbers, requiring regular utilization reporting by carriers and articulation of circumstances under which previously underutilized telephone numbers must be returned to the "pool" to be
reallocated to other carriers. Our NumeriTrack solution, which has been licensed to four carriers, facilitates compliance with the FCC mandates for both wireline and wireless carriers, provides
inventory management of phone numbers and other assets such as SIM cards, supports inventory assignments,

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and
supports integration with carriers' existing back-office systems. The NumeriTrack solution contains features for the inventory of and assignment logic for numbers associated with IP
addresses and is used by a large carrier in the U.S. for deployment of its Voice over Internet Protocol ("VoIP") service offering. As is the case with our LNP and WNP solutions, the implementation of
our NumeriTrack solutions has far-reaching implications for integration with carriers' existing OSS environments and business processes.



Our Service Activation solution, Provident, is employed by carriers to activate new services. Provident is used by some of the world's most advanced and demanding
service providers as their
next-generation solution. Our Provident product provides a flexible operating environment and can be used by carriers to manage their voice, data, and content service needs for both their
traditional and broadband Internet Protocol ("IP") networks. Provident is an integrated solution comprised of three components:



Our
Provident solution addresses the entire service lifecycle enabling service providers to better plan, manage and execute the introduction of new services. Provident allows carriers to
introduce new network technologies and eases the burden of integration with existing devices and systems.



Our mediation portfolio consists of network data mediation products and billing mediation. The network mediation products include Traffic Data Management System
("TDMS") acquired in the CMS acquisition and our next generation productMediation Central. Our billing mediation product, Evident, was
acquired as part of the Tertio acquisition.



Billing mediation is the process of collecting network usage data and verifying that usage data is accurate, and is a required pre-condition for
generating accurate bills for a carrier's customers. Billing mediation's importance lies in its ability to provide a systematic point of reliability
and assurance between network consumption and the billing system input. Our Evident product supports convergent voice, data, and content services. Evident enables the accurate management of data,
allowing reconciliation of data inputs and outputs. In addition, Evident provides support for compliance with relevant regulatory, accounting and data integrity requirements. This product also
provides service usage data for business intelligence, revenue assurance, and next-generation billing solutions. Our Evident solution can be used by wireline, broadband and wireless
carriers and provides carrier-grade support in terms of reliability, performance, and scalability.

As
carriers bring new services to market they are often accompanied by the need for a new mediation process to support those new services. Evident has been designed with the flexibility
to support new service concepts and designs.



A common challenge for telecommunications carriers is to create an integration layer between network element ("NE") devices and the OSS applications that
provision, monitor, and control them.

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Deploying
new devices needed for extending service offerings into the network can therefore be difficult, time consuming, and expensive. Our mediation solutions provide a common framework for
simplifying the data collection and distribution of critical network data. Our network mediation product, Mediation Central, supports a broad array of technologies that carriers typically deploy in
their network. Mediation Central provides support for wireline, broadband, transport and wireless networks. Our Mediation Central product supports both centralized and distributed configurations
allowing, for example, carriers to deploy a single solution for all their data collection and distribution needs.

We
also offer our TDMS solution, which is designed to automate key business processes and make valuable network data available to select employees in the enterprise, including Alarm and
Fault Management, Capacity and Network Planning, Data Collection, Mediation, Performance Management, Service Activation, Service Design and Assignment, and Service Quality Analysis. TDMS is installed
as the narrow band traffic collection data system in three of the nation's largest wireline carriers.

Custom Solutions and Integration

Since our inception we have developed and supported a variety of custom solutions for the OSS environment. Based on that experience, we have developed domain
knowledge that continues to help us serve our customers. As an example, we still maintain and support a complex Cellular Digital Packet Data ("CDPD") network element solution, as well as legacy
provisioning systems deployed at a major wireless carrier.

Business Structure and Strategy for Growth

We have developed a solutions business model that leverages our products and strong telecommunications domain expertise with a worldwide work force. This business
model combines our U.S. presence (offices in Denver, Colorado and Columbus, Ohio) and United Kingdom presence (offices in London and Bath, England) with the lower-cost offshore development
capabilities provided by our growing Indian subsidiary (with offices in Bangalore, India). We developed this model in response to the downturn in the telecommunications industry, and in 2002, we
successfully completed a restructuring plan that resulted in dramatically improved financial resultsrevenue growth and solid profitabilityfor our year ended
December 31, 2003.

In
March 2004, we launched Evolving Systems India in the city of Bangalore, with an initial staffing of 15 employees. This subsidiary has now grown to 46 employees. Utilization of
this captive development team in India enables us to continue to offer our customers high-quality, lower-cost solutions and a more consistent
round-the-clock workday.

Beginning
in late 2003 and continuing through 2004, we extended our strategy to focus on growth through a combination of organic and acquisitive activity and have worked to build one
integrated company from our three recent acquisitions; CMS, TSE and Tertio.

We
have completed integration of CMS and TSE into our business model and operations. We are working to integrate Tertio into our business model and operations and plan to complete that
integration by the end of 2005.

Sales and Marketing

The primary objective of our sales and marketing efforts is to educate existing and potential customers throughout the telecommunications industry about the depth
and breadth of our capabilities, experience and product portfolio. We work with those customers through discovery, concept, business case and implementation to create solutions that reduce cost,
increase revenue opportunities or allow compliance with government and regulatory mandates. In addition, we conduct many of our sales

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activities
as a result of responding to requests for proposals and competitive tenders. Our sales and marketing efforts include constant interaction with existing and target customers and prospects,
participation in relevant industry bodies, a website presence, presentations at industry conferences and forums, news releases to the industry and other marketing initiatives. Our sales focus is to
create solution opportunities for our product offerings. The majority of our sales efforts are conducted by direct sales teams. However, increasingly we are engaging in sales through business partners
or system integrators that have been selected by our customers for larger solution implementations where our products represent only a portion of the overall solution. A key component of the value of
Tertio was based on its strong business partner relationships with global systems integration firms. In addition, sales activities are also being delivered through channel partners, whose efforts are
directed at different market segments than those of our direct sales force. We plan to continue the approach of working with channel partners and system integrators in 2005 and beyondthis
is predicated by the success we have seen using partners at Evolving Systems and the fact that a large portion of the distribution model at Tertio relied on sales through strategic partners.

Product Development and Support

Our product development efforts are focused on identifying specific customer business needs as well as market requirements and then developing possible solutions
for those needs that leverage our existing product capabilities. Based upon the identified customer business needs, our product development efforts comprise a combination of design and development of
new products or features to enhance our existing products, and design and development of new product functionality as identified in our product "roadmaps," funded as research and development.
Investment plans are built for the three principal product areas which include number solutions, service activation and mediation/assurance. We make other investments in tools and product extensions
to accelerate the development, implementation and integration process for customer solutions. We usually do not develop completely new products, major product enhancements or tools until we have at
least one customer who has agreed to license what we will develop.

Competition

The market for telecommunications OSS products is intensely competitive and is subject to rapid technological change, changing industry standards and regulatory
developments. We face continuous demand for improved product performance, new product features and rapid integration capabilities, and reduced prices, as well as pressure to accelerate the release of
new products and product enhancements. Our existing and potential competitors include many large domestic and international companies and certain of our customers' internal IT organizations, that have
substantially greater financial, technological, marketing, distribution and other resources, larger installed customer bases and longer-standing relationships with telecommunications customers than we
do. The market for telecommunications software and services is extremely large. Consequently, we hold only a small portion of the total market share. However, by concentrating our focus on number
solutions, activation solutions and mediation and assurance solutions, we hold reasonable market share in those three areas. We differentiate ourselves from competitors through our combination of
telecommunications domain knowledge, low-cost offshore development, products, services, integration capabilities and strong customer relationships.

Our
principal competitors in the LNP and WNP market include Telcordia Technologies, Inc., Syniverse Technologies and Tekelec. Our principal competitors in activation are Metasolv
and Comptel. In mediation, we compete with many different companies with no single dominant competitor.

Many
of our customers have large internal development organizations, which develop software solutions and provide services similar to our products and services. As a result, our
customers often choose to implement their own solutions rather than choosing solutions we offer. In addition, other

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integration
companies such as Accenture, Bearing Point and IBM, compete with us for integration work.

We
believe that our ability to compete successfully depends on a wide range of factors. We plan to compete by offering quality low-cost solutions that are tailored
specifically to the customer. Furthermore, once one of our customers has implemented one of our core software products, we are in a preferable position, in contrast to our competitors, to develop
additional functionality or react to changes in our customers' business needs by offering additional products or services. Many of our customer relationships span five years or more with some
extending beyond ten years. We believe these long-term relationships also give us a competitive advantage.

Intellectual Property

We rely on a combination of copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect
our proprietary rights. We presently have U.S. patents on elements of our principal LNP OSS products, NumberManager and OrderPath, and we have both a U.S. patent on certain elements of and a pending
application for patent protection on certain elements of ourOmniPresenceServer application. In addition, we have applied for patent
protection on elements of ourServiceXpresstest harness application.

Backlog

We define backlog as firm non-cancelable sales orders that are anticipated to be delivered and recognized in revenue over the next twelve months. As
of December 31, 2004 and 2003, our backlog, as defined, was approximately $12.5 million and $11 million, respectively. Our backlog, as defined, at December 31, 2004 is
comprised of license fees and services of $8.0 million and customer support of $4.5 million compared to license fees and services of $3.4 million and customer support of
$7.6 million at December 31, 2003.

Employees

As of December 31, 2004, we employed 240 people including 96 in the United States, 98 in the United Kingdom and 46 in Bangalore, India. Of our worldwide
staff, 78% are involved in product delivery, development, support and professional services, 11% in sales and marketing, and 11% in general administration. Additionally, Tertio used the services of an
offshore subcontractor who provided the equivalent of approximately 20 employees, primarily in the area of delivery of professional services. The work being performed by the offshore subcontractor
will be transitioned to Evolving Systems India during 2005.

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RISK FACTORS

Risks related to Tertio Acquisition



Historically sales of our products have been limited to customers in the United States. Our only international operational experience has been with our Indian
offshore development subsidiary. The acquisition of Tertio resulted in the addition of significant sales and operations outside the United States, including Europe, Asia and Africa. If we are unable
to manage our sales and operations on a global basis, our financial condition or results of operations could be materially adversely affected. Our international business is subject to the financial
and operating risks including:





In consideration for our acquisition of Tertio, we made a cash payment of $11.0 million, issued 966,666 shares of Series B Convertible Preferred
Stock ("Series B Preferred Stock"), issued a short-term secured note with a principal amount of $4.0 million bearing interest at 5.5% per annum and issued
long-term seller financed notes (the "Long-Term Notes") with an aggregate principal amount of approximately $11.9 million bearing interest initially at
11% per annum (increasing to 14% on the second anniversary). Subject to stockholder approval, the holders of the Long-Term Notes have elected to exchange these notes for convertible notes
(the "Convertible Notes") convertible into shares of our common stock which would bear interest at the applicable federal rate at the time the Convertible Notes are issued, currently about 3.3%.

Each
share of Series B Preferred Stock is convertible into three shares of our common stock which could result in the issuance of up to 2,899,998 shares of our common stock. In
the event that the Series B Preferred Stock and/or the Convertible Notes are converted into shares of common stock, there will be a significant dilutive effect on the ownership interests and
voting rights of our existing stockholders.

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Prior
to our acquisition of Tertio, only one of our stockholders beneficially owned in excess of five percent of our common stock. If the Series B Preferred Stock and the
Convertible Notes are exchanged for shares of our common stock, the holder and their affiliates would hold in excess of twenty percent (but no more than thirty-three percent) of the outstanding shares
of our common stock. The sale by such holders of one or more large blocks of our common stock could have a negative impact on the market price of our common stock. Additionally, such ownership
interests could effectively deter a third party from making an offer to buy us, which might involve a premium over our current stock price or other benefits for our stockholders, or otherwise prevent
changes in the control or management of Evolving Systems. In addition, there are no restrictions, in the form of a standstill agreement or otherwise, on the ability of such stockholders or their
affiliates to purchase additional shares of our common stock and thereby further increase their ownership interests.



The holders of the Series B Preferred Stock have preferential rights with respect to distributions upon a liquidation of Evolving Systems, including
certain business combinations deemed to be a liquidation. Accordingly, no distributions upon liquidation may be made to the holders of common stock until the holders of the Series B Preferred
Stock have been paid their liquidation preference. As a result, it is possible that, on liquidation, all amounts available for the holders of equity of Evolving Systems would be paid to the holders of
the Series B Preferred Stock, and that the holders of common stock would not receive any payment. Additionally, in connection with the Tertio acquisition we are obligated to file and keep
effective a registration statement providing for the resale of the shares of our common stock issuable upon the conversion of the Series B Preferred Stock and the Convertible Notes. If the
Securities and Exchange Commission refuses to declare the registration statement effective or we fail to keep the registration statement effective, the holders of the Series B Preferred Stock
will have the right to cause us to repurchase for cash the shares of the Series B Preferred Stock for $3.89 per share (on an
as converted basis), or approximately $11.3 million. If we are required to make this payment, it would have a significant adverse impact on our liquidity and could cause us to incur additional
indebtedness.

Additionally,
the Series B Preferred Stock, as well as the Convertible Notes (if approved), contain certain weighted average price based anti-dilution protections
that, as long as those securities remain outstanding, would be triggered if we issued shares of our common stock (subject to certain adjustments and standard exclusions relating to Company options)
below $3.89 per share. In the event that we issued shares below this threshold, the holders of our common stock would be diluted to an unknown degree. Furthermore, the mere existence of such
anti-dilution protections could make it difficult for us to issue any common stock below $3.89 per share, if at all. In the event the anti-dilution adjustments of the
Series B Preferred Stock are triggered, such adjustments would result in a deemed dividend to the Series B Preferred Stock holders that would reduce income available to common
stockholders. The charge would be equal to the number of additional shares issuable as a result of the anti-dilution calculation, multiplied by the fair value of the common stock on the
date of the issuance of the Series B Preferred Stock, or $4.64. The deemed dividend charge could negatively affect the price of our common stock.



The indebtedness incurred with respect to the short- and long-term secured notes and, possibly, the redemption of the Series B Preferred Stock,
is material in relation to our current level of indebtedness, our ability to service the debt from our operating cash flow and our ability to repay the debt in full at maturity. If we do not obtain
stockholder approval to permit holders to exchange the

10

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Long-Term
Notes into Convertible Notes, and such notes are not converted into common stock, we will be required to service the full amount of the long-term debt and related
interest payments. Additionally, if we do not receive such stockholder approval, the Series B Preferred Stock will not automatically be converted into common stock and will remain outstanding
in accordance with its terms. No assurance can be given that sufficient funds will be available to meet our operating needs, to pay the interest due on the short and the long-term secured
notes or, if required, to redeem the Series B Preferred Stock. The notes are secured by a general lien on all of our assets. If we are unable to pay the notes as they become due, the holders of
the notes could foreclose on all of our assets. The increased level of our indebtedness, among other things, could:



If
we incur new indebtedness in the future, the related risks that we now face could intensify. Whether we are able to make required payments on our outstanding indebtedness and to
satisfy any other future debt obligations will depend on our future operating performance and our ability to obtain additional debt or equity financing.

Nasdaq
Rule 4350(i)(1)(C) requires that a company whose stock is traded on Nasdaq obtain stockholder approval in connection with the acquisition of another company involving the
issuance or potential issuance of common stock equal to twenty percent or more of its common stock. The issuance of the Series B Preferred Stock alone, does not exceed this twenty percent
threshold. However, because the issuance of the shares of common stock upon conversion of the Series B Preferred Stock and the Convertible Notes would, collectively, result in us issuing in
excess of twenty percent of our outstanding shares of common stock, we are required under the Nasdaq rules to seek stockholder approval for the exchange of the Long-Term Notes into
Convertible Notes. No assurances can be given that our stockholders will approve the matters required for such conversion or that we will be able to obtain a sufficient quorum to vote on all such
matters. If our stockholders do not approve such exchange or do not approve the amendment of our Articles of Incorporation to increase our authorized shares of common stock, needed to provide shares
into which the Convertible Notes may be converted, the Long-Term Notes will remain outstanding until December 31, 2007 (unless earlier repaid), will require debt repayments during
2006 and 2007, and our ability to continue to service such debt could adversely affect our financial condition.



There is a potential that the Company will incur additional charges in the future related to various provisions of the financial instruments issued in connection
with the acquisition of Tertio. Subject to stockholder approval and election by the note holders, the Long-Term Notes initially bearing interest at 11% per annum could be exchanged for a
combination (based on the allocation election of the note holders) of convertible notes bearing interest at the applicable federal rate at the time the convertible notes are issued (currently about
3.3%), and fixed rate, non-convertible notes bearing interest initially at 9% per annum. The holders of the Long-Term Notes have elected to exchange the full principal of those
notes, and accrued interest, for Convertible Notes. Such exchange is dependent upon the approval by the Company's stockholders to increase the number of authorized shares and to approve such exchange.
When and if such exchange occurs, the extinguishment of the Long-Term Notes and the issuance of the Convertible Notes will be recorded at their fair value, which could result in a charge

11

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reducing
our income which in turn could negatively affect our stock price. Fair value assessments are dependent upon market factors in existence at the time of measurement.

In
addition to the aforementioned charges related to remeasuring the Long-Term Notes exchange at fair value, if the conversion rate on the Convertible Notes is less than the
fair value of the stock into which the notes are convertible, on the date of issuance, the Company will be required to record as additional interest expense a beneficial conversion feature that will
negatively affect interest expense in the period in which the Convertible Notes are issued.

The
inability to register shares of our common stock underlying the Series B Preferred Stock and/or an inability to keep such registration effective, as described above, could
result in the Series B Preferred Stock becoming mandatorily redeemable. Currently, the Series B Preferred Stock is classified as non-permanent equity since the events that
would require its redemption have not occurred. If we are unable to obtain and/or maintain the effectiveness of the related registration statement, the Series B Preferred Stock will become
mandatorily redeemable at the option of the holders and the instrument will be reclassified as a liability. Upon reclassification, the Series B Preferred Stock will be remeasured at its then
current fair value and the difference between its fair value and redemption price will be charged to additional paid-in capital. Such charge to equity may negatively impact the price of
our common stock. Subsequent changes to the fair value of this instrument would be recognized in earnings, as a charge or income, and such amounts could be significant and unpredictable.



The notes issued in conjunction with the Tertio acquisition contain certain affirmative and negative covenants that, if breached, could result in the acceleration
of such notes becoming immediately due and payable. The covenants include the Company's agreement to do the following:



The
covenants also include the Company's agreement not to do any of the following (except as specifically authorized in such notes):



The
covenants may limit the Company's flexibility in planning for, or reacting to changes in, its business. Failure to comply with such covenants, if not waived, could result in the
acceleration of the notes. If the Company is required to pay the notes on an accelerated basis, it would have a significant

12

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adverse
impact on the Company's liquidity and financial condition and could cause us to incur additional indebtedness.

Additionally,
the notes issued in conjunction with the Tertio acquisition require us to offer the note holders a prepayment on such notes in the amount that our closing cash balance
exceeds $7.0 million at the end of any fiscal quarter beginning with the quarter ended March 31, 2005. Such a requirement will restrict our liquidity and cash management flexibility.
Until the notes are repaid, our ability to engage in transactions or to enter into agreements requiring significant cash investments may be adversely affected.

Risks Related to Our Business



Our operating results have fluctuated significantly in the past and may continue to fluctuate significantly in the future. Fluctuations in operating results may
result in volatility of the price of our common stock. These quarterly and annual fluctuations may result from a number of factors, including:



13

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Our
expense levels are based in significant part on our expectations regarding future revenue. Our revenue is difficult to forecast as the market for our products and services is rapidly
changing, and our sales cycle and the size and timing of significant contracts vary substantially among customers. Accordingly, we may be unable to adjust spending in a timely manner to compensate for
any unexpected shortfall in revenue. Any significant shortfall from anticipated levels of demand for our products and services could have a material adverse effect on our business, financial
condition, results of operations and cash flows.

Based
on these factors, we believe our future quarterly and annual operating results may vary significantly from quarter to quarter and year to year. As a result,
quarter-to-quarter and year-to-year comparisons of operating results are not necessarily meaningful nor do they indicate what our future performance
will be. Furthermore, we believe that in future reporting periods if our operating results fall below the expectations of public market analysts or investors, it is possible that the market price of
our common stock could go down.



The market for our traditional North American OSS products was created and has primarily been driven by the adoption of regulations under the Telecom Act
requiring Regional Bell Operating Companies ("RBOCs") to implement LNP as a condition to being permitted to provide long distance
services. Therefore, any changes to these regulations, or the adoption of new regulations by federal or state regulatory authorities under the Telecom Act, or any legal challenges to the Telecom Act,
could hurt the market for our products and services. For example, when the FCC delayed implementation of the Telecom Act with respect to wireless carriers until November 2003, these delays had
an impact on our revenue from our WNP products and services. Likewise, in mid-2001 when Verizon Wireless petitioned the FCC requesting forbearance from this requirement, we saw our
wireless customers delay making decisions to purchase WNP products. WNP went into effect in November 2003. However, any invalidation, repeal or modification in the requirements imposed by the
Telecom Act or the FCC, could materially harm our business, financial condition and results of operations. In addition, customers may require, or we may find it necessary or advisable, to modify our
products or services to address actual or anticipated changes in regulations affecting our customers. This could also materially harm our business, financial condition, results of operations, and cash
flows. Additionally, with our acquisition of Tertio, we are now subject to numerous regulatory requirements of foreign jurisdictions. Any compliance failures or changes in such regulations could also
materially harm our business, financial condition, results of operations and cash flows.



In the past, and currently, we earn a significant portion of our revenue from a small number of customers in the telecommunications industry. We expect this to be
mitigated somewhat by the expansion of our customer base through our recent acquisitions. However, the loss of any significant customer, delays in delivery or acceptance of any of our products by a
customer, delays in the performance of services for a customer, or delays in collection of customer receivables could be materially harmful to our business, financial condition, results of operations
and cash flows.

During
2004, we recognized approximately 61% of our total revenue from four significant customers, who each were responsible for more than 10% of our total revenue. In 2003 and 2002
approximately 61% and 66% of our revenue came from three significant customers. It is likely that we will continue to depend on large contracts with a small number of major customers. This can cause
our revenue and earnings to fluctuate between reporting periods based on the timing of contracts and when our customers install our products. None of our major customers have any obligation to
purchase

14

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additional
products or services beyond annual support contracts that they may or may not renew each year. As a result, our failure to maintain relationships with our existing customers or to develop
relationships with significant new customers could materially harm our business, financial condition, results of operations and cash flows.



The integration of Tertio and TSE or future acquisitions may present risks and we may be unable to achieve the product, financial or strategic goals intended at
the time of any acquisition. The risks we may encounter in such transactions include:



15

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Based
on all of the foregoing, we believe it is possible for future revenue, expenses and operating results to vary significantly from quarter to quarter and year to year. As a result,
quarter-to-quarter and year-to-year comparisons of operating results are not necessarily meaningful or indicative of future performance.



Implementing our solutions can be a relatively complex and lengthy process since we typically customize these solutions for each customer's unique environment.
Often our customers may also require rapid deployment of our software solutions, resulting in pressure on us to meet demanding delivery and implementation schedules. Delays in implementation may
result in customer dissatisfaction and/or damage our reputation. This could materially harm our business, financial condition, results of operations and cash flows.

The
majority of our existing contracts provide for acceptance testing by the customer, which can be a lengthy process. Unanticipated difficulties or delays in the customer acceptance
process could result in higher costs, delayed payments, and deferral of revenue recognition. In addition, if our software contains defects or we otherwise fail to satisfy acceptance criteria within
prescribed times, the customer may be entitled to cancel its contract and receive a refund of all or a portion of amounts paid or other amounts as damages, which could exceed related contract revenue
and which could result in a future charge to earnings. Any failure or delay in achieving final acceptance of our software and services could have a material harmful effect on our business, financial
condition, results of operations and cash flows.



Large telecommunications solutions used for enterprise-wide, mission-critical purposes, involve significant capital expenditures and lengthy
implementation plans. Prospective customers typically commit significant resources to the technical evaluation of our products and services and require us to spend substantial time, effort and money
providing education regarding our solutions. This evaluation process often results in an extensive and lengthy sales cycle, typically ranging between three and twelve months, making it difficult for
us to forecast the timing and magnitude of sales contracts. For example, customers' budgetary constraints and internal acceptance reviews may cause potential customers to delay or forego a purchase.
The delay or failure to complete one or more large contracts could materially harm our business, financial condition, results of operations and cash flows and cause our operating results to vary
significantly from quarter to quarter and year to year.



The telecommunications industry has recently experienced significant reorganization and consolidation. This may continue. Mergers and acquisitions of large
telecommunications companies, as well as the formation of new alliances, have resulted in a constantly changing marketplace for our products and services. Delays associated with these changes are
common. These consolidations have caused us to lose customers and it is possible that we could lose additional customers as a result of more consolidations. In addition, due to a major downturn in the
telecommunications industry which began in the second half of 2000 (and continues to the present), many of the companies in the telecommunications industry reduced their capital expenditures in
response to changes in the telecommunications marketplace; some companies have declared bankruptcy, cancelled contracts, delayed payments to their suppliers or delayed additional purchases. The delay
or failure to complete one or more large contracts, or the loss of a significant customer, could materially harm our business, financial condition, results of operations, or cash flows, and cause our
operating results to vary significantly from quarter to quarter and year to year.

16

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Currently, a large portion of our revenue is from contracts that are on a fixed-price basis. We anticipate that customers will continue to request we provide
software and integration services as a total solution on a fixed-price basis. These contracts specify certain obligations and deliverables we must meet regardless of the actual costs we incur.
Projects done on a fixed-price basis are subject to budget overruns. On occasion, we have experienced budget overruns, resulting in lower than anticipated margins. We can give no assurance we will not
incur similar budget overruns in the future, including overruns that result in losses on these contracts. If we incur budget overruns, our margins and results of operations may be materially harmed.



The market for our products and services is subject to rapid technological changes, evolving industry standards, changes in carrier requirements and preferences
and frequent new product introductions and enhancements. The introduction of products that incorporate new technologies and emergence of new industry standards can make existing products obsolete and
unmarketable. To compete successfully, we must continue to design, develop and sell enhancements to existing products and new products that provide higher levels of performance and reliability in a
timely manner, take advantage of technological advancements and changes in industry standards and respond to new customer requirements. As a result of the complexities inherent in software
development, major new product enhancements and new products can require long development and testing periods before they are commercially released and delays in planned delivery dates may occur.
There can be no assurance we will successfully identify new product opportunities or will achieve market acceptance of new products brought to market. In addition, products developed by others may
cause our products to become obsolete or noncompetitive. If we fail to anticipate or respond adequately to changes in technology and customer preferences, or if our products do not perform
satisfactorily, or if we have delays in product development, our business, financial condition, results of operations may be materially harmed.



The market for our number portability products is mature in the U.S and we may not be able to successfully identify new product opportunities in the U.S. or
abroad or achieve market acceptance of new products brought to the market. Although wireless number portability was only recently mandated in the U.S., many of the wireless carriers selected solutions
from our competitors and it is unclear how many new opportunities there will be with these carriers. If we are unable to identify new product opportunities in the U.S. or abroad, our business,
financial condition, results of operations or cash flows could be materially harmed.



We have taken steps to reduce our expenses, such as reductions in staff, closing of our satellite facilities, reductions in employee benefits and general cost
control measures. If, as a result of such cost reductions, we have not adequately responded to balance expenses against revenue, or if our fixed costs cannot be reduced enough, our financial condition
could be materially harmed. Likewise, cutbacks in staff may have an impact on our ability to generate future revenue.



In February 2004, we formed Evolving Systems India, a wholly owned subsidiary of Evolving Systems, to transfer the services provided by our Indian
subcontractor, Infosys, to Evolving Systems India. If Evolving Systems India fails to provide quality software in a timely fashion, this could

17

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negatively
affect our ability to satisfy our customer contracts. Furthermore, political changes and uncertainties in India could negatively impact the business climate there. As a result, we may be
unable to satisfactorily perform our customer contracts and our business, financial condition and results of operations could be materially harmed.



Our primary markets are intensely competitive and are subject to rapid technological changes, evolving industry standards and regulatory developments. We face
continuous demand for improved product performance, new product features and reduced prices, as well as intense pressure to accelerate the release of new products and product enhancements. Our
existing and potential competitors include many large domestic and international companies, including some competitors that have substantially greater financial, manufacturing, technological,
marketing, distribution and other resources, larger installed customer bases and longer-standing relationships with customers than we do. Our principal competitors in the LNP and WNP market include
Telcordia Technologies, Inc., Syniverse Technologies and Tekelec. Our principal competitors in activation are Metasolv and Comptel. In mediation, we compete with many different companies with
no single competitor. There also can be no assurance that customers will not offer competitive products or services in the future since customers who have purchased solutions from us are not precluded
from competing with us. Many telecommunications companies have large internal development organizations, which develop software solutions and provide services similar to the products and services we
provide. We also expect competition may increase in the future from Application Service Providers, existing competitors and from other companies that may enter our existing or future markets with
solutions which may be less costly, provide higher performance or additional features or be introduced earlier than our solutions.

We
believe that our ability to compete successfully depends on numerous factors. For example, the following factors affect our ability to compete successfully:



Some
of these factors are within our control, and others are not. A variety of potential actions by our competitors, including a reduction of product prices or increased promotion,
announcement or accelerated introduction of new or enhanced products, or cooperative relationships among competitors and their strategic partners, could harm our business, financial condition, results
of operations and cash flows. There can be no assurance that we will be able to compete successfully with existing or new competitors or that we will properly identify and address the demands of new
markets. This is

18

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particularly
true in new markets where standards are not yet established. Our failure to adapt to emerging market demands, respond to regulatory and technological changes or compete successfully with
existing and new competitors would materially harm our business, financial condition, results of operations and cash flows.



Our ability to manage future expansion, if any, effectively will require us to attract, train, motivate and manage new employees successfully, to integrate new
management and employees into our overall operations and to continue to improve our operations, financial and management systems. There can be no assurance that we will be able to retain personnel or
to hire additional personnel on a timely basis, if at all. Because of the complexity of our software solutions, a significant time lag exists between the hiring date of technical and sales personnel
and the time when they become fully productive. We have at times experienced difficulty in recruiting and retaining such personnel. In addition, our stock option plan terminates on December 31,
2005 and under Nasdaq rules we will be required to obtain stockholder approval to establish a new equity compensation plan. If we are unsuccessful in obtaining this approval, our ability to attract or
retain employee may be harmed. Our failure to retain personnel or to hire qualified personnel on a timely basis could materially harm our business, financial condition, results of operations and cash
flows.



Our agreements with our customers typically contain provisions designed to limit our exposure to potential liability for damages arising out of the use of or
defects in our products. These limitations, however, tend to vary from customer to customer and it is possible that these limitations of liability provisions may not be effective. We currently have
errors and omissions insurance, which, subject to customary exclusions, covers claims resulting from failure of our software products or services to perform the function or to serve the purpose
intended. To the extent that any successful product liability claim is not covered by this insurance, we may be required to pay for a claim. This could be expensive, particularly since our software
products may be used in critical business applications. Defending such a suit, regardless of its merits, could be expensive and require the time and attention of key management personnel, either of
which could materially harm our business, financial condition and results of operations. In addition, our business reputation could be harmed by product liability claims, regardless of their merit or
the eventual outcome of these claims.



Our success and ability to compete are dependent to a significant degree on our proprietary technology. We rely on a combination of patent, copyright, trademark
and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. We have U.S. patents on elements of our LNP products,
NumberManager and OrderPath, and elements of our OmniPresenceServer application and have applied for patent protection on various other elements of our OmniPresenceServer application and our
ServiceXpress Test Harness application. In addition, we have registered or filed for registration of certain of our trademarks. Despite these precautions, it may be possible for a third party to copy
or otherwise obtain and use our products or technology without authorization or to develop similar technology independently through reverse engineering or other means. In addition, the laws of some
foreign countries may not adequately protect our proprietary rights. There can be no assurance that our means of protecting our proprietary rights in the U.S. or abroad will be adequate or that others
will not independently develop technologies that are similar or superior to our technology, duplicate our technology or design around any of our patents.

19

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It is also possible that our business activities may infringe upon the proprietary rights of others, or that other parties may assert infringement claims against
us. If we become liable to any third party for infringing its intellectual property rights, we could be required to pay substantial damage awards and to develop non-infringing technology,
obtain licenses, or to cease selling the applications that contain the infringing intellectual property. Litigation is subject to inherent uncertainties, and any outcome unfavorable to us could
materially harm our business. Furthermore, we could incur substantial costs in defending against any intellectual property litigation, and these costs could increase significantly if any dispute were
to go to trial. Our defense of any litigation, regardless of the merits of the complaint, likely would be time-consuming, costly, and a distraction to our management personnel. Adverse
publicity related to any intellectual property litigation also could harm the sale of our products and damage our competitive position.

Certain
software developed or used by Evolving Systems, as well as certain software acquired in our acquisitions of TSE or Tertio, may include or be derived from software that is made
available under an open source software license.



The continued threat of terrorism within the U.S. and throughout the world and acts of war may cause significant disruption to commerce throughout the world. Our
business and results of operations could be materially and adversely affected to the extent that such disruptions result in delays or cancellations of customer orders, delays in collecting cash, a
general decrease in corporate spending on information technology, or our inability to effectively market, manufacture or ship our products. We are unable to predict whether war and the threat of
terrorism or the responses thereto will result in any long-term commercial disruptions or if such activities or responses will have any long-term material adverse effect on our
business, results of operations, financial condition or cash flows.



The trading price of our common stock has been subject to wide fluctuations in response to quarterly variations in operating results, announcements of
technological innovations or new products

20

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by
us or our competitors, merger and acquisition activity, changes in financial estimates by securities analysts, the operating and stock price performance of other companies that investors may deem
comparable to us, general stock market and economic considerations and other events or factors. This may continue in the future.

In
addition, the stock market has experienced volatility that has particularly affected the market prices of stock of many technology companies and often has been unrelated to the
operating performance of these companies. These broad market fluctuations may negatively impact the trading price of our common stock. As a result of the foregoing factors, we cannot assure our
investors that our common stock will trade at or higher than its current price.



If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall. The perception among
investors that such sales will occur could also produce this effect. These factors also could make it more difficult to raise funds through future offerings of common stock.



Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with
the protection of investors and the oversight companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC and the Nasdaq, have
recently issued new requirements and regulations and are currently developing additional regulations and requirements in response to recent laws enacted by Congress, most notably the Sarbanes-Oxley
Act of 2002. Our compliance with certain of these rules, such as Section 404 of the Sarbanes-Oxley Act, is likely to require the commitment of
significant and managerial resources. We are currently reviewing our material internal control systems, processes and procedures in compliance with the requirements of Section 404. There can be
no assurance that such a review will not result in the identification of significant deficiencies or material weaknesses in our internal controls.



We have never paid cash dividends on our common stock. We currently intend to retain all future earnings, if any, for use in the operation of our business. In
addition, the notes issued in connection with the Tertio acquisition prohibit us from declaring dividends to our common stockholders during the term of the notes. Accordingly, we do not anticipate
paying cash dividends on our common stock in the foreseeable future.



Our restated certificate of incorporation allows our board of directors to issue up to 2,000,000 shares of preferred stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or action by our stockholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the future. Issuance of preferred stock, while providing desired flexibility in connection with possible acquisitions and other
corporate purposes, could make it more difficult for a third party to acquire a majority of our outstanding voting stock. In 1999, our Board of directors designated 250,000 shares of Series A
Junior Participating Preferred Stock that contain "poison pill" provisions. In connection with the Tertio acquisition, we issued 966,666 shares of Series B Preferred Stock. We have no current
plans to issue additional shares of preferred stock.

21

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In
addition, we are subject to the anti-takeover provisions of Section 203 of Delaware General Corporation Law, which prohibit us from engaging in a "business
combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is
approved in the prescribed manner. The application of Section 203 and certain provisions of our restated certificate of incorporation, including a classified board of directors, may have the
effect of delaying or preventing changes in control of our management, which could adversely affect the market price of our common stock by discouraging or preventing takeover attempts that might
result in the payment of a premium price to our stockholders.

Available Information

You can find out more information about us at our Internet website located atwww.evolving.com.Our Annual Report
on Form 10-K, our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K and any amendments to those reports are available free of
charge on our Internet website as soon as reasonably practicable after we electronically file such material with the SEC. Additionally, these reports are available at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549 or on the SEC's website at www.sec.gov. Information on the operation of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330.

Item 2. Properties

During 2004, we leased office space at ten locations (the Vienna, Virginia lease expired during 2004). The office spaces currently being utilized are the
Englewood, Colorado location, the space in Columbus, OH, which was acquired as part of the CMS acquisition, the space in London, England, Bath, England and Munich, Germany, which was acquired as part
of the Tertio Telecoms LTD acquisition and the Bangalore, India space. We closed all of our other offices in 2002, with the exception of the Greenwood Village, Colorado space, which was
acquired and closed in 2004 as part of the Telecom Software Enterprises acquisition. Any remaining lease obligations associated with the closed offices were accrued as restructuring and other
expenses, net of estimated sublease income (see Note 5 to the Consolidated Financial Statements). We currently have sublease agreements on the California, New Jersey and Greenwood Village,
Colorado locations. We also sublease a portion of our space in our Bath, England office. Our current leases are shown below:

Location

Square
Footage

Lease
ExpirationEnglewood, Colorado (Headquarters)

36,719

5/31/07Columbus, Ohio

15,335

10/31/07Bath, England

10,450

9/26/05London, England

7,765

3/24/05Bangalore, India

7,488

3/7/07Munich, Germany

732

4/30/05Greenwood Village, Colorado (closed in December 2004)

6,436

11/30/05Santa Maria, California (closed in 2002 restructuring)

6,600

4/30/06Iselin, New Jersey (closed in 2002 restructuring)

2,951

1/31/05


Item 3. Legal Proceedings

From time to time we are involved in various legal proceedings arising in the normal course of business operations. We are not currently involved in any such
proceedings.

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

None

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Our common stock began trading publicly through the NASDAQ National Market under the symbol "EVOL" on May 12, 1998. Prior to that date,
there was no public market for the common stock. We transferred from the NASDAQ National Market to the NASDAQ SmallCap Market on August 28, 2002. The closing price of our common stock as
reported on the NASDAQ SmallCap Market as of March 18, 2005 was $2.40 per share. The following table sets forth for the periods indicated the high and low closing sale quotations for the common
stock as reported on the NASDAQ National and SmallCap Markets. The prices reported do not include retail mark-ups, markdowns or commissions.

For the Years Ended December 31,2004

2003High

Low

High

LowFirst Quarter

$
12.98

$
6.93

$
2.94

$
0.91Second Quarter

$
8.33

$
3.25

$
4.20

$
2.85Third Quarter

$
4.68

$
2.72

$
14.08

$
3.33Fourth Quarter

$
5.35

$
3.47

$
18.50

$
12.11


As
of March 18, 2005, there were approximately 171 holders of record of our common stock.

We
have not declared or paid a cash dividend on our common stock. In addition, the notes issued in connection with the Tertio acquisition prohibit us from declaring dividends to our
common stockholders during the term of the notes. We currently intend to retain any future earnings, if any, to finance the growth and development of our business and, therefore, do not anticipate
paying cash dividends in the foreseeable future.

Item 6. Selected Financial Data

The selected financial data set forth below for each of the years in the five-year period ended December 31, 2004, has been derived from our
consolidated financial statements. The following selected financial data should be read in conjunction with "Item 7: Management's Discussion and Analysis of Financial Condition and Results of
Operations", the consolidated financial statements and the notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K. 2004 results include
amounts related to the acquisition of Tertio from the purchase date of November 2, 2004 to December 31, 2004 and amounts related to the acquisition of TSE from the

23

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purchase
date of October 15, 2004 to December 31, 2004. 2003 results include amounts related to the acquisition of CMS from the purchase date of November 3, 2003 to
December 31, 2003.

|                                                                                                        |                                                         | For the Years Ended December 31, |       
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | -------------------------------- | ------
|
|
|Revenue                                                                                                 |                                                         | $                                | 26,342
|Operating Expenses:                                                                                     |                                                         |                                  |       
|                                                                                                        | Cost of revenue excluding depreciation and amortization |                                  |       
|                                                                                                        | Sales and marketing                                     |                                  |       
|                                                                                                        | General and administrative                              |                                  |       
|                                                                                                        | Product development(2)                                  |                                  |       
|                                                                                                        | Depreciation                                            |                                  |       
|                                                                                                        | Amortization(1)                                         |                                  |       
|                                                                                                        | Restructuring and other expense(3)                      |                                  |       
|                                                                                                        |                                                         |                                  |       
|Income (loss) from operations                                                                           |                                                         |                                  | 39    
|Other income                                                                                            |                                                         |                                  | 87    
|Provision for (benefit from) income taxes(4)                                                            |                                                         |                                  | (298  
|                                                                                                        |                                                         |                                  |       
|Net income (loss)                                                                                       |                                                         |                                  | 424   
|Deemed dividend for beneficial conversion feature of Series B convertible redeemable preferred stock(5) |                                                         |                                  | 3,306 
|                                                                                                        |                                                         |                                  |       
|Net income (loss) available to common stockholders                                                      |                                                         | $                                | (2,882
|                                                                                                        |                                                         |                                  |       
|Basic income (loss) available to common stockholders per common share                                   |                                                         | $                                | (0.18 
|Diluted income (loss) available to common stockholders per common share                                 |                                                         | $                                | (0.18 
|Weighted average basic shares outstanding                                                               |                                                         |                                  | 16,307
|Weighted average diluted shares outstanding                                                             |                                                         |                                  | 16,307
|Working capital (deficit)(6)                                                                            |                                                         | $                                | (3,343
|Total assets(7)                                                                                         |                                                         |                                  | 86,491
|Long-term debt, net of current portion                                                                  |                                                         |                                  | 16,616
|Series B convertible redeemable preferred stock                                                         |                                                         |                                  | 11,281
|Stockholders' equity                                                                                    |                                                         |                                  | 29,314

---

24

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

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that have
been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about
Evolving Systems' industry, management's beliefs, and certain assumptions made by management. Forward-looking statements include our expectations regarding product, services, and customer support
revenue, our expectations associated with Evolving India, the integration of Tertio and TSE, and short- and long-term cash needs. In some cases, words such as "anticipates", "expects",
"intends", "plans", "believes", "estimates", variations of these words, and similar expressions are intended to identify forward-looking statements. The following discussion should be read in
conjunction with, and is qualified in its entirety by, the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Our actual
results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this section and in the section entitled "Risk
Factors."

Executive Summary

In 2004 we focused on generating growthin our product portfolio, global footprint and revenue basethrough a combination of organic and
acquisitive activity. In the process, we transitioned from a company with one principal product line in a maturing U.S. market to a company with a broad set of products and related services, an
expanded customer base and worldwide operations.

In
October 2004, we acquired TSE. TSE's products are sold to U.S. wireline and wireless carriers, and provide for simulation of the nation's centralized NPAC and a testing
environment for critical back office systems that carriers use for enabling number portability. Other products in the TSE portfolio are used for enhanced integration between back office OSS systems.
TSE has installed its products at several of the leading wireless and wireline carriers in North America. By acquiring TSE, we have expanded our customer base and extended the set of solutions we
offer our LNP customers.

In
November 2004, we acquired Tertio, our third acquisition in a twelve month period. By acquiring Tertio we became a global company with a customer base that includes many of the
world's largest communication carriers. Tertio's activation and mediation solutions, Provident and Evident, fit

25

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well
with elements of our product portfolio, enabling us to provide activation solutions and strengthening our current network mediation and service assurance offerings.



We recorded decreased revenues in license and services in 2004 due to industry consolidation, which caused certain customers to postpone purchasing decisions, and
smaller overall license and services sales which is reflective of the maturity of the numbering solutions market. With the acquisitions of TSE and Tertio we have expanded our customer base, which we
believe will provide opportunities for cross selling, and expanded our product portfolio, which strengthens our ability to pursue business opportunities in higher growth areas. Future challenges in
growing license and services revenue include developing an effective plan that will support cross selling to our expanded customer base and increasing organic sales as we build on the new products and
capabilities from our acquisitions.

Customer
support revenues increased primarily due to increased mediation support revenue on products acquired in the CMS acquisition in November 2003, and revenue generated on
products acquired in the TSE and Tertio acquisitions. Customer support agreements have historically been renewed annually. Customer pressures for quarterly maintenance renewals and lower maintenance
fees could affect future customer support contracts.

Total
costs of revenue and operating expenses increased by 25% or $5.2 million during 2004. The increase is due to a full year of CMS expenses versus a partial year in 2003 and
partial year expenses from TSE and Tertio, partially offset by savings realized from our transition from our off-shore subcontractors to our wholly-owned subsidiary Evolving Systems India.

Critical Accounting Policies

Management's Discussion and Analysis of Financial Condition and Results of Operations are based on our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States of America, or GAAP. We review the accounting
policies we use in reporting our financial results on a regular basis. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We have identified the policies listed below as critical to our business operations
and the understanding of our financial position and results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's
Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these
and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements in Item 16 of this Annual Report on Form 10-K, beginning on
page F-7.



26

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The Company derives revenue from two primary sources: license fees/services and customer support. We recognize revenue in accordance with Statement of Position,
("SOP") 97-2 "Software Revenue Recognition," as amended and interpreted by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions." In addition we have applied Staff Accounting Bulletin, ("SAB") No. 104, "Revenue Recognition," which provides further interpretive guidance for public companies on the
recognition, presentation and disclosure of revenue in financial statements.

The
majority of our license fees and services revenue is generated from fixed-price contracts which provide for both licenses to our software products and services. Revenue under these
arrangements, where the services are essential to the functionality of the delivered software, is recognized using the percentage-of-completion method of accounting, in
accordance with SOP 97-2 and SOP 81-1, "Accounting for Long-Term Construction Type Contracts." The percentage of completion for each contract is determined using
input factors (hours or costs), and revenue is recognized based on the ratio of direct labor hours/costs incurred to total estimated direct labor hours/costs. Due to the fact that estimates of total
direct labor hours or costs can have a significant impact on revenue recognition, these estimates are critical and are reviewed by management regularly. Amounts billed in advance of services being
performed are recorded as unearned revenue. Unbilled work-in-progress represents revenue earned but not yet billable under the terms of the fixed-price contracts and all such
amounts are expected to be billed and collected during the succeeding 12 months.

In
arrangements where the services are not essential to the functionality of the delivered software, we recognize license revenue when a license agreement has been signed, delivery has
occurred, the fee is fixed or determinable and collectibility is reasonably assured. Where applicable, fees from multiple element arrangements are unbundled and recorded as revenue as the elements are
delivered to the extent that vendor specific objective evidence ("VSOE") of fair value of the undelivered elements exist. If VSOE for the undelivered elements does not exist, fees from such
arrangements are deferred until the earlier of the date that VSOE does exist on the undelivered elements or all of the elements have been delivered.

Services
revenue provided under fixed-price contracts is generally recognized using the percentage of completion method described above. Revenue from professional services provided
pursuant to time-and-materials contracts and training services are recognized as the services are performed, as that is when our obligation to our customers under such
arrangements is fulfilled.

Customer
support and maintenance revenue is generally recognized ratably over the service contract period. When maintenance or training services are bundled with the original license fee
arrangement,
their fair value, based upon VSOE, is deferred and recognized during the periods such services are provided.

We
may encounter budget and schedule overruns on fixed price contracts caused by increased material, labor or overhead costs. Adjustments to cost estimates are made in the periods in
which the facts requiring such revisions become known. Estimated losses, if any, for arrangements accounted for under SOP 81-1, are recorded in the period in which current estimates
of total contract revenue and contract costs indicate a loss.



We make judgments related to our ability to collect outstanding accounts receivable. We provide allowances for receivables when their collection becomes doubtful
by recording an expense. Generally, we determine the allowance based on our assessment of the realization of receivables using historical information and current economic trends, including assessing
the probability of collection from

27

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customers.
If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments owed to us, an increase in the allowance for doubtful accounts
would be required. We evaluate the adequacy of the allowance regularly and make adjustments accordingly. Adjustments to the allowance for doubtful accounts could materially affect our results of
operations.



We account for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Significant
judgment is required in determining our provision for income taxes. We assess the likelihood that our deferred tax asset will be recovered from future taxable income, and to the extent we believe that
recovery is not likely, we establish a valuation allowance. We consider future taxable income projections, historical results and ongoing tax planning strategies in assessing the recoverability of
deferred tax assets. However, adjustments could be required in the future if we determine that the amount to be realized is less or greater than the amount that we recorded. Such adjustments, if any,
could have a material impact on our results of our operations.



We account for our purchase of an acquired company in accordance with SFAS No. 141, "Business Combinations." We allocate the cost of an acquired company to
the tangible and identifiable intangible assets and liabilities acquired, with the remaining amount being recorded as goodwill. Certain intangible assets are amortized over their estimated lives,
while in-process research and development is recorded as a one-time charge to product development expense in the statements of operations on the acquisition date.

We
assess the impairment of identifiable intangibles if events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Factors that we consider
important which could trigger an impairment review include the following:



If
we determine that the carrying value of intangibles and/or long-lived assets may not be recoverable based on the existence of one or more of the above indicators of
impairment, we measure any impairment based on the estimated discounted cash flows expected to result from the use of the asset and its eventual disposition and compare that to the asset's carrying
amount. Any impairment loss recognized would represent the excess of the asset's carrying value over its estimated
fair value. Significant estimates and judgments are required when estimating such fair values. If it is determined that the intangibles are impaired, an impairment charge would be recorded, and the
amount could be material.



Accounting for business combinations, including the allocation of the purchase price to acquired assets and assumed liabilities based on their estimated fair
values, requires management in certain circumstances to estimate fair values for items that have no ready market or for which no independent market exists. Management uses its best judgment to
determine a fair value based upon inference to other transactions and other data. As a result, the amounts determined by us for such items as

28

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accounts
receivable, identifiable intangible assets, goodwill, and deferred revenue are not individually the result of an arm's length transaction, but are the result of management estimates of the
fair value and the allocation of the purchase price. Accordingly, revenue recognized related to fulfillment of assumed contractual obligations is based on fair value estimates made by us. In addition,
the acquisitions of CMS, TSE and Tertio has resulted in approximately $38 million of goodwill. Such goodwill is subject to review for impairment at least annually, or more frequently if
circumstances warrant. Because the review is a fair value-based review, there is a high degree of subjective judgment required. If it is determined that the fair values do not support the carrying
value of the goodwill, an impairment charge will be recorded and the amount could be material.



We expend amounts on research and development ("R&D"), particularly for new products and/or for enhancements of existing products. For internal development of
software products that are to be licensed by us, we follow Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed" ("SFAS 86"). SFAS 86 requires that the cost of developing software be expensed prior to establishing technological feasibility, and those costs be capitalized once
technological feasibility has been established. Capitalization ceases upon general release of the software. The determination of whether internal software R&D costs are subject to capitalization is,
by its nature, highly subjective and involves significant judgements. This decision could significantly affect earnings during the development period. Further, once capitalized, the software costs are
generally amortized on a straight-line basis over the estimated economic life of the product. The determination of the expected useful life of a product is highly judgmental. Finally,
capitalized software costs must be assessed for impairment if facts and circumstances warrant such a review. We did not capitalize any internal software R&D costs during the years ended
December 31, 2004, 2003, or 2002. In addition, we did not have any capitalized internal software R&D costs included in our December 31, 2004 and 2003 Consolidated Balance Sheets. We
believe that during these periods no material internal software R&D costs were required to be capitalized. Our conclusion is primarily based on the fact that the feature-rich,
pre-integrated, and highly-scalable nature of our products requires that our development efforts include complex design, coding and testing methodologies, which include next generation
software languages and development tools. Development projects of this nature carry a high-degree of development risk. Substantially all of our internal software R&D efforts are of this
nature, and therefore, we believe the period between achieving technological feasibility and the general release of the software to operations is so short that any costs incurred during this period
are not material.

29

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Results of Operations

The following table sets forth, for the periods indicated, our Consolidated Statements of Operations reflected as a percentage of total revenue.

|                                                   |                                                                                                      | Years Ended December 31, |     
|-------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | ------------------------ | ----
|
|REVENUE                                            |                                                                                                      |                          |     
|                                                   | License fees and services                                                                            |                          | 42.0
|                                                   | Customer support                                                                                     |                          | 58.0
|                                                   |                                                                                                      |                          |     
|Total revenue                                      |                                                                                                      | 100.0                    | %   
|                                                   |                                                                                                      |                          |     
|COSTS OF REVENUE AND OPERATING EXPENSES            |                                                                                                      |                          |     
|                                                   | Costs of license fees and services, excluding depreciation And amortization                          |                          | 22.3
|                                                   | Costs of customer support, excluding depreciation and amortization                                   |                          | 26.8
|                                                   | Sales and marketing                                                                                  |                          | 16.8
|                                                   | General and administrative                                                                           |                          | 19.3
|                                                   | Product development                                                                                  |                          | 4.0 
|                                                   | Depreciation                                                                                         |                          | 4.4 
|                                                   | Amortization                                                                                         |                          | 6.3 
|                                                   | Restructuring and other expenses                                                                     |                          |    
|                                                   |                                                                                                      |                          |     
|Total costs of revenue and operating expenses      |                                                                                                      | 99.9                     | %   
|                                                   |                                                                                                      |                          |     
|Income (loss) from operations                      |                                                                                                      | 0.1                      | %   
|                                                   | Other income, net                                                                                    |                          | 0.4 
|                                                   |                                                                                                      |                          |     
|Income (loss) before income taxes                  |                                                                                                      | 0.5                      | %   
|                                                   | Provision (benefit) for income taxes                                                                 |                          | (1.1
|                                                   |                                                                                                      |                          |     
|Net income (loss)                                  |                                                                                                      | 1.6                      | %   
|                                                   | Deemed dividend for beneficial conversion feature of Series B Convertible redeemable preferred stock |                          | 12.6
|                                                   |                                                                                                      |                          |     
|Net income (loss) available to common stockholders |                                                                                                      | (11.0                    | )%  
|                                                   |                                                                                                      |                          |     

Revenue

Revenue is comprised of license fees/services and customer support. License fees and services revenue represent the fees we receive from the licensing of our
software products and those services directly related to the delivery of the licensed product as well as integration services and time and materials work. Customer support revenue includes annual
support fees, recurring maintenance fees, maintenance upgrades and warranty fees. Warranty services are typically bundled with a license sale and the related revenue, based on VSOE, is deferred and
recognized ratably over the warranty period. Prior to the first quarter of 2003, we classified license fees and those services directly related to the delivery of licensed product, along with warranty
maintenance, as license fees and related services. Customer support and other services included the remaining revenue types. Beginning in the first quarter of 2003, all delivery projects are
classified as license fees-services and all support projects are classified as customer support. This change has not impacted our revenue recognition policy. Accordingly, license
fees/services and customer support revenues and the related costs of license fees/services and customer support for the year ended December 31, 2002 have been reclassified to conform to our
current presentation. This change had no effect on our financial position, total revenue, net income (loss) or cash flows for any of the periods presented. Total revenue was $26.3,
$28.0 million and

30

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$23.0 million
for the years ended December 31, 2004, 2003 and 2002, respectively. The following table presents our revenue by product (in thousands).

For the Years Ended December 31,2004

2003

2002Numbering solutions

$
19,048

$
27,603

$
22,963Mediation


4,042


370


Activation


3,252





$
26,342

$
27,973

$
22,963




License fees and services revenues decreased 24% to $11.1 million for the year ended December 31, 2004, from $14.6 million for the year ended
December 31, 2003. The decrease in license fees and services is due to lower revenue from our numbering solutions products, partially offset by mediation and activation sales related to
products acquired in the CMS and Tertio acquisitions. The decline in sales for number portability and inventory products is due to industry consolidation, which caused certain customers to postpone
purchasing decisions, and smaller overall license sales which is reflective of the maturity of the narrowband numbering solutions market in the U.S.

License
fees and services revenues increased 20% to $14.6 million for the year ended December 31, 2003, from $12.1 million for the year ended December 31,
2002. The increase in 2003 is due to our transition to a solutions business model, which increased the number of revenue generating projects, internal stabilization following the 2002 restructuring
and improved customer confidence related to our improved financial condition.



Customer support revenues increased 14% to $15.3 million for the year ended December 31, 2004 from $13.4 million for the year ended
December 31, 2003. The increase in 2004 is primarily due to increased mediation and activation support revenue on products acquired in the CMS and Tertio acquisitions, partially offset by
reductions in certain customer support contracts.

Customer
support revenues increased 24% to $13.4 million for the year ended December 31, 2003 from $10.8 million for the year ended December 31, 2002. The
increase in 2003 is due to the increase in our installed licensed software base upon which support fees are charged and our acquisition of CMS, which provided $370,000 of customer support revenue from
its acquisition date of November 3, 2003 through December 31, 2003.

Costs of Revenue, Excluding Depreciation and Amortization

Costs of revenue, excluding depreciation and amortization, consist primarily of personnel costs, facilities costs, the costs of third-party software and all other
direct costs associated with these personnel. Total costs of revenue, excluding depreciation and amortization, were $12.9 million, $11.3 million and $17.0 million for the years
ended December 31, 2004, 2003 and 2002, respectively. Headcount reductions of 111 associated with our restructuring plan in 2002 were related to departments within costs of revenue. For the
nine months ended September 30, 2004 and the year ended December 31, 2003, costs of revenue included amortization expense related to intangible assets acquired as part of our acquisition
of CMS. With the acquisition of Tertio and TSE intangible asset amortization has become a significant expense and is now being shown separately on the statements of operations. Amortization expense
for the nine months ended September 30, 2004 and the year ended December 31, 2003 has been reclassified to conform to the current period's presentation.

31

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Costs of revenue for license fees and services, excluding depreciation and amortization, increased 14% to $5.9 million for the year ended
December 31, 2004 from $5.1 million for the year ended December 31, 2003. The increase in 2004 is due to a full year of CMS expenses plus expenses from TSE and Tertio, partially
offset by savings realized from our transition from our off-shore subcontractors to our wholly-owned subsidiary Evolving Systems India. As a percentage of license fees and services
revenue, costs of license fees and services, excluding depreciation and amortization, increased to 53% for the year ended December 31, 2004, from 35% for the year ended December 31,
2003. The increase as a percentage of license fees and services revenue is primarily due to the decrease in license fees and services revenue during 2004 and higher expenses resulting from our
acquisitions.

Costs
of revenue for license fees and services, excluding depreciation and amortization, decreased 9% to $5.1 million for the year ended December 31, 2003 from
$5.6 million for the year ended December 31, 2002. The decrease in 2003 is due to decreased employee and related expenses due to staff reductions, primarily in the first three quarters
of 2002 and reduced facilities costs related to our restructuring plan. As a percentage of license fees and services revenue, costs of license fees and services, excluding depreciation and
amortization, decreased to 35% for the year ended December 31, 2003, from 46% for the year ended December 31, 2002. The decrease as a percentage of license fees and services revenue is
primarily due to the 20% increase in license fees and services revenue during 2003.



Costs of revenue for customer support, excluding depreciation and amortization, increased 14% to $7.1 million for the year ended December 31, 2004
from $6.2 million for the year ended December 31, 2003. The increase in 2004 is due to a full year of CMS expenses plus expenses from TSE and Tertio, partially offset by savings realized
from our transition from our off-shore subcontractors to our wholly-owned subsidiary Evolving Systems India. As a percentage of customer support revenue, costs of customer support,
excluding depreciation and amortization, remained at 46% for the years ended December 31, 2004 and 2003. The costs as a percentage of customer support revenue remained the same because the
increased revenue was offset by increased costs.

Costs
of revenue for customer support, excluding depreciation and amortization, decreased 46% to $6.2 million for the year ended December 31, 2003 from $11.4 million
for the year ended December 31, 2002. The decrease in 2003 is due to decreased employee and related expenses due to staff reductions in 2002 and reduced facilities costs related to our
restructuring plan. As a percentage of customer support revenue, costs of customer support, excluding depreciation and amortization, decreased to 46% for the year ended December 31, 2003, from
105% for the year ended December 31, 2002. The decrease as a percentage of customer support revenue is primarily due to decreased costs related to our restructuring plan and a 24% increase in
customer support revenue.

Sales and Marketing

Sales and marketing expenses primarily consist of compensation costs, including bonuses and commissions, travel expenses, advertising and occupancy expenses.
Sales and marketing expenses were $4.4 million, $2.9 million and $4.9 million for the years ended December 31, 2004, 2003 and 2002, respectively. The increase of 50% to
$4.4 million for the year ended December 31, 2004 from $2.9 million for the year ended December 31, 2003 was due to additional costs from TSE and Tertio plus a full year of
CMS expenses and the launch of global sales and marketing. As a percentage of revenue, sales and marketing expenses increased to 17% for the year ended December 31, 2004 from 11% for the year
ended December 31, 2003. The increase as a percentage of revenue is due to the aforementioned additional costs during 2004.

32

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Sales
and marketing expenses decreased 40% to $2.9 million for the year ended December 31, 2003 from $4.9 million for the year ended December 31, 2002. The
decrease was due to a reduction of our sales and marketing staff throughout 2002, related to our restructuring plan as well as significant decreases in advertising and travel and entertainment costs
which were partially offset by increased bonus
expense. We eliminated 18 of the 24 positions in sales and marketing related to our restructuring plan in 2002. As a percentage of revenue, sales and marketing expenses decreased to 11% for the year
ended December 31, 2003 from 21% for the year ended December 31, 2002. The decrease as a percentage of revenue is due to the aforementioned reduction in sales and marketing staff and
related expenses in 2002 and a 22% increase in revenue during 2003.

General and Administrative

General and administrative expenses consist principally of employee related costs and professional fees for the following departments; facilities, finance, legal,
human resources, and executive management. General and administrative expenses were $5.1 million, $3.5 million and $5.4 million for the years ended December 31, 2004, 2003
and 2002, respectively. The increase of 46% to $5.1 million for the year ended December 31, 2004 from $3.5 million for the year ended December 31, 2003 was due to increased
professional and legal expenses and costs from the acquired entities. As a percentage of revenue, general and administrative expenses increased to 19% for the year ended December 31, 2004 from
13% for the year ended December 31, 2003. The increase as a percentage of revenue is primarily due to the aforementioned increased expenses.

General
and administrative expenses decreased 36% to $3.5 million for the year ended December 31, 2003 from $5.4 million for the year ended December 31, 2002.
The decrease was due to decreased salary expenses resulting from staff reductions throughout 2002, partially offset by increased bonus expense, and reduced facility costs related to our restructuring
plan. We eliminated 16 of the 39 general and administrative positions as a result of the restructuring plan that took place in 2002. As a percentage of revenue, general and administrative expenses
decreased to 13% for the year ended December 31, 2003 from 24% for the year ended December 31, 2002. The decrease as a percentage of revenue is due to the aforementioned headcount
reductions and restructure of our headquarters lease in 2002 as well as a 22% increase in revenue in 2003.

Product Development

Product development expenses consist primarily of employee-related costs, offshore development subcontractor expenses, costs to start up our offshore Indian
facility and the write-off on in-process research and development. Product development expenses were $1.1 million, $2.0 million and $1.2 million for the
years ended December 31, 2004, 2003 and 2002, respectively. The decrease of 48% to $1.1 million for the year ended December 31, 2004 from $2.0 million for the year ended
December 31, 2003 was due to decreased hours spent on the development of ourServiceXpresstoolkit, as the project was completed during the third
quarter and our development teams focus on customer specific projects rather than general research and development efforts. Also contributing to the decrease was a write-off of
in-process research and development of $90,000 in 2004 related to the acquisition of Tertio versus $233,000 in 2003 which was related to the acquisition of CMS. As a percentage of revenue,
product development costs decreased to 4% for the
year ended December 31, 2004 from 7% for the year ended December 31, 2003. The increase as a percentage of revenue is due to the aforementioned decreased expenses.

Product
development expenses increased 69% to $2.0 million for the year ended December 31, 2003 from $1.2 million for the year ended December 31, 2002. The
increase was due to our work on ourServiceXpresstoolkit, WNP readiness and a $233,000 write-off of in-process research and
development associated with our acquisition of CMS. As a percentage of revenue, product development costs increased to 7% for the year ended December 31, 2003 from 5% for the year ended

33

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December 31,
2002. The increase as a percentage of revenue is due to the work onServiceXpressand the in-process research and
development write-off related to the CMS acquisition.

Amortization

Amortization expense consists of amortization of identifiable intangibles from our acquisitions of CMS, TSE and Tertio. Amortization expense was
$1.7 million and $130,000 for the years ended December 31, 2004 and 2003. The increase in amortization expense for the year ended December 31, 2004 is due to amortization of
identifiable intangibles related to the acquisitions of TSE and Tertio and a full year of amortization from CMS intangibles.

Restructuring and Other Expense (Recovery)

In early 2002, management implemented a restructuring plan (the "Plan") due to the downturn in the telecommunications industry, the Company's sharp decline in
revenue, the FCC's delay in ruling on wireless number portability and other factors. The Plan included workforce reductions, restructuring of the Company's headquarters building lease, the closure of
its satellite field offices and the write-down of certain fixed assets, all of which were executed in 2002. At December 31, 2004 and 2003, the remaining accrual related to the
closure of the satellite offices.

Closure of satellite offices.The Company closed all of its satellite field offices during 2002. Because the costs to
sublease or terminate these lease commitments are based on estimates, the Company may incur additional costs related to the satellite office closures. As of December 31, 2004 and 2003
approximately $59,000 and $128,000, respectively, were included in accounts payable and accrued
liabilities, and approximately $20,000 and $47,000, respectively, were included in long-term obligations, related to the closure of the satellite offices.

Other Income (Expense)

Other income (expense) includes interest expense on our notes payable and capital leases, interest income on cash and cash equivalents, realized foreign currency
transaction gains and losses and gains or losses on the disposal of assets. Other income was $87,000, $191,000 and $35,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
The decrease for the year ended December 31, 2004 compared to 2003 is due to increased interest expense on notes payable related to the acquisitions of Tertio and TSE, partially offset by
increased interest income from higher cash balances and realized foreign currency transaction gains. The increase for the year ended December 31, 2003 compared to 2002 is due to increased
interest income from higher cash balances and losses on disposal of certain assets that occurred in 2002.

Provision for income taxes

We recorded an income tax benefit of $298,000 during 2004, primarily related to our UK-based operations.

In
conjunction with the acquisition of Tertio, certain identifiable intangible assets were recorded. Since the amortization of these identifiable intangibles is not deductible for UK
income tax purposes, a deferred tax liability of $4.6 million was established at the acquisition date for the expected difference between what would be expensed for financial reporting purposes
and what would be deductible for income tax purposes.

In
conjunction with the acquisition of Tertio, future revenue under contracts in existence at the acquisition dates was reduced to an amount equal to the Company's estimated costs to
fulfill its obligations under the contracts plus a reasonable profit margin. The resulting reduction of future revenue recorded for financial reporting purposes is not deductible for income tax
purposes and thus, a

34

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deferred
tax liability of approximately $600,000 was established at the acquisition date. Both of the aforementioned deferred tax liabilities will be recognized as a reduction of current income tax
expense as the identifiable intangibles are amortized and the contract revenue is recognized.

Our
tax liability in the U.S. is substantially offset through utilization of our operating loss carryforwards.

We
recorded income tax expense of $167,000 during 2003 to record our alternative minimum tax ("AMT") liability. The expense is a result of the net operating loss carryforward for AMT
purposes that may only be used to offset 90% of our alternative minimum taxable income.

A
full valuation allowance was recorded against our U.S. net deferred tax assets as of December 31, 2004 and 2003, due to uncertainties related to the ability to utilize our U.S.
deferred tax assets, primarily consisting of certain net operating loss carryforwards, before they expire. Our assessment of this valuation allowance was made using all available evidence. In
particular, we considered both historical results and projections of profitability for only the reasonably foreseeable future periods. Our realization of the recorded net deferred tax assets is
dependent on future taxable income and, therefore, we are not assured that such benefits will be realized.

Deemed Dividend for Beneficial Conversion of Series B Preferred Stock

Based upon the various features of the Series B Preferred Stock, fair value of this security was determined to approximate the stated redemption price.
Since the conversion price of the Series B Preferred Stock was fixed in the purchase agreement to equal $3.50 per common share, a beneficial conversion feature exists on the acquisition date
equal to the difference between the value of our common stock on the acquisition date, or $4.64, and the conversion price stated in the purchase agreement. The beneficial conversion feature was
recognized as a reduction in net income available to common stockholders of $3.3 million on the acquisition date since the Series B Preferred Stock was immediately convertible to common
stock.

35

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Quarterly Financial Information

The following table sets forth certain unaudited information for each of our last eight quarters. This data has been derived from unaudited consolidated financial
statements that have been prepared on the same basis as the annual audited consolidated financial statements and, in our opinion, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such information. Fourth quarter 2004 results include amounts related to the acquisition of Tertio from the purchase date of November 2, 2004
to December 31, 2004 and amounts related to the acquisition of TSE from the purchase date of October 15, 2004 to December 31, 2004. Fourth quarter 2003 results include the
acquisition of CMS from the acquisition date of November 3, 2003 to December 31, 2003.

These
consolidated unaudited quarterly results should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on
Form 10-K. The results of operations for any quarter are not necessarily indicative of the results for any future period.

|                                                                                                |  | Three Months Ended |        | Three Months Ended
|----------------------------------------------------------------------------------------------- |  | ------------------ | ------ | ------------------
|
|Revenue:                                                                                        |  |                    |        |                   
|License fees and services(1)                                                                    |  | $                  | 4,662  |                   
|Customer support(2)                                                                             |  |                    | 4,914  |                   
|                                                                                                |  |                    |        |                   
|Total revenue                                                                                   |  |                    | 9,576  |                   
|                                                                                                |  |                    |        |                   
|Costs of revenue and operating expenses:                                                        |  |                    |        |                   
|Costs of license fees and services, excluding depreciation and amortization                     |  |                    | 2,863  |                   
|Costs of customer support, excluding depreciation and amortization                              |  |                    | 1,785  |                   
|Sales and marketing                                                                             |  |                    | 1,633  |                   
|General and administrative                                                                      |  |                    | 2,116  |                   
|Product development(3)                                                                          |  |                    | 182    |                   
|Depreciation                                                                                    |  |                    | 341    |                   
|Amortization(4)                                                                                 |  |                    | 1,021  |                   
|Restructuring and other expenses                                                                |  |                    | (15    | )                 
|                                                                                                |  |                    |        |                   
|Total costs of revenue and operating expenses                                                   |  |                    | 9,926  |                   
|                                                                                                |  |                    |        |                   
|Income (loss) from operations                                                                   |  |                    | (350   | )                 
|Other income (expense), net                                                                     |  |                    | (129   | )                 
|                                                                                                |  |                    |        |                   
|Income (loss) before income taxes                                                               |  |                    | (479   | )                 
|Provision for (benefit from) income taxes                                                       |  |                    | (310   | )                 
|                                                                                                |  |                    |        |                   
|Net income (loss)                                                                               |  |                    | (169   | )                 
|Deemed dividend for beneficial conversion of Series B convertible redeemable preferred stock(5) |  |                    | 3,306  |                   
|                                                                                                |  |                    |        |                   
|Net income (loss) available to common stockholders                                              |  | $                  | (3,475 | )                 
|                                                                                                |  |                    |        |                   
|Basic earnings (loss) available to common stockholders per common share                         |  | $                  | (0.20  | )                 
|                                                                                                |  |                    |        |                   
|Diluted earnings (loss) available to common stockholders per common share                       |  | $                  | (0.20  | )                 
|                                                                                                |  |                    |        |                   
|Weighted average basic shares outstanding                                                       |  |                    | 17,647 |                   
|Weighted average diluted shares outstanding                                                     |  |                    | 17,647 |                   

---

36

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|                                                                                             |  | Three Months Ended |    | Three Months Ended |  
|-------------------------------------------------------------------------------------------- |  | ------------------ | -- | ------------------ | -
|
|Revenue:                                                                                     |  |                    |    |                    |  
|License fees and services                                                                    |  | 48.7               | %  | 14.1               | %
|Customer support                                                                             |  | 51.3               | %  | 85.9               | %
|                                                                                             |  |                    |    |                    |  
|Total revenue                                                                                |  | 100.0              | %  | 100.0              | %
|                                                                                             |  |                    |    |                    |  
|Costs of revenue and operating expenses:                                                     |  |                    |    |                    |  
|Costs of license fees and services, excluding depreciation and amortization                  |  | 29.9               | %  | 14.1               | %
|Costs of customer support, excluding depreciation and amortization                           |  | 18.6               | %  | 31.5               | %
|Sales and marketing                                                                          |  | 17.1               | %  | 16.4               | %
|General and administrative                                                                   |  | 22.1               | %  | 19.2               | %
|Product development                                                                          |  | 1.9                | %  | 2.6                | %
|Depreciation                                                                                 |  | 3.6                | %  | 4.7                | %
|Amortization                                                                                 |  | 10.7               | %  | 3.7                | %
|Restructuring and other expenses                                                             |  | (0.2               | )% |                   | %
|                                                                                             |  |                    |    |                    |  
|Total costs of revenue and operating expenses                                                |  | 103.7              | %  | 92.2               | %
|                                                                                             |  |                    |    |                    |  
|Income (loss) from operations                                                                |  | (3.7               | )% | 7.8                | %
|                                                                                             |  |                    |    |                    |  
|Other income (expense), net                                                                  |  | (1.3               | )% | 1.6                | %
|                                                                                             |  |                    |    |                    |  
|Income (loss) before income taxes                                                            |  | (5.0               | )% | 9.4                | %
|Provision for (benefit from) income taxes                                                    |  | (3.2               | )% | 0.4                | %
|                                                                                             |  |                    |    |                    |  
|Net income (loss)                                                                            |  | (1.8               | )% | 9.0                | %
|Deemed dividend for beneficial conversion of Series B convertible redeemable preferred stock |  | 34.5               | %  |                   | %
|                                                                                             |  |                    |    |                    |  
|Net income (loss) available to common stockholders                                           |  | (36.3              | )% | 9.0                | %
|                                                                                             |  |                    |    |                    |  

Liquidity and Capital Resources

We have historically financed operations through a combination of cash flow from operations and equity transactions. At December 31, 2004, our principal
source of liquidity was $11.4 million in cash and cash equivalents.

Net
cash provided by operating activities was $4.3 million in the year ended December 31, 2004 compared to $6.9 million in the year ended December 31, 2003.
The main factors in the cash provided by operating activities for the year ended December 31, 2004 were a decreases in accounts receivables

37

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of
$2.4 million and unbilled work-in-progress of $583,000, and depreciation and amortization of $2.8 million. Offsetting increases to cash flows from operating activities for the year
ended December 31, 2004 was a decrease in unearned income of $2.1 million.

Net
cash provided by operating activities was $6.9 million in the year ended December 31, 2003 compared to cash used in operating activities of $2.5 million in the
year ended December 31, 2002. The main factors in the cash provided by operating activities for the year ended December 31, 2003 were net income of $6.9 million, a decrease in
accounts receivables of $3.5 million and depreciation and amortization of $1.3 million. Offsetting increases to cash flows from operating activities for the year ended
December 31, 2003 were decreases in accounts payable and accrued liabilities of $1.5 million, unearned income of $3.2 million, and a decrease in unbilled
work-in-process of $493,000.

Net
cash used by investing activities during the year ended December 31, 2004 was $11.7 million compared to $9,000 in the year ended December 31, 2003. During 2004,
net cash spent on the acquisitions of Tertio and TSE was $10.5 million and we purchased $1.2 million in property and equipment to support operations.

Net
cash used by investing activities during the year ended December 31, 2003 was $9,000 compared to cash used by investing activities during the year ended December 31,
2002 of $180,000. During 2003, we purchased $367,000 in property and equipment to support operations. The acquisition of CMS provided a net cash inflow of $352,000.

Financing
activities provided $478,000 in cash for the year ended December 31, 2004 compared to $2.5 million in the year ended December 31, 2003. During 2004, we
received proceeds from the issuance
of common stock under our stock option and employee stock purchase plans of $407,000, plus $100,000 of our restricted cash was released, which was partially offset by repayments of capital lease
obligations of $29,000.

Financing
activities provided $2.5 million in cash for the year ended December 31, 2003 compared to cash used by financing activities of $521,000 in the year ended
December 31, 2002. During 2003, we received proceeds from the issuance of common stock under our stock option and employee stock purchase plans of $2.6 million which was partially offset
by repayments of capital lease obligations of $29,000.

Working
capital (deficit) at December 31, 2004 was ($3.3) million compared to $13.8 million at December 31, 2003. As previously mentioned, we acquired two companies,
TSE and Tertio, during the fourth quarter of 2004. In those transactions we paid cash of $1.5 million and $11.0 million for TSE and Tertio, respectively. The TSE transaction also
includes a short-term note payable of approximately $889,000. The acquisition of Tertio also includes the issuance of seller-financed notes of approximately $15.9 million, including
a short-term note of $4.0 million and a long-term note of approximately $12.0 million. The purchase price related to these two acquisitions, including estimated
transaction costs of $2.0 million, have reduced our working capital by approximately $19.4 million.

We
believe that our current cash and cash equivalents, together with anticipated cash flow from operations will be sufficient to meet our working capital and capital expenditure
requirements for at least the next twelve months. In making this assessment we considered the following:



38

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To
the extent we are unable to invoice and collect in a timely manner under our customer revenue arrangements, it could have a material adverse impact on our ability to meet our intended
business objectives. Management believes that we have the ability to further reduce operating expenses, if necessary, such that current working capital (exclusive of deferred revenue) and cash flows
from operations will be adequate to meet our cash needs through the next twelve months.

We
entered into the Long-Term Notes payable on November 2, 2004, in conjunction with the acquisition of Tertio. From the acquisition date through November 2,
2006, the Long-Term Notes bear interest at 11.0% per annum. From November 2, 2006 through the maturity date of December 31, 2007, the notes will bear interest at 14.0% per
annum. Interest is accrued to the principal balance through December 31, 2005, and beginning March 31, 2006, interest is payable on a quarterly basis in addition to the scheduled
principal payments. The Long-Term Notes may be prepaid at any time without penalty. Beginning on March 31, 2005, if our quarterly cash balances exceed $7.0 million the holder
of the Long-Term Notes may require a prepayment on the note equal to the amount by which the quarterly cash balance exceeds $7.0 million. Based on our current cash projections, no
such additional payments will be required during 2005. The scheduled principal payments on the long-term seller financed notes are as follows (in thousands):

Payment date

AmountMarch 31, 2006

$
1,340June 30, 2006


3,110December 31, 2006


1,430March 31, 2007


1,870June 30, 2007


3,110December 31, 2007


1,090$
11,950


In
the upcoming annual stockholders' meeting we are asking stockholders to approve the exchange of the Long-Term Notes into Convertible Notes. The currently outstanding notes
plus accrued interest through May 16, 2005 totaling approximately $12.7 million, upon stockholder approval, would be exchanged for notes that would be convertible into approximately
3.8 million shares of our common stock at $3.296 per share. The Convertible Notes would bear interest at the Federal Applicable Rate, which is currently approximately 3.3%. In addition, all
principal and unpaid interest would be due and payable on December 31, 2007 under such convertible note. If we do not obtain stockholder approval to permit holders to exchange some or all of
the Long-Term Notes into Convertible Notes, and such notes are not converted, we will be required to service the full amount of the Long-Term Notes and related interest
payments. Our inability to convene the Initial Shareholders' Meeting, as defined, by May 16, 2005, constitutes an event of default under this note. We believe we will be able to convene this
meeting by the appointed time.

The
Long-Term Notes subject us to certain affirmative and negative covenants, including a financial covenant indexed to our computation of EBITDA, as defined.

39

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Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or Special Purpose Entities ("SPEs") or Variable Interest Entities ("VIEs"), which would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes. As of December 31, 2004, we are not involved in any unconsolidated SPE, VIE or similar
off-balance sheet arrangements.

Contractual Obligations and Commercial Commitments

The following summarizes our significant contractual obligations as of December 31, 2004, which are comprised of a capital lease, operating leases and
principal and interest payments on our long-term debt, assuming no prepayments are made (in thousands).

|                  |  | As of December 31,
|----------------- |  | ------------------
|
|Capital lease     |  | $                 
|Operating leases  |  |                   
|Long-term debt    |  |                   
|                  |  |                   
|Total commitments |  | $                 
|                  |  |                   

Our
long-term debt obligation is discussed in more detail in Note 9 to our Consolidated Financial Statements. The operating lease obligations are discussed in
Note 5 to our Consolidated Financial Statements.

Impact of Inflation

Inflation has not had a significant effect on our operations during the three years ended December 31, 2004.

Accounting Estimates

On an on-going basis, we evaluate our estimates, including those related to project completion, customer programs and incentives, bad debts, income
taxes, warranty maintenance, cancellation costs, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. There can be no
assurance that actual results will not differ from these estimates under different assumptions or conditions.

Business Combinations



On November 2, 2004, we acquired all of the outstanding shares of privately-held, United Kingdom-based Tertio. Total consideration for Tertio's
net assets determined in accordance with Generally Accepted Accounting Principles ("GAAP") approximated $40.2 million, consisting of $11.0 million in cash, approximately
$15.9 million in seller-financed notes, 966,666 shares of Series B Preferred Stock with an estimated fair value of approximately $11.3 million and approximately
$2.0 million in estimated transaction-related costs. Of the total purchase price, 10% was deposited in escrow with Wells Fargo Bank, N.A. as escrow agent to secure the sellers' representations
and warranties under the purchase agreement. Of the funds deposited in escrow, 80% will remain in escrow

40

---



until
November 2, 2005 and the remaining 20% will remain in escrow until November 2, 2007, unless sooner released to us in payment of indemnification claims. Both Evolving Systems and
Tertio operate on a calendar year. The acquisition was recorded as a purchase business combination and Tertio's results of operations have been combined with Evolving Systems' from the acquisition
date forward.

Tertio's
activation and mediation solutions, Provident and Evident, fit well with elements of our product portfolio, enabling us to provide activation solutions and strengthening our
current network mediation and service assurance offerings. In addition, this acquisition provides us with a global reach and a customer base that includes many of the world's leading communications
carriers. The purchase price for Tertio included goodwill because we concluded that increased scale may be achieved from a financial, customer and product perspective. In addition, Tertio brings a
quality experienced work force.

The
purchase price has been allocated to tangible assets, liabilities and intangible assets acquired, as well as in-process research and development, based on their estimated
fair values. The excess purchase price over the fair values of tangible and identifiable intangible net assets was recognized as goodwill. Goodwill will not be deductible for tax purposes. The fair
value assigned to intangible assets acquired was based on estimates and assumptions determined by management. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill
will not be amortized but will be reviewed annually for impairment. Purchased intangibles with finite lives are amortized on a straight-line basis over their respective useful lives. In
accordance with SFAS No. 52, "Foreign Currency Translation," these assets and liabilities will be measured in Tertio's functional currency, pounds sterling (£), and will be
translated into the functional currency of Evolving Systems, U.S. Dollars, based on the exchange rates in effect at the balance sheet date. As a result, the amount recorded for intangible
assets, in U.S. Dollars will vary based on the period-end exchange rate, and such change is reflected as a component of other comprehensive income. The purchase price for Tertio is
preliminary, has not been finalized, and is subject to change as the preliminary items are finalized, which is expected to be completed in the second quarter of 2005, except for specific
pre-acquisition contingencies. The total purchase price has been allocated as follows (in thousands):

Cash

$
4,030Contract receivables, net


4,026Other current assets


2,281Property and equipment, net


887Acquired IPR&D (charged directly to expense)


90Identifiable intangible assets


15,407Goodwill


27,767Total assets acquired


54,488Current liabilities


(9,081
)Deferred tax liability


(5,250
)Total purchase price

$
40,157


The
purchase price allocation analysis included the future use of the acquired assets, analyses of historical performance and estimates of future performance of Tertio's products. The
fair value of intangible assets was primarily determined using the present value of estimated cash flows. The rates utilized to discount the net cash flows to their present values varied based on the
relative risk of the individual asset, but were generally based on weighted average costs of capital for the telecom software industry. Identifiable intangible balances at December 31, 2004
include the effects of changes in foreign

41

---



currency
exchange rates of approximately $785,000. At December 31, 2004, identifiable intangible assets purchased in the Tertio acquisition consist of the following (in thousands, except for
useful life):

Gross
Amount

Estimated
Useful LifeIdentifiable intangible assets:Acquired software

$
7,773

5 yrsCustomer contracts


1,859

1 yrTrademarks and tradenames


1,196

6 yrsBusiness partnerships


1,491

7 yrsCustomer relationships


3,873

7 yrs$
16,192


Amortization
expense of intangible assets related to Tertio was $718,000 for the year ended December 31, 2004. Expected future amortization expense related to identifiable
intangibles as of December 31, 2004 is as follows (in thousands, note these values may differ from actuals as the assets and amortization expense are translated from pounds sterling to U.S.
dollars):

Years ending2005

$
3,9902006


2,5262007


2,5252008


2,5252009


2,253Thereafter


1,655$
15,474


In-process
research and development ("IPR&D") of $90,000 was expensed as "Product Development" in the accompanying statements of operations for the year ended
December 31, 2004 because the purchased research and development had no alternative uses and had not reached technological feasibility. The value assigned to IPR&D was determined using the
income approach by segregating cash flow projections related to in-process projects. The stage of each in process project was estimated to determine the discount rate to be applied to the
valuation of the in process technology.



On October 15, 2004, we acquired all of the outstanding ownership interests in privately-held TSE. Total GAAP consideration for TSE
approximated $2.4 million, consisting of $1.5 million in cash, a note payable of $889,000 and approximately $55,000 in transaction-related costs. The note payable is due and payable on
March 31, 2005. Of the total purchase price, $250,000 was deposited in escrow for one year with Wells Fargo Bank, N.A. as escrow agent to secure the sellers' representations and warranties
under the purchase agreement. We agreed to pay additional consideration of up to $3.5 million contingent upon the achievement of certain specified revenue and gross margin results. Up to
$2.5 million of the contingent consideration may be payable over a 24 month period from the closing date and additional contingent consideration of up to $1.0 million may be paid
through the year 2011 if certain specified sales of TSE products occur. In accordance with SFAS No. 141, the contingent consideration will not be recorded until the contingency is resolved and
the additional consideration is distributable. We recorded additional goodwill of $447,000 during the year ended December 31, 2004 related to certain specified gross margin results produced by
TSE during the period from the acquisition date through December 31, 2004. The contingent consideration was paid in the first quarter

42

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of
2005. The acquisition was treated as a purchase business combination and the results of TSE's operations have been combined with Evolving Systems' from the acquisition date forward. Both Evolving
Systems and TSE operate on a calendar year.

TSE's
products are sold to U.S. wireline and wireless carriers, and provide for simulation of the nation's centralized NPAC enabling a testing environment for critical back office
systems that carriers use for enabling number portability. Other products in the TSE portfolio are used for enhanced integration between back office OSS systems. TSE has installed its products at
several of the leading wireless and wireline carriers in North America. By acquiring TSE, we have expanded our customer base and extended the set of solutions we offer our LNP customers. The primary
reason for a valuation which gives rise to goodwill is related to the value the Company placed on the TSE's solid reputation as a provider of LNP products, our expectations of new customers and the
experienced employees acquired in the TSE acquisition.

The
purchase price has been allocated to tangible assets, liabilities and intangible assets acquired, as well as in-process research and development, based on their estimated
fair values. The excess purchase price over the fair values was recognized as goodwill. Goodwill will be deductible for tax purposes with a tax life of 15 years. The fair value assigned to
intangible assets acquired was based on estimates and assumptions determined by management. In accordance with SFAS No. 142, goodwill will not be amortized but will be reviewed annually for
impairment. Purchased intangibles with finite lives are amortized on a straight-line basis over their respective useful lives. The purchase price for TSE is preliminary, has not been
finalized, and is subject to change as the preliminary items are finalized, which is expected to be completed in the second quarter of 2005. The total purchase price has been allocated as follows (in
thousands):

Net tangible liabilities

$
(338
)Identifiable intangible assets


1,634Goodwill


1,595Aggregate preliminary purchase price

$
2,891


The
purchase price allocation analysis included the future use of the acquired assets, analyses of historical performance and estimates of future performance of TSE's products. The fair
value of intangible assets was primarily determined using the present value of estimated cash flows. The rates utilized to discount the net cash flows to their present values varied based on the
relative risk of the individual asset, but were generally based on weighted average costs of capital for the telecom software industry. At December 31, 2004, identifiable intangible assets
purchased in the TSE acquisition consist of the following (in thousands, except for useful life):

Gross
Amount

Estimated
Useful LifeIdentifiable intangible assets:Purchased software

$
1,233

2-5 yrsCustomer relationships


401

1-4 yrs$
1,634


43

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Amortization expense of intangible assets related to TSE was $101,000 for the year ended December 31, 2004. Expected future amortization expense related to identifiable
intangibles as of December 31, 2004 is as follows (in thousands):

Years ending2005

$
4632006


3932007


3142008


2722009


91$
1,533


Item 7A. Quantitative and Qualitative Disclosures about Market Risk

In the ordinary course of business, we are exposed to certain market risks, including changes in foreign currency exchange rates and interest rates. Uncertainties
that are either non-financial or non-quantifiable such as political, economic, tax, other regulatory, or credit risks are not included in the following assessment of market
risks.

Our
cash balances are subject to interest rate fluctuations and as a result, interest income amounts may fluctuate from current levels.

We
transact business in various foreign currencies. As we continue to expand our international business, we are subject to increasing exposure from adverse movements in foreign exchange
rates. At the present time, we do not hedge our foreign currency exposure, nor do we use derivative financial instruments for speculative trading purposes.

Item 8. Consolidated Financial Statements and Supplementary Data

The consolidated financial statements required pursuant to this item are included in Item 15 of this Annual Report on Form 10-K and are
presented beginning on page F-1.

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

On July 9, 2004, the Audit Committee and the Board of Directors of Evolving Systems, Inc. approved the decision to change the Company's independent
registered public accounting firm. Our Board of Directors, upon the recommendation of the Audit Committee, dismissed PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") and appointed KPMG LLP
("KPMG") as the Company's independent registered public accounting firm for the current fiscal year ended December 31, 2004.

The
reports of PricewaterhouseCoopers on the Company's consolidated financial statements as of and for the years ended December 31, 2003 and 2002 did not contain any adverse
opinion or disclaimer of opinion, nor were the reports qualified or modified as to uncertainty, audit scope or accounting principle. During the two most recent fiscal years and through July 9,
2004, there were no disagreements with PricewaterhouseCoopers on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which disagreements,
if not resolved to PricewaterhouseCoopers' satisfaction, would have caused PricewaterhouseCoopers to make reference to the subject matter of the disagreement in connection with its reports on the
Company's consolidated financial statements for such years. During the two most recent fiscal years and through July 9, 2004, there were no reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K.

44

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During
the two most recent fiscal years and through July 9, 2004, the Company did not consult with KPMG regarding either (i) the application of accounting principles to a
specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on the Company's financial statements, and neither a written report was provided to the Company
or oral advice was provided that KPMG concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any
matter that was either the subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of
Regulation S-K, or a reportable event, as that term is defined in Item 304(a)(1)(V) of Regulation S-K.

Item 9A. Controls and Procedures

Evaluation of disclosure controls and procedures.We maintain "disclosure controls and procedures," as such term is defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods 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, as appropriate, to allow timely decisions regarding required disclosure. In designing
and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part
upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based
on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer and Chief Financial Officer have
concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated
subsidiaries, is made known to them by others within those entities, particularly during the period in which this Annual Report on Form 10-K was being prepared.

Changes in internal control over financial reporting.During 2004, adapted our internal control over financial reporting to
accommodate the consolidation of Tertio. Absent that change, there was no change in our internal control over financial reporting that occurred during the fourth quarter of the period covered by this
Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None

PART III

Item 10. Directors and Executive Officers of the Registrant

Incorporated by reference to the section of Evolving Systems, Inc. 2005 Proxy Statement, anticipated to be filed within 120 days of
December 31, 2004, entitled "Proposal 1Election of Directors," and the section entitled "Management."

45

---



Item 11. Executive Compensation

Incorporated by reference to the section of the Evolving Systems, Inc. 2005 Proxy Statement, anticipated to be filed within 120 days of
December 31, 2004, entitled "Executive Compensation."

Item 12. Security Ownership of Certain Beneficial Owners and Management

Incorporated by reference to the section of the Evolving Systems, Inc. 2005 Proxy Statement, anticipated to be filed within 120 days of
December 31, 2004, entitled "Security Ownership of Certain Beneficial Owners and Management."

Item 13. Certain Relationships and Related Transactions

Incorporated by reference to the section of the Evolving Systems, Inc. 2005 Proxy Statement, anticipated to be filed within 120 days of
December 31, 2004, entitled "Certain Relationships and Related Transactions."

Item 14. Principal Accounting Fees and Services

Incorporated by reference to the section of the Evolving Systems, Inc. 2005 Proxy Statement, anticipated to be filed within 120 days of
December 31, 2004, entitled "Report of the Audit Committee-Review of Fiscal Year 2004 Financial Statements."

PART IV

Item 15. Exhibits and Financial Statement Schedules

Consolidated
Financial Statements: The following consolidated financial statements of Evolving Systems, Inc. are filed as part of this report.

Report of Independent Registered Public Accounting Firm

F-1Report of Independent Registered Public Accounting Firm

F-2Consolidated Balance Sheets as of December 31, 2004 and 2003

F-3Consolidated Statements of Operations For the Years Ended December 31, 2004, 2003 and 2002

F-4Consolidated Statements of Changes in Stockholders' Equity For the Years Ended December 31, 2004, 2003 and 2002

F-5Consolidated Statements of Cash Flows For the Years Ended December 31, 2004, 2003 and 2002

F-6Notes to Consolidated Financial Statements

F-7


Schedule IIValuation and Qualifying Accounts

S-1


Schedules
other than the one listed above have been omitted since they are neither required, nor applicable or the information is otherwise included.

46

---



3.     Exhibits.

|Exhibit
Number |  | Description of Document                                                                                                                                                                                                                                                                            
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1           |  | Restated Certificate of Incorporation.                                                                                                                                                                                                                                                             
|3.2           |  | Amended and Restated Bylaws.                                                                                                                                                                                                                                                                       
|4.1           |  | Reference is made to Exhibits 3.1 and 3.2.                                                                                                                                                                                                                                                         
|4.2           |  | Specimen stock certificate representing shares of Common Stock.                                                                                                                                                                                                                                    
|10.1          |  | Indemnification Agreement, entered into by the Registrant and each of its directors and executive officers, dated as of January 1, 1998.                                                                                                                                                           
|10.2          |  | Amended and Restated Stock Option Plan.                                                                                                                                                                                                                                                            
|10.3          |  | Employee Stock Purchase Plan.                                                                                                                                                                                                                                                                      
|10.10         |  | Software Development Agreement, by and between the Registrant and American Telephone and Telegraph Company, dated as of May 1, 1993. (The division of American Telephone & Telegraph Company responsible for this Agreement has split off
from AT&T and is now known as Lucent Technologies, Inc.).
|21             |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                     
|23.1           |  | Consent of KPMG LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                
|23.2           |  | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                                              
|24.1           |  | Power of Attorney (included on signature page).                                                                                                                                                                                                                                                    
|31.1           |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                 
|31.2           |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                 
|32.1           |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                  
|32.2           |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                  

---

The
exhibits listed on the accompanying index to exhibits, immediately following the financial statement schedule are filed as part of, or incorporated by reference into, this
Form 10-K.

47

---





SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly
caused this report to be signed on its behalf by the undersigned; thereunto duly authorized, on the 31st day of March, 2005.

| |  | EVOLVING SYSTEMS, INC.
| |  | ----------------------
| |  | By:                   

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen K. Gartside, Jr. and Anita T. Moseley, or any of
them, his or her attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report, and to file the same,
with exhibits thereto and other documents in connections therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.

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

|Signature                                            |  | Title                                                                                          |  | Date          
|---------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --------------
|                                                     |  |                                                                                                |  |               
|/S/ STEPHEN K. GARTSIDE, JR.Stephen K. Gartside, Jr. |  | President and Chief Executive Officer                                                          |  | March 31, 2005
|/S/ BRIAN R. ERVINEBrian R. Ervine                   |  | Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer) |  | March 31, 2005
|/S/ GEORGE A. HALLENBECKGeorge A. Hallenbeck         |  | Chairman of the Board of Directors                                                             |  | March 31, 2005
|/S/ DAVID J. NICOLDavid J. Nicol                     |  | Director                                                                                       |  | March 31, 2005
|/S/ BRENDAN F. REIDYBrendan Reidy                    |  | Director                                                                                       |  | March 31, 2005
|/S/ PETER J. SKINNERPeter Skinner                    |  | Director                                                                                       |  | March 31, 2005
|/S/ STEVE B. WARNECKESteve B. Warnecke               |  | Director                                                                                       |  | March 31, 2005

48

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The
Board of Directors and Stockholders
Evolving Systems, Inc.:

We
have audited the accompanying consolidated balance sheet of Evolving Systems, Inc. and subsidiaries as of December 31, 2004, and the related consolidated statements of operations,
stockholders' equity and comprehensive income, and cash flows for the year then ended. In connection with our audit of the consolidated financial statements, we also have audited the financial
statement schedule of valuation and qualifying accounts for the year ended December 31, 2004. These consolidated financial statements and the financial statement schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audit.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Evolving Systems, Inc. and subsidiaries as of
December 31, 2004 and the results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the
related financial statement schedule of valuation and qualifying accounts, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

KPMG
LLP

Denver,
Colorado
March 29, 2005

F-1

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Stockholders and Board of Directors
of Evolving Systems, Inc.

In
our opinion, the accompanying consolidated balance sheet as of December 31, 2003 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended December 31, 2003 present fairly, in all material respects, the financial position, results of operations and cash flows of Evolving Systems, Inc. and its
subsidiary as of December 31, 2003 and for each of the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the consolidated financial statement schedule for each of the two years in the period ended December 31, 2003 presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related consolidated financial statements. These consolidated financial statements and the consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the consolidated financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.

|/s/ PricewaterhouseCoopers LLP |  |  |  | 
|------------------------------ |  |  |  | 
|                               |  |  |  | 

PricewaterhouseCoopers
LLP
Denver, Colorado
March 22, 2004

F-2

---





EVOLVING SYSTEMS, INC.        CONSOLIDATED BALANCE SHEETS        (in thousands except share data)

|                                                      |                                                                                                                                 | December 31,
2004                          |        | December 31,
2003 |       
|----------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ----------------- | ------
|ASSETS                                                |                                                                                                                                 |                                            |        |                   |       
|Current assets:                                       |                                                                                                                                 |                                            |        |                   |       
|                                                      | Cash and cash equivalents                                                                                                       |                                            | $      | 11,386            |       
|                                                      | Current portion of restricted cash                                                                                              |                                            |        | 100               |       
|                                                      | Contract receivables, net of allowance of $44 and $65 at December 31, 2004 and 2003, respectively                               |                                            |        | 11,296            |       
|                                                      | Unbilled work-in-progress                                                                                                       |                                            |        | 1,323             |       
|                                                      | Prepaid and other current assets                                                                                                |                                            |        | 1,832             |       
|                                                      |                                                                                                                                 |                                            |        |                   |       
|                                                      |                                                                                                                                 | Total current assets                       |        |                   | 25,937
|Property and equipment, net                           |                                                                                                                                 |                                            | 2,563  |                   |       
|Intangible assets, net                                |                                                                                                                                 |                                            | 19,993 |                   |       
|Goodwill                                              |                                                                                                                                 |                                            | 37,698 |                   |       
|Long-term restricted cash                             |                                                                                                                                 |                                            | 300    |                   |       
|                                                      |                                                                                                                                 |                                            |        |                   |       
|                                                      |                                                                                                                                 | Total assets                               |        | $                 | 86,491
|                                                      |                                                                                                                                 |                                            |        |                   |       
|LIABILITIES AND STOCKHOLDERS' EQUITY                  |                                                                                                                                 |                                            |        |                   |       
|Current liabilities:                                  |                                                                                                                                 |                                            |        |                   |       
|                                                      | Current portion of long-term obligations                                                                                        |                                            | $      | 31                |       
|                                                      | Notes payable                                                                                                                   |                                            |        | 4,880             |       
|                                                      | Accounts payable and accrued liabilities                                                                                        |                                            |        | 8,357             |       
|                                                      | Payable to Tertio sellers                                                                                                       |                                            |        | 2,664             |       
|                                                      | Deferred foreign income taxes                                                                                                   |                                            |        | 265               |       
|                                                      | Unearned revenue                                                                                                                |                                            |        | 13,083            |       
|                                                      |                                                                                                                                 |                                            |        |                   |       
|                                                      |                                                                                                                                 | Total current liabilities                  |        |                   | 29,280
|Long-term liabilities:                                |                                                                                                                                 |                                            |        |                   |       
|                                                      | Long-term obligations                                                                                                           |                                            |        | 125               |       
|                                                      | Notes payable                                                                                                                   |                                            |        | 11,849            |       
|                                                      | Deferred foreign income taxes                                                                                                   |                                            |        | 4,642             |       
|                                                      |                                                                                                                                 |                                            |        |                   |       
|                                                      |                                                                                                                                 | Total liabilities                          |        |                   | 45,896
|Commitments and contingencies                         |                                                                                                                                 |                                            |        |                   |       
|                                                      | Series B convertible redeemable preferred stock; $.001 par value; 966,666 shares issued and outstanding as of December 31, 2004 |                                            |        | 11,281            |       
|Stockholders' equity:                                 |                                                                                                                                 |                                            |        |                   |       
|                                                      | Series A preferred stock; $.001 par value; 250,000 shares authorized; no shares issued or outstanding                           |                                            |        |                  |       
|                                                      | Common stock, $0.001 par value; 25,000,000 shares authorized; 15,987,217 and 15,778,540 shares issued and outstanding as of     |                                            |        |                   |       
|December 31, 2004 and December 31, 2003, respectively |                                                                                                                                 |                                            | 16     |                   |       
|                                                      | Additional paid-in capital                                                                                                      |                                            |        | 67,765            |       
|                                                      | Other comprehensive income                                                                                                      |                                            |        | 1,994             |       
|                                                      | Accumulated deficit                                                                                                             |                                            |        | (40,461           | )     
|                                                      |                                                                                                                                 |                                            |        |                   |       
|                                                      |                                                                                                                                 | Total stockholders' equity                 |        |                   | 29,314
|                                                      |                                                                                                                                 |                                            |        |                   |       
|                                                      |                                                                                                                                 | Total liabilities and stockholders' equity |        | $                 | 86,491
|                                                      |                                                                                                                                 |                                            |        |                   |       

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

F-3

---





EVOLVING SYSTEMS, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        (in thousands except per share data)

|                                                                          |                                                                                                      | For the Years Ended December 31, |       
|------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------- | -------------------------------- | ------
|
|REVENUE                                                                   |                                                                                                      |                                  |       
|                                                                          | License fees and services                                                                            |                                  | $     
|                                                                          | Customer support                                                                                     |                                  |       
|                                                                          |                                                                                                      |                                  |       
|Total revenue                                                             |                                                                                                      |                                  | 26,342
|                                                                          |                                                                                                      |                                  |       
|COSTS OF REVENUE AND OPERATING EXPENSES                                   |                                                                                                      |                                  |       
|                                                                          | Costs of license fees and services, excluding depreciation and amortization                          |                                  |       
|                                                                          | Costs of customer support, excluding depreciation and amortization                                   |                                  |       
|                                                                          | Sales and marketing                                                                                  |                                  |       
|                                                                          | General and administrative                                                                           |                                  |       
|                                                                          | Product development                                                                                  |                                  |       
|                                                                          | Depreciation                                                                                         |                                  |       
|                                                                          | Amortization                                                                                         |                                  |       
|                                                                          | Restructuring and other expenses (recovery)                                                          |                                  |       
|                                                                          |                                                                                                      |                                  |       
|Total costs of revenue and operating expenses                             |                                                                                                      |                                  | 26,303
|                                                                          |                                                                                                      |                                  |       
|Income (loss) from operations                                             |                                                                                                      |                                  | 39    
|                                                                          |                                                                                                      |                                  |       
|Other income (expense):                                                   |                                                                                                      |                                  |       
|                                                                          | Interest income                                                                                      |                                  |       
|                                                                          | Interest expense                                                                                     |                                  |       
|                                                                          | Gain (loss) on foreign exchange transactions and disposal of assets, net                             |                                  |       
|                                                                          |                                                                                                      |                                  |       
|                                                                          | Other income, net                                                                                    |                                  |       
|Income (loss) before income taxes                                         |                                                                                                      |                                  | 126   
|                                                                          | Provision for (benefit from) income taxes                                                            |                                  |       
|                                                                          |                                                                                                      |                                  |       
|Net income (loss)                                                         |                                                                                                      |                                  | 424   
|                                                                          | Deemed dividend for beneficial conversion feature of Series B convertible redeemable preferred stock |                                  |       
|                                                                          |                                                                                                      |                                  |       
|Net income (loss) available to common stockholders                        |                                                                                                      | $                                | (2,882
|                                                                          |                                                                                                      |                                  |       
|Basic earnings (loss) available to common stockholders per common share   |                                                                                                      | $                                | (0.18 
|                                                                          |                                                                                                      |                                  |       
|Diluted earnings (loss) available to common stockholders per common share |                                                                                                      | $                                | (0.18 
|                                                                          |                                                                                                      |                                  |       
|Weighted average basic shares outstanding                                 |                                                                                                      |                                  | 16,307
|Weighted average diluted shares outstanding                               |                                                                                                      |                                  | 16,307

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

F-4

---





EVOLVING SYSTEMS, INC.        CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME        (in thousands, except share data)

|                                                                                                     |                                         | Common Stock |   |   |    | Accumulated
Other
Comprehensive
Income |   |        |       |   |      
|---------------------------------------------------------------------------------------------------- | --------------------------------------- | ------------ | - | - | -- | -------------------------------------- | - | ------ | ----- | - | -----
|
|
|Balance, December 31, 2001                                                                           |                                         | 13,292,339   |   |   | 13 |                                        |   | 53,627 |       |   |     
|                                                                                                     |                                         |              |   |   |    |                                        |   |        |       |   |      
|Stock option exercises and other                                                                     |                                         | 8,217        |   |   |   |                                        |   | 6      |       |   |     
|Common Stock issued pursuant to the Employee Stock Purchase Plan                                     |                                         | 4,496        |   |   |   |                                        |   | 1      |       |   |     
|Net loss and comprehensive loss                                                                      |                                         |             |   |   |   |                                        |   |       |       |   |     
|                                                                                                     |                                         |              |   |   |    |                                        |   |        |       |   |      
|Balance, December 31, 2002                                                                           |                                         | 13,305,052   |   |   | 13 |                                        |   | 53,634 |       |   |     
|                                                                                                     |                                         |              |   |   |    |                                        |   |        |       |   |      
|Stock option and warrant exercises                                                                   |                                         | 1,716,380    |   |   | 2  |                                        |   | 2,550  |       |   |     
|Common Stock issued pursuant to the Employee Stock Purchase Plan                                     |                                         | 24,335       |   |   |   |                                        |   | 15     |       |   |     
|Stock issued in acquisition                                                                          |                                         | 732,773      |   |   | 1  |                                        |   | 10,976 |       |   |     
|Tax benefit of stock options                                                                         |                                         |             |   |   |   |                                        |   | 167    |       |   |     
|Net income and comprehensive income                                                                  |                                         |             |   |   |   |                                        |   |       |       |   |     
|                                                                                                     |                                         |              |   |   |    |                                        |   |        |       |   |      
|Balance, December 31, 2003                                                                           |                                         | 15,778,540   |   |   | 16 |                                        |   | 67,342 |       |   |     
|                                                                                                     |                                         |              |   |   |    |                                        |   |        |       |   |      
|Stock option and warrant exercises                                                                   |                                         | 191,762      |   |   |   |                                        |   | 349    |       |   |     
|Common stock issued pursuant to the Employee Stock Purchase Plan                                     |                                         | 16,915       |   |   |   |                                        |   | 58     |       |   |     
|Beneficial conversion feature recorded upon the issuance of Series B                                 |                                         |             |   |   |   |                                        |   |       |       |   |     
|                                                                                                     | convertible redeemable preferred stock  |              |  |   |    |                                       |   |        | 3,306 |   |      
|Deemed dividend for beneficial conversion feature of Series B convertible redeemable preferred stock |                                         |             |   |   |   |                                        |   | (3,306 | )     |   |     
|Tax benefit of stock options                                                                         |                                         |             |   |   |   |                                        |   | 16     |       |   |     
|Comprehensive income:                                                                                |                                         |              |   |   |    |                                        |   |        |       |   |      
|                                                                                                     | Net income                              |              |  |   |    |                                       |   |        |      |   |      
|                                                                                                     | Foreign currency translation adjustment |              |  |   |    |                                       |   |        |      |   |      
|                                                                                                     |                                         |              |   |   |    |                                        |   |        |       |   |      
|Comprehensive income                                                                                 |                                         |              |   |   |    |                                        |   |        |       |   |      
|                                                                                                     |                                         |              |   |   |    |                                        |   |        |       |   |      
|Balance, December 31, 2004                                                                           |                                         | 15,987,217   |   | $ | 16 |                                        | $ | 67,765 |       | $ | 1,994
|                                                                                                     |                                         |              |   |   |    |                                        |   |        |       |   |      

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

F-5

---





EVOLVING SYSTEMS, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        (in thousands)

|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    | For the Years Ended
December 31,                                                                   |                                                                 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 | Net income (loss)                                                                                                                                                                                                                                                  |                                                                                                    | $                                                               
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    | Depreciation                                                    
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    | Amortization of intangible assets                               
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    | Amortization of debt issuance costs                             
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    | Acquired in-process research and development                    
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    | (Gain)/loss on impairment and disposal of property and equipment
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    | Foreign currency unrealized transaction gains                   
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    | Tax benefit from stock options                                  
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    | Bad debt recovery                                               
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    | Benefit from foreign deferred income taxes                      
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    | Change in operating assets and liabilities:                     
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 | Purchase of property and equipment                                                                                                                                                                                                                                 |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 | Proceeds from sale of property and equipment                                                                                                                                                                                                                       |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 | Business combinations, net of cash acquired                                                                                                                                                                                                                        |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                                                                                                                            |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 | Capital lease payments                                                                                                                                                                                                                                             |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 | Proceeds from the issuance of stock                                                                                                                                                                                                                                |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 | Restricted cash                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    | Effect of exchange rate changes on cash                                                            |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    | Net increase (decrease) in cash and cash equivalents                                               |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    | Cash and cash equivalents at beginning of year                                                     |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    | Cash and cash equivalents at end of year                                                           |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|Supplemental disclosure of other cash and non-cash financing transactions:                                                                                                                                                                       |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|Interest paid                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                    | $                                                                                                  | 22                                                              
|Income taxes paid                                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                    |                                                                                                    | 70                                                              
|Assets acquired under capital lease                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                
|Reconciliation for acquisition of business:
(As discussed in Note 2 to the consolidated financial statements, the Company acquired Tertio Telecoms Ltd and Telecom Software Enterprises, LLC during 2004. See Note 2 for cash flow disclosures). |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 | On November 3, 2003, the Company acquired all of the issued and outstanding stock of CMS Communications, Inc. in exchange for $11.2 million of consideration. In conjunction with the acquisition the fair value of asets
and liabilities received were as follow: |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    | Fair value of assets acquired                                                                      |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    | Common stock issued for acquired company                                                           |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    | Cash paid for other acquisition costs                                                              |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    | Fair value of liabilities assumed                                                                  |                                                                 
|                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                    |                                                                                                    |                                                                 

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

F-6

---





EVOLVING SYSTEMS, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization

Evolving Systems, Inc. (the "Company"), is a provider of mission critical software products and services to communications carriers. The Company's
customers are many of the largest wireline, wireless and cable communications carriers worldwide. The Company develops, deploys, enhances, maintains and integrates complex, software solutions for a
range of Operations Support Systems ("OSS") and Network Support Systems ("NSS"). The Company offers software products and solutions in three core areasnumbering solutions which enable
carriers to comply with government-mandated requirements regarding number portability and phone number conservation; network mediation solutions supporting data collection for both service assurance
and billing applications; and a service activation solution that is used to activate complex bundles of voice, video and data services.

The
core Evolving System portfolio that included ordering and provisioning solutions for Local Number Portability ("LNP"), as well as a number inventory and assignment platform has been
expanded significantly in 2004, as a result of three acquisitions the Company made over a period of 12 months from November of 2003 to November of 2004. Through the acquisition of CMS
Communications, Inc. ("CMS") in November 2003 the Company acquired a network mediation and service assurance solution to add to its product portfolio. Additionally, with the acquisition
of Telecom Software Enterprises, LLC ("TSE") on October 15, 2004 the Company added LNP and Wireless Number Portability ("WNP") number ordering and provisioning testing products which provide
new OSS system integration capabilities. Most recently, on November 2, 2004, the Company acquired Tertio Telecoms Ltd. ("Tertio"), a privately held supplier of OSS software solutions to
communication carriers throughout Europe, the
Middle East, Africa and Asia, expanding its markets beyond North America. Tertio's activation solutionProvident,and mediation solution Evident, strengthen the overall product portfolio. The Company significantly expanded its product and service capabilities and now is able
to address a larger portion of its customer's application needs. As a result, the Company has a global reach and a customer base that includes many of the world's leading communications carriers. The
Company is positioned as a provider of OSS, NSS and comprehensive systems integration capabilities. These complementary competencies enable the Company to address and implement solutions across much
of a customer's back office.

Founded
in 1985, the Company initially focused on providing custom software development and professional services to a limited number of telecommunications companies in the United States
of America ("U.S."). In 1996, concurrent with the passage of the Telecommunications Act of 1996 (the Telecom Act), the Company made a strategic decision to add software products to its established
professional services offerings. Since that time the Company has built a product portfolio, of which it is best known for solutions for LNP and service activation.

Historically,
the Company has helped customers integrate its products into their existing business process and OSS environments. In 2002, the Company initiated a restructuring plan,
which, in addition to significant operational cost reductions and greater leverage of offshore development, included the reengineering of its business model to a solutions strategy. The solutions
business model reflects a more balanced mix of services and products, as well as integration and product enhancements for its customers' back office to meet the specific requirements of each customer.
Solutions which include the Company's products as well as product extensions and integration, are typically licensed to its customers and supported by the Company.

F-7

---



Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All significant intercompany
transactions and balances have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenue and expenses during the reporting period. Significant estimates have been made by management with respect to the collectibility of accounts
receivable, estimates to complete long-term contracts and in establishing the estimated fair values of acquired assets and liabilities. Actual results could differ from these estimates.

Foreign Currency Translation

The Company's foreign subsidiaries use as their functional currency the local currency of the countries in which they operate. Their assets and liabilities are
translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Revenues, expenses, and cash flows are translated at the average rates of exchange prevailing during the period.
Translation gains and losses are included in comprehensive income (loss) in stockholders' equity. Realized and unrealized transaction gains and losses resulting from the remeasurement of
non-functional currency financial instruments are included in the determination of net income (loss). Transaction gains for the year ended December 31, 2004 were approximately
$80,000. There were no transaction gains or losses during the years ended December 31, 2003 or 2002.

Comprehensive Income

The Company's comprehensive income (loss) is comprised of its net income (loss) and foreign currency translation adjustment. For the year ended
December 31, 2004, total comprehensive income was $2.4 million. For the years ended December 31, 2003 and 2002, comprehensive income equaled net income (loss) of
$6.9 million and ($12.4) million, respectively, as there were no foreign currency translation adjustments or other items of comprehensive income (loss) during these periods.

Cash and Cash Equivalents

All highly liquid investments and investments with a maturity of three months or less when purchased are considered to be cash equivalents. All cash equivalents
are carried at cost, which approximates fair value. The Company has cash investment policies that limit investments to investment grade securities and certificates of deposit.

Restricted Cash

As of December 31, 2004, the Company had $400,000 of restricted cash in connection with the restructuring of its headquarters lease. The restricted cash
requirement will expire by $100,000 in December 2005 and the remainder in May 2007 as long as the lease account is in good standing.

F-8

---



Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of contract receivables and unbilled
work-in-progress. The Company performs ongoing evaluations of its customers' financial condition and, generally, requires no collateral from its customers.

Contract
receivables are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit
losses in the Company's existing accounts receivable. The Company determines the allowance based on historical write-off experience and information received during collection efforts. The
Company reviews its allowance for doubtful accounts monthly and past due balances over 90 days are reviewed individually for collectibility. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance-sheet credit exposure related to
its customers.

A
substantial portion of the Company's revenue is from a limited number of customers, all in the telecommunications industry. The following table depicts the percentage of revenue
generated from significant customers (defined as contributing at least 10%):

For the Years Ended December 31,2004

2003

2002Customer A

12
%
22
%
10
%Customer B

23
%
23
%
26
%Customer C

14
%
16
%
30
%Customer D

12
%
8
%
4
%Total % of Revenue

61
%
69
%
70
%


At
December 31, 2004, three significant customers accounted for 58% of contract receivables and at December 31, 2003, three customers accounted for 75% of contract
receivables, as follows:

As of December 31,2004

2003Customer A



12
%Customer B

30
%
29
%Customer C

17
%
34
%Customer E

11
%
3
%Total % of Contract Receivables

58
%
78
%


Fair Value of Financial Instruments

The carrying amounts for certain financial instruments, including cash and cash equivalents, contract receivables and accounts payable, approximate fair value due
to their short maturities. As of December 31, 2004, the fair value of the Company's short-term notes payable approximated their fair

F-9

---



values
due to the short maturity of this debt. As of December 31, 2004, the estimated fair value of the Company's long-term notes payable were $11.4 million, compared to the
stated amount of $11.9 million, utilizing an estimated market rate of interest of approximately 12%.

Advertising and Promotion Costs

All advertising and promotion costs are expensed as incurred. Advertising costs totaled approximately $72,000, $15,000 and $836,000, for the years ended
December 31, 2004, 2003 and 2002, respectively.

Product Development Costs

Product development expenses consist primarily of personnel, occupancy and offshore development subcontractor expenses. Product development costs incurred prior
to the establishment of technological feasibility of the product are expensed as incurred. After technological feasibility is established, any
additional software development costs are capitalized. The Company believes its process for developing software is essentially completed concurrently with the establishment of technological
feasibility and, accordingly, no software development costs have been capitalized to date. All product development projects are approved by management prior to any costs being incurred.

Property and Equipment and Long-Lived Assets

Property and equipment are stated at cost or estimated fair value if acquired in an acquisition, less accumulated depreciation, and are depreciated over their
estimated useful lives, generally two to four years or the lease term, if shorter, using the straight-line method. Leasehold improvements are stated at cost, less accumulated amortization,
and are amortized over the shorter of the lease term or estimated useful life of the asset. Maintenance and repair costs are expensed as incurred.

Statement
of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," requires that long-lived
assets, such as property and equipment, and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset or asset group may not be recoverable. The recoverability of an asset or asset group is evaluated by comparing its carrying amount to the estimated undiscounted future cash flows
expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the estimated fair value of the asset.

Goodwill and Intangible Assets

The Company follows the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" in accounting for acquired goodwill and other intangible assets.
Amortizable intangible assets acquired in conjunction with the Company's purchases of CMS, TSE and Tertio are amortized using the straight-line method over their estimated lives. SFAS
No. 142 requires that goodwill no longer be amortized but that goodwill be tested for impairment annually or more frequently if events and circumstances warrant. See Note 3 "Goodwill and
Intangible Assets" for further discussion.

F-10

---



Revenue Recognition

The Company derives revenue from two primary sources: license fees/services and customer support. We recognize revenue in accordance with Statements of Position
("SOP") 97-2, "Software Revenue Recognition," as amended and interpreted by SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions." In addition we have adopted Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," which provides further interpretive guidance for public companies on the
recognition, presentation and disclosure of revenue in financial statements.

The
majority of the Company's license fees and services revenue is generated from fixed-price contracts which provide for both licenses to its software products and services. Revenue
under these arrangements, where the services are determined to be essential to the functionality of the delivered software, is recognized using the percentage-of-completion
method of accounting, in accordance with SOP 97-2 and SOP 81-1, "Accounting for Long-Term Construction Type Contracts," once a license agreement has been signed,
the fee is fixed or determinable and collectibility is reasonably assured. The percentage of completion for each contract is estimated based on the ratio of direct labor hours incurred to total
estimated direct labor hours. The estimated percentage of completion on contracts entered into by the Company's UK subsidiary, Tertio, are based upon the ratio of project costs incurred to total
estimated project costs. The use of project costs by Tertio approximates what would have resulted had direct labor hours been used since the majority of project costs consist of direct labor. Due to
the fact that the estimated direct labor hours and project costs, and changes thereto, can have a significant impact on revenue recognition, these estimates are critical and are reviewed by management
regularly. Amounts billed in advance of services being performed are recorded as unearned revenue. Unbilled work-in-progress represents revenue earned but not yet billable
under the terms of the fixed-price contracts. All such amounts are expected to be billed and collected during the succeeding 12 months.

In
arrangements where the services are not essential to the functionality of the delivered software, the Company recognizes license revenue when a license agreement has been signed,
delivery has occurred, the fee is fixed or determinable and collectibility is reasonably assured. Where applicable, fees from multiple element arrangements are unbundled and recorded as revenue as the
elements are delivered to the extent that vendor specific objective evidence ("VSOE") of the fair value of the undelivered elements exists. If VSOE for the undelivered elements does not exist, fees
from such arrangements are deferred until the earlier of the date that VSOE does exist on the undelivered elements or all of the elements have been delivered.

Services
revenue provided under fixed-price contracts is generally recognized using the percentage-of-completion method of accounting described above. Revenue
from professional services provided pursuant to time-and-materials based contracts and training services are recognized as the services are performed, as that is when the
Company's obligation to its customers under such arrangements is fulfilled.

Customer
support and maintenance revenue is generally recognized ratably over the service contract period. When maintenance or training services are bundled with the original license fee
arrangement, their fair value, based upon VSOE, is deferred and recognized during the periods such services are provided.

F-11

---



The
Company may encounter budget and schedule overruns on fixed price contracts caused by increased material, labor or overhead costs. Adjustments to cost estimates are made in the
periods in which the facts requiring such revisions become known. Estimated losses, if any, are recorded in the period in which current estimates of total contract revenue and contract costs indicate
a loss.

Allowance for Doubtful Accounts

Management makes judgments related to the Company's ability to collect outstanding accounts receivable. The Company provides allowances for receivables when their
collection becomes doubtful by recording an expense. Generally, the Company determines the allowance based on its assessment of the realization of receivables using historical information and current
economic trends, including assessing the probability of collection from customers. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their
ability to make payments owed, an increase in the allowance for doubtful accounts would be required. Adjustments to the allowance for doubtful accounts could materially affect the Company's results of
operations.

Reclassifications

Certain prior period balances have been reclassified to conform to the current year's presentation.

As
a result of the significance of the intangible assets and the related amortization expense from the acquisitions of Tertio and TSE, the Company is now reporting amortization expense
as a separate line item on the statements of operations.

Prior
period revenue and costs of revenue balances, excluding depreciation and amortization have been reclassified to conform to the current period's presentation. Beginning in the first
quarter of 2003, the Company began to evaluate its business on a project basis, separately managing its delivery of new projects from recurring customer support projects. Delivery projects include
software licenses fees, custom development, integration and time and materials work. Support projects include recurring maintenance fees, annual support fees and warranty maintenance. Warranty
maintenance revenues are withheld from the percent complete calculation on a project and are recognized ratably over the warranty period. Prior to the first quarter of 2003, the Company classified
license fees and those services directly related to the delivery of the licensed product, along with warranty maintenance, as license fees and related services. Customer support and other services
included the remaining revenue types. Beginning in the first quarter of 2003, all delivery projects were classified as license fees and services and all support projects are classified as customer
support. This reclassification has not impacted the Company's revenue recognition policy. Accordingly, license fees and services and customer support revenues and the related costs of license fees and
services and costs of customer support for the year ended December 31, 2002 have been reclassified to conform to the Company's current presentation. This change had no effect on total revenue,
net income (loss) or cash flows for

F-12

---



any
of the periods presented. The table below summarizes (in thousands) the effect of the reclassifications on the reported revenue and costs of revenue for the year ended December 31, 2002.

For the Year Ended
December 31,
2002RevenueLicense fees and related services (as previously reported)

$
10,388Warranty maintenance


(1,270
)Services


3,027License fees and services (reclassified)


12,145Customer support other services (as previously reported)


12,575Warranty maintenance


1,270Services


(3,027
)Customer support (reclassified)


10,818Total revenue (as previously reported and reclassified)

$
22,963Costs of revenueCosts of license fees and related services, excluding depreciation and amortization (as previously reported)

$
3,926Warranty maintenance


(1,244
)Services


2,962Costs of license fees and services, excluding depreciation and amortization (reclassified)


5,644Costs of customer support and other services, excluding depreciation and amortization (as previously reported)


13,093Warranty maintenance


1,244Services


(2,962
)Costs of customer support, excluding depreciation and amortization (reclassified)


11,375Total costs of revenue, excluding depreciation and amortization (as previously reported and reclassified)

$
17,019


Stock-based Compensation

The Company applies the intrinsic-value-based method prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for employee stock-based compensation arrangements. Non-employee stock compensation arrangements are accounted for under SFAS
No. 123 and Emerging Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other than Employees, or in Conjunction with Selling
Goods or Services."

FASB
Statement No. 123, "Accounting for Stock-Based Compensation" and FASB Statement No. 148, "Accounting for Stock-Based CompensationTransition and
Disclosure, an amendment of

F-13

---



FASB
Statement No. 123," established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted
by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of
Statement No. 123, as amended. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in
each period (in thousands, except per share data):

For the Years Ended December 31,2004

2003

2002Net income (loss) available to common stockholders, as reported

$
(2,882
)
$
6,871

$
(12,407
)Stock based compensation expense under the fair value method


(2,071
)

(2,925
)

(1,603
)Pro forma net income (loss) available to common stockholders


(4,953
)

3,946


(14,010
)Earnings (loss) available to common stockholders' per common share as reported:Basic

$
(0.18
)
$
0.48

$
(0.93
)Diluted

$
(0.18
)
$
0.43

$
(0.93
)Pro forma earnings (loss) available to common stockholders' per common share:Basic

$
(0.30
)
$
0.28

$
(1.05
)Diluted

$
(0.30
)
$
0.24

$
(1.05
)


Based
on calculations using the Black-Scholes option-pricing model, the estimated weighted average grant date fair value of options and warrants granted to employees during the years
ended December 31, 2004, 2003 and 2002 was $4.96, $2.63 and $0.56, respectively. The Company used the following Black-Scholes option-pricing model assumptions for the 2004, 2003 and 2002
employee stock option grants: no dividend yield for all periods; an expected life of 3 years for all periods; volatility of 133%, 138% and 141%, respectively; and weighted average risk free
interest rates of 2.7%, 2.5% and 2.9%, respectively.

The
fair value of each grant made under the Company's Employee Stock Purchase Plan was estimated on the date of grant using the Black-Scholes model with the following assumptions for
2004, 2003 and 2002, respectively: no dividend yield for all periods; an expected life of .5 years for all periods; volatility of 133%, 138% and 141%, respectively; and a risk free interest
rate of 2.67%, 2.04% and 1.83%, respectively.

Earnings Per Common Share

Basic earnings per share ("EPS") is computed by dividing net income or loss available to common stockholders by the weighted average number of shares outstanding
during the period, including common stock issuable under participating securities, such as the Series B Convertible, Redeemable Preferred Stock ("Series B Preferred Stock"). Diluted EPS
is computed using the weighted average

F-14

---



number
of shares outstanding, including participating securities, plus all potentially dilutive common stock equivalents. Common stock equivalents consist of stock options and warrants. The following
is the reconciliation of the numerators and denominators of the basic and diluted EPS computations for the years ended December 31 (in thousands except per share data):

|                                                                          |                                                     | 2004 |        | 2003   |   | 2002   |       
|------------------------------------------------------------------------- | --------------------------------------------------- | ---- | ------ | ------ | - | ------ | ------
|Basic earnings (loss) available to common stockholders per common share   |                                                     |      |        |        |   |        |       
|                                                                          | Net income (loss) available to common stockholders  |      | $      | (2,882 | ) | $      | 6,871 
|                                                                          | Weighted average common shares outstanding          |      |        | 15,824 |   |        | 14,205
|                                                                          | Participating securities                            |      |        | 483    |   |        |      
|                                                                          |                                                     |      |        |        |   |        |       
|                                                                          | Basic weighted average common shares outstanding    |      |        | 16,307 |   |        | 14,205
|                                                                          |                                                     |      |        |        |   |        |       
|Basic earnings (loss) available to common stockholders per common share   |                                                     | $    | (0.18  | )      | $ | 0.48   |       
|                                                                          |                                                     |      |        |        |   |        |       
|Diluted earnings (loss) available to common stockholders per common share |                                                     |      |        |        |   |        |       
|                                                                          | Net income (loss) available to common stockholders' |      | $      | (2,882 | ) | $      | 6,871 
|                                                                          | Weighted average common shares outstanding          |      |        | 15,824 |   |        | 14,205
|                                                                          | Participating securities                            |      |        | 483    |   |        |      
|                                                                          | Effect of dilutive securitiesoptions and warrants  |      |        |       |   |        | 1,934 
|                                                                          |                                                     |      |        |        |   |        |       
|Diluted weighted average common shares outstanding                        |                                                     |      | 16,307 |        |   | 16,139 |       
|                                                                          |                                                     |      |        |        |   |        |       
|Diluted earnings (loss) available to common stockholders per common share |                                                     | $    | (0.18  | )      | $ | 0.43   |       
|                                                                          |                                                     |      |        |        |   |        |       

Weighted
average options to purchase 540,000, 125,000 and 4.0 million shares of common stock equivalents were excluded from the computation of diluted weighted average shares
outstanding for the years ended December 31, 2004, 2003 and 2002 respectively, because the effect would have been anti-dilutive since their exercise prices were greater than the
average fair value of the Company's stock for the period. Weighted average options to purchase 2.5 million and 1.1 million shares of common stock were excluded from the computation of
diluted weighted average shares outstanding for the years ended December 31, 2004 and 2002, respectively, as their effect would have been anti-dilutive as a result of the net loss
available to common stockholders for each of the periods.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are recorded for
the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating
loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realized.

F-15

---



Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest EntitiesAn Interpretation of Accounting Research Bulletin (ARB) No. 51." In December 2003, the FASB issued FIN 46 (revised December 2003),
"Consolidation of Variable Interest Entities" ("FIN 46R"). FIN 46R provides guidance on how to identify variable interest entities and how to determine whether or not those entities
should be consolidated. The Company was required to apply FIN 46R by the end of the first reporting period
after March 15, 2004, for entities which were created before February 1, 2003. The adoption of FIN 46R was immediate for variable interest entities created after
January 31, 2003. The Company evaluated the provisions of FIN 46R and determined that it does not have any variable interest entities that require consolidation in the financial
statements.

In
December 2004, the FASB issued SFAS No. 123(Revised), "Share-Based Payment." This statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under the modified prospective method of adoption, SFAS No. 123(R) requires companies to apply a
fair-value-based measurement method in accounting for share-based payment transactions with employees and to record compensation cost for all stock awards granted after the required
effective date and to awards modified, repurchased, or cancelled after that date. In addition, the Company is required to record compensation expense (as awards previously granted continue to vest)
for the unvested portion of those awards that remain outstanding at the date of adoption. SFAS 123(R) will be effective in the Company's third quarter ending September 30, 2005.
Management has not yet determined the impact that SFAS 123(R) will have on its financial position and results of operations, but expects that the stock incentive plans' disclosure provides a
reasonable measure of the expected annual impact.

2. Business Combinations



On November 2, 2004, the Company acquired all of the outstanding shares of privately-held, United Kingdom-based Tertio. Total consideration for
Tertio's net assets determined in accordance with generally accepted accounting principles ("GAAP") approximated $40.2 million, consisting of $11.0 million in cash, approximately
$15.9 million in seller-financed notes, 966,666 shares of Series B Preferred Stock with an estimated fair value of approximately $11.3 million and approximately
$2.0 million in estimated transaction-related costs. Of the total purchase price, 10% was deposited in escrow with Wells Fargo Bank, N.A. as escrow agent to secure the sellers' representations
and warranties under the purchase agreement. Of the funds deposited in escrow, 80% will remain in escrow until November 2, 2005 and the remaining 20% will remain in escrow until
November 2, 2007, unless sooner released to the Company in payment of indemnification claims. Both Evolving Systems and Tertio operate on a calendar year. The acquisition was recorded as a
purchase business combination and Tertio's results of operations have been combined with Evolving Systems' from the acquisition date forward.

Tertio's
activation and mediation solutions, Provident and Evident, fit well with elements of the Company's product portfolio, enabling it to provide activation solutions and
strengthening its current network mediation and service assurance offerings. In addition, this acquisition provides the Company with a global reach and a customer base that includes many of the
world's leading communications

F-16

---



carriers.
The purchase price for Tertio included goodwill because the Company concluded that increased scale may be achieved from a financial, customer and product perspective. In addition, Tertio
brings a quality experienced work force.

The
purchase price has been allocated to tangible assets, liabilities and intangible assets acquired, as well as in-process research and development, based on their estimated
fair values. The excess purchase price over the fair values of tangible and identifiable intangible net assets was recognized as goodwill. Goodwill will not be deductible for tax purposes. The fair
value assigned to intangible assets acquired was based on estimates and assumptions determined by management. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill
will not be amortized but will be reviewed annually for impairment. Purchased intangibles with finite lives are amortized on a straight-line basis over their respective useful lives. In
accordance with SFAS No. 52, "Foreign Currency Translation," these assets and liabilities will be measured in Tertio's functional currency, pounds sterling (£), and will be
translated into the functional currency of Evolving Systems, U.S. Dollars, based on the exchange rates in effect at the balance sheet date. As a result, the amount recorded for intangible
assets, in U.S. Dollars will vary based on the period-end exchange rate, and such change is reflected as a component of other comprehensive income. The purchase price for Tertio is
preliminary, has not been finalized, and is subject to change as the preliminary items are finalized, which is expected to be completed in the second quarter of 2005, except for certain
pre-acquisition contingencies. The total purchase price has been allocated as follows (in thousands):

Cash

$
4,030Contract receivables, net


4,026Other current assets


2,281Property and equipment, net


887Acquired IPR&D (charged directly to expense)


90Identifiable intangible assets


15,407Goodwill


27,767Total assets acquired


54,488Current liabilities


(9,081
)Deferred tax liability


(5,250
)Total purchase price

$
40,157


The
purchase price allocation analysis included the future use of the acquired assets, analyses of historical performance and estimates of future performance of Tertio's products. The
fair value of intangible assets was primarily determined using the present value of estimated cash flows. The rates utilized to discount the net cash flows to their present values varied based on the
relative risk of the individual asset, but were generally based on the weighted average costs of capital for the telecom software industry. Identifiable intangible balances at December 31, 2004
include the effects of changes in foreign currency exchange rates of approximately $785,000. At December 31, 2004, identifiable

F-17

---



intangible
assets purchased in the Tertio acquisition consist of the following (in thousands, except for useful life):

Gross
Amount

Estimated
Useful
LifeIdentifiable intangible assets:Acquired software

$
7,773

5 yrsCustomer contracts


1,859

1 yrTrademarks and tradenames


1,196

6 yrsBusiness partnerships


1,491

7 yrsCustomer relationships


3,873

7 yrs$
16,192


Amortization
expense of intangible assets related to Tertio was $718,000 for the year ended December 31, 2004. Expected future amortization expense related to identifiable
intangibles as of December 31, 2004 is as follows (in thousands, note these values may differ from actuals as the assets and amortization expense are translated from pounds sterling to U.S.
dollars):

Years ending2005

$
3,9902006


2,5262007


2,5252008


2,5252009


2,253Thereafter


1,655$
15,474


In-process
research and development ("IPR&D") of $90,000 was expensed as "Product Development" in the accompanying statements of operations for the year ended
December 31, 2004 because the purchased research and development had no alternative uses and had not reached technological feasibility. The value assigned to IPR&D was determined using the
income approach by segregating cash flow projections related to in-process projects. The stage of each in-
process project was estimated to determine the discount rate to be applied to the valuation of the in-process technology.



On October 15, 2004, the Company acquired all of the outstanding ownership interests in privately-held TSE. Total GAAP consideration for TSE
approximated $2.4 million, consisting of $1.5 million in cash, a note payable of $889,000 and approximately $55,000 in transaction-related costs. The note payable is due and payable on
March 31, 2005. Of the total purchase price, $250,000 was deposited in escrow for one year with Wells Fargo Bank, N.A. as escrow agent to secure the sellers' representations and warranties
under the purchase agreement. The Company agreed to pay additional consideration of up to $3.5 million contingent upon the achievement of certain specified revenue and

F-18

---



gross
margin results. Up to $2.5 million of the contingent consideration may be payable over a 24 month period from the closing date and additional contingent consideration of up to
$1.0 million may be paid through the year 2011 if certain specified sales of TSE products occur. In accordance with SFAS No. 141, the contingent consideration will not be recorded until
the contingency is resolved and the additional consideration is distributable. The Company recorded additional goodwill of $447,000 during the year ended December 31, 2004 related to certain
specified gross margin results achieved by TSE during the period from the acquisition date through December 31, 2004. The contingent consideration was paid in the first quarter of 2005. The
acquisition was treated as a purchase business combination and the results of TSE's operations have been combined with Evolving Systems' from the acquisition date forward. Both Evolving Systems and
TSE operate on a calendar year.

TSE's
products are sold to U.S. wireline and wireless carriers, and provide for simulation of the nation's centralized NPAC and a testing environment for critical back office systems
that carriers use for enabling number portability. Other products in the TSE portfolio are used for enhanced integration between back office OSS systems. TSE has installed its products at many of the
leading wireless and wireline carriers in North America. By acquiring TSE, the Company has expanded its customer base and extended the set of solutions it offers its LNP customers. The primary reason
for a valuation which gives rise to goodwill is related to the value the Company placed on the TSE's solid reputation as a provider of LNP products, our expectation of new customers and the
experienced employees acquired in the TSE acquisition.

The
purchase price has been allocated to tangible assets, liabilities and intangible assets acquired, as well as in-process research and development, based on their estimated
fair values. The excess purchase price over the fair values was recognized as goodwill. Goodwill will be deductible for tax purposes with a tax life of 15 years. The fair value assigned to
intangible assets acquired was based on estimates and assumptions determined by management. In accordance with SFAS No. 142, goodwill
will not be amortized but will be reviewed annually for impairment. Purchased intangibles with finite lives are amortized on a straight-line basis over their respective useful lives. The
purchase price for TSE is preliminary, has not been finalized, and is subject to change as the preliminary items are finalized, which is expected to be completed in the second quarter of 2005. The
total purchase price has been allocated as follows (in thousands):

Net tangible liabilities

$
(338
)Identifiable intangible assets


1,634Goodwill


1,595Aggregate preliminary purchase price

$
2,891


The
purchase price allocation analysis included the future use of the acquired assets, analyses of historical performance and estimates of future performance of TSE's products. The fair
value of intangible assets was primarily determined using the present value of estimated cash flows. The rates utilized to discount the net cash flows to their present values varied based on the
relative risk of the individual asset, but were generally based on weighted average costs of capital for the telecom software

F-19

---



industry.
At December 31, 2004, identifiable intangible assets purchased in the TSE acquisition consist of the following (in thousands, except for useful life):

Gross
Amount

Estimated
Useful LifeIdentifiable intangible assets:Purchased software

$
1,233

2-5 yrsCustomer relationships


401

1-4 yrs$
1,634


Amortization
expense of intangible assets related to TSE was $101,000 for the year ended December 31, 2004. Expected future amortization expense related to identifiable
intangibles as of December 31, 2004 is as follows (in thousands):

Years ending2005

$
4632006


3932007


3142008


2722009


91$
1,533




On November 3, 2003, the Company acquired all of the outstanding shares of privately-held CMS of Columbus, Ohio in exchange for 732,773 shares
of Evolving Systems Inc. common stock, of which 10% was held in escrow for one year. The stock escrow was released in the first quarter of 2005 and the Company made no claims against the
escrowed shares. There was also a cash escrow account of $62,000 that was put in place by CMS to ensure that net cash position of CMS was positive as of the acquisition date. Net cash is defined as
the sum of all cash, cash equivalents, prepaid expenses and net accounts receivable less the sum of all accounts payable, accrued liabilities and deferred revenue. The cash escrow account was
distributed to the Company in the first quarter of 2004 since CMS had a negative net cash position as of the acquisition date. The acquisition was accounted for using the purchase method of accounting
and accordingly, the assets acquired and liabilities assumed were recorded at their respective fair values as of the acquisition date. The results of CMS' operations have been included in the
consolidated financial statements since the purchase date.

CMS
is a provider of network management operations support software for major telecommunications carriers. In addition to adding complementary products and sharing many common customers,
CMS brought a workforce that is familiar with complex tier one telecommunications solutions. The Company believes that CMS's network management products will fit its solutions business model and
provide it with additional opportunities with its tier one customers.

The
aggregate purchase price of approximately $11.2 million included the issuance of 732,773 shares of Evolving Systems, Inc. common stock in exchange for all outstanding
shares of CMS. The fair value of Evolving Systems, Inc.'s common stock was determined using an average price of

F-20

---



approximately
$14.98 in accordance with EITF 99-12, "Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination," which was
the average closing price a few days before and after the merger agreement.

Purchase price:732,773 shares issued at $14.98

$
10,977Other acquisition costs (legal, accounting, etc.)


183$
11,160


The
excess purchase price over the fair values of tangible and identifiable intangibles net assets was recognized as goodwill. Goodwill will not be deductible for tax purposes. The fair
value assigned to intangible assets acquired was based on estimates and assumptions determined by management. The total purchase price has been allocated as follows (in thousands):

Cash

$
535Other current assets


99Property and equipment


312Goodwill


6,996Intangible assets


3,975Acquired IPR&D (charged directly to expense)


233Total assets acquired


12,150Current liabilities


(344
)Deferred revenue


(646
)Total purchase price

$
11,160


The
purchase price allocation analysis included, the future use of the acquired assets, analyses of historical performance and estimates of future performance of CMS' products. The fair
value of intangible assets was primarily determined using the present value of estimated cash flows. At December 31, 2004, identifiable intangible assets purchased in the CMS acquisition
consist of the following (in thousands, except for useful life):

Gross
Amount

Estimated
Useful LifeIdentifiable intangible assets:Purchased software

$
174

5 yrsPurchased licenses


1,335

5 yrsCustomer relationships


2,466

2-5 yrs$
3,975


F-21

---





Amortization
expense of indentifiable intangible assets related to CMS was $859,000 and $130,000 for the years ended December 31, 2004 and 2003, respectively. Expected future
amortization expense related to identifiable intangibles as of December 31, 2004 is as follows (in thousands):

Years ending:2005

$
8542006


7682007


7402008


624$
2,986


IPR&D
of $233,000 was expensed as "Product development" in the accompanying statements of operations during the year ended December 31, 2003 because the purchased research and
development had no alternative uses and had not reached technological feasibility. The value assigned to IPR&D was determined using the income approach by segregating cash flow projections related to
in process
projects. The stage of each in process project was estimated to determine the discount rate to be applied to the valuation of the in process technology.



The financial information in the table below summarizes the combined results of operations of Evolving Systems, Inc., CMS on a pro forma basis, as though
the companies had been combined as of the beginning of the 2002 and the combined results of operations of Evolving Systems, Inc., CMS, TSE and Tertio on a pro forma basis, as though the
companies had been combined as of the beginning of the 2003. The impact of the IPR&D charges associated with the acquisitions has been excluded. This pro forma financial information is presented for
informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisitions actually taken place as of the beginning of the period
presented below. The following amounts are in thousands, except per share amounts.

For the Years Ended December 31,2004

2003

2002Revenues

$
48,188

$
49,827

$
26,278Net income (loss)

$
585

$
1,944

$
(12,391
)Basic income (loss) per share

$
0.03

$
0.11

$
(0.88
)Diluted income (loss) per share

$
0.03

$
0.10

$
(0.88
)


3. Goodwill and Intangible Assets

The Company has recorded goodwill and intangible assets from its acquisition of CMS in 2003 and TSE and Tertio in 2004. In accordance with SFAS No. 142,
goodwill will not be amortized but will be subject to an impairment test at least annually. The goodwill is assessed on an annual basis for impairment at the reporting unit level by applying a
fair-value-based test. The changes in the carrying

F-22

---



amounts
of goodwill by reporting unit for the years ended December 31, 2004 and 2003 are as follows (in thousands):

License
and
Services

Customer
Support

Total
GoodwillBalance as of December 31, 2003

$
1,819

$
5,177

$
6,996Goodwill acquired during the year


18,133


11,229


29,362Effects of foreign currency exchange rates


737


603


1,340Balance as of December 31, 2004

$
20,689

$
17,009

$
37,698


The
Company's annual goodwill impairment test was conducted as of July 31, 2004, and it was determined that goodwill, at that time related solely to the CMS acquisition, was not
impaired as of the test date. Additionally, goodwill is assessed for impairment at each reporting period end if certain events have occurred indicating that an impairment may have occurred. From
July 31, 2004 through December 31, 2004, no events have occurred that management believes may have impaired goodwill.

As
of December 31, 2004, identifiable intangibles were as follows (in thousands):

Gross
Amount

Accumulated
Amortization

Estimated
Useful LifeIdentifiable intangible assets:Purchased software

$
9,180

$
326

5 yrsCustomer contracts


1,859


305

1 yrPurchased licenses


1,335


309

5 yrsTrademarks and tradenames


1,196


33

6 yrsBusiness partnerships


1,491


35

7 yrsCustomer relationships


6,740


800

2-7 yrs$
21,801

$
1,808


As
of December 31, 2003, identifiable intangibles were as follows (in thousands):

Gross
Amount

Accumulated
Amortization

Estimated
Useful LifeIdentifiable intangible assets:Purchased software

$
174

$
6

5 yrsPurchased licenses


1,335


42

5 yrsCustomer relationships


2,466


82

2-5 yrs$
3,975

$
130


Amortization
expense of indentifiable intangible assets was $1.7 million and $130,000 for the years ended December 31, 2004 and 2003, respectively. Because the Tertio
intangibles are stated in pounds sterling (£), the amount of amortization actually recorded will be based upon exchange rates in effect

F-23

---



at
that time. Expected future amortization expense related to identifiable intangibles as of December 31, 2004 is as follows (in thousands):

Years ending2005

$
5,3072006


3,6872007


3,5792008


3,4212009


2,344Thereafter


1,655$
19,993


4. Balance Sheet Components

The components of certain balance sheet line items are as follows (in thousands):

As of December 31,Estimated
Useful Life2004

2003Property and equipment:Computer equipment and purchased software

$
25,218

$
23,165

2-4 yrsFurniture, fixtures and leasehold improvements


2,028


1,990

5-7 yrs27,246


25,155Less accumulated depreciation


(24,683
)

(23,576
)$
2,563

$
1,579


Depreciation
expense was $1.2 million, $1.2 million and $1.8 million for the years ended December 31, 2004, 2003 and 2002, respectively.

As of December 31,2004

2003Assets acquired under capital lease:Original book value

$
104

$
104Accumulated amortization


(33
)

(7
)Net book value

$
71

$
97


F-24

---



Included
in property and equipment at December 31, 2004 and 2003 are assets under capital lease. Depreciation expense related to assets under capital leases was $26,000, $24,000
and $34,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

As of December 31,2004

2003Accounts payable and accrued liabilities:Accounts payable

$
1,828

$
266Accrued compensation and related expenses


2,661


1,634Restructuring payable, current portion


59


128Accrued liabilities


3,809


1,016$
8,357

$
3,044


5. Leases and Commitments

Evolving Systems leases office and operating facilities and equipment under non-cancelable operating leases. Current facility leases include the
Company's headquarters, the Columbus, Ohio office which was assumed as part of the CMS acquisition, the London, England, Bath, England and Munich, Germany offices which were assumed as part of the
Tertio acquisition, the Bangalore, India office, the Greenwood Village, Colorado office which was assumed as part of the TSE acquisition, and satellite field offices. All of the satellite offices were
closed during 2002 and the headquarters lease was restructured in order to decrease the term of the lease as well as the amount of space being leased. Satellite offices that were closed during 2002
had the remaining lease obligation, net of anticipated sublease income, accrued as of the date which the office was closed (Note 6). Rent expense was $1.2 million, $852,000 and
$1.2 million for the years ended December 31, 2004, 2003 and 2002, respectively. Rent expense is net of sublease rental income of $1,000, $0 and $37,000 for the years ended
December 31, 2004, 2003 and 2002, respectively. Sublease
income related to the offices affected by the restructuring is adjusted against the restructuring liability and is not netted against rent expense.

The
Company's headquarters facility lease contains a clause that adjusts the lease rate every year. The lease rate increases 3% annually as of June 1. The Company accounts for the
effect of such escalating lease payments as if the lease rate were consistent over the lease term.

F-25

---



Future
minimum commitments under non-cancelable operating leases and capital leases as of December 31, 2004, net of rental income under non-cancelable
subleases, are as follows (in thousands):

Operating
Leases

Capital
Leases2005

$
1,208

$
422006


796


422007


378


422008





35Total minimum lease payments

$
2,382

$
161Less: Amount representing interest





(25
)Principal balance of capital lease obligations





136Less: Current portion of capital lease obligations





(31
)Long-term portion of capital lease obligations




$
105


6. Restructuring and Other Expenses (Recovery)

In early 2002, management implemented a restructuring plan (the "Plan") due to the downturn in the telecommunications industry, the Company's sharp decline in
revenue, the FCC's delay in ruling on wireless number portability and other factors. The Plan included workforce reductions, restructuring of the Company's headquarters building lease, the closure of
its satellite field offices and the write down of certain fixed assets, all of which were executed in 2002. At December 31, 2004 and 2003, the remaining accrual related to the closure of the
satellite offices.

Closure of satellite offices.The Company closed all of its satellite field offices during 2002. Because the costs to
sublease or terminate these lease commitments are based on estimates, the Company may incur additional costs related to the satellite office closures. As of December 31, 2004 and 2003
approximately $59,000 and $128,000, respectively were included in accounts payable and accrued liabilities, and approximately $20,000 and $47,000, respectively were included in long-term
obligations, related to the closure of the satellite offices.

F-26

---



The
following table summarizes the change in the accrual balance since December 31, 2004 (in thousands):

Work Force
Reductions

Restructure of
Headquarters
Lease

Closure of
Satellite Offices

Total
Restructuring
and Other
ChargesAccrual balance December 31, 2002

$
150

$
1,076

$
157

$
1,3832003 expense and adjustments


(93
)




84


(9
)2003 cash payments


(57
)

(1,076
)

(66
)

(1,199
)Accrual balance December 31, 2003








175


1752004 expense and adjustments








(15
)

(15
)2004 cash payments








(81
)

(81
)Accrual balance December 31, 2004

$


$


$
79

$
79


7. Stockholders' Equity

Stock Options

In January 1996, the Company approved "The Amended and Restated Stock Option Plan" (the "Option Plan"). Under the Option Plan, 6,850,000 shares of the
Company's common stock were reserved for issuance. At the annual meeting of stockholders held on May 13, 2004, the Company's stockholders approved an amendment to the Option Plan to increase
the total number of shares of common stock authorized for issuance under the plan by 1,500,000 shares. Of the 8,350,000 shares reserved for issuance, 1,997,397 shares were available for grant as of
December 31, 2004. Options issued under the Option Plan are at the discretion of the Board of Directors, including the provisions of each stock option granted, which need not be identical.
Options generally vest over four years and expire no more than ten years from the date of grant. The Option Plan terminates on December 31, 2005; options granted before that date are not
affected.

The
status of total stock options and warrants outstanding and exercisable under the Plan as of December 31, 2004 follows:

Stock Options Outstanding

Stock Options ExercisableRange of Exercise Prices

Number of
Shares

Weighted
Avg.
Remaining
Contractual
Life (years)

Weighted
Average
Exercise
Price

Number of
Shares

Weighted Average
Exercise Price$0.28 - $  0.39

92,406

7.78

$
0.33

66,574

$
0.33$0.58 - $  0.99

612,530

7.29

$
0.71

345,077

$
0.68$1.32 - $  2.95

1,667,141

6.51

$
2.76

1,085,874

$
2.76$3.40 - $  5.85

911,220

9.72

$
4.54

30,470

$
4.02$7.99 - $11.78

305,000

9.08

$
10.32

29,999

$
11.78$14.15

42,800

8.84

$
14.15

10,700

$
14.153,631,097

7.68

$
3.57

1,568,694

$
2.47


F-27

---



The
following is a summary of stock option and warrant activity:

|                                           |                         | Options   |            | Warrants |          | Weighted Average
Exercise Price |      | Options and
Warrants
Exercisable |           | Weighted Average
Exercise Price
|------------------------------------------ | ----------------------- | --------- | ---------- | -------- | -------- | ------------------------------- | ---- | -------------------------------- | --------- | -------------------------------
|Options & warrants outstanding at 12/31/01 |                         | 4,681,467 |            | 910,633  |          | $                               | 2.75 |                                  | 2,683,050 |                                
|                                           |                         |           |            |          |          |                                 |      |                                  |           |                                
|                                           | Options granted         |           | 728,354    |          |          |                                 | $    | 0.72                             |           |                                
|                                           | Less options forfeited  |           | (3,337,437 | )        |          |                                 | $    | 3.86                             |           |                                
|                                           | Less options exercised  |           | (8,217     | )        |          |                                 | $    | 0.73                             |           |                                
|                                           |                         |           |            |          |          |                                 |      |                                  |           |                                
|Options & Warrants outstanding at 12/31/02 |                         | 2,064,167 |            | 910,633  |          | $                               | 1.00 |                                  | 1,694,627 |                                
|                                           |                         |           |            |          |          |                                 |      |                                  |           |                                
|                                           | Options granted         |           | 2,589,932  |          |          |                                 | $    | 3.44                             |           |                                
|                                           | Less options forfeited  |           | (438,813   | )        |          |                                 | $    | 1.08                             |           |                                
|                                           | Less options exercised  |           | (1,280,972 | )        |          |                                 | $    | 1.99                             |           |                                
|                                           | Less warrants exercised |           |           |          | (910,633 | )                               | $    | 0.80                             |           |                                
|                                           |                         |           |            |          |          |                                 |      |                                  |           |                                
|Options & warrants outstanding at 12/31/03 |                         | 2,934,314 |            |         |          | $                               | 2.77 |                                  | 1,013,727 |                                
|                                           |                         |           |            |          |          |                                 |      |                                  |           |                                
|                                           | Options granted         |           | 1,310,999  |          |          |                                 | $    | 6.44                             |           |                                
|                                           | Less options forfeited  |           | (422,454   | )        |          |                                 | $    | 7.77                             |           |                                
|                                           | Less options exercised  |           | (191,762   | )        |          |                                 | $    | 1.82                             |           |                                
|                                           |                         |           |            |          |          |                                 |      |                                  |           |                                
|Options & warrants outstanding at 12/31/04 |                         | 3,631,097 |            |         |          | $                               | 3.57 |                                  | 1,568,694 |                                
|                                           |                         |           |            |          |          |                                 |      |                                  |           |                                

All warrants were exercised in 2003, as a result of cashless exercises that resulted in the issuance of 435,408 shares of common stock.

Series B Convertible Redeemable Preferred Stock

On November 2, 2004, the Company issued 966,666 shares of Series B Preferred Stock in connection with its acquisition of Tertio Telecoms Limited.
Based on the specific features of the Series B Preferred Stock, the issuance date fair value was estimated to be approximately the same as its value upon redemption, which is the same as its
value upon liquidation. The Series B Preferred Stock is entitled to dividends on an as-converted basis with the common stock and is therefore considered a participating security and
shares issuable upon conversion are included in weighted average shares outstanding for purposes of calculating basic earnings per share. Upon the occurrence of certain material events (liquidation,
merger, etc.,), the holders of Series B Preferred Stock are entitled to receive a preference payment that is senior to the common stock and that is equal to the sum of the number of shares of
common stock into which each share of Series B Preferred Stock is convertible as of the date of such event multiplied by $3.89 per share (subject to adjustment for stock splits and
combinations), or $11.3 million at December 31, 2004.

Shares
of Series B Preferred Stock may be converted into Company common stock at the option of the holder at any time. Each share of Series B Preferred Stock is initially
convertible into three shares of common stock. The conversion ratio is subject to adjustment as a result of price-based anti-dilution protections for issuances of Company common stock
below $3.50 per share. All but 1,000 shares of the Series B Preferred Stock will automatically convert into Company common stock in the event that the Company's stockholders approve the
conversion of the long term notes into convertible notes and the increase in the Company's authorized capital stock at the 2005 annual meeting of the Company's stockholders, which is expected to occur
on May 16, 2005. The Company may also cause the

F-28

---



Series B
Preferred Stock to automatically convert after November 2, 2006 in the event that the 45 day average market price for the Company's common stock is equal to or greater
than $8.75 (subject to adjustment for stock splits and combinations).

Following
the 2005 annual meeting of the Company's stockholders, the holders of Series B Preferred Stock will vote with the holders of the shares of Common Stock as one class with
each share of Series B Preferred Stock entitled to approximately 2.7 votes due to the application of Nasdaq Marketplace Rule 4351 which provides certain voting limitations on shares
issued below market price. A majority of holders of Series B Preferred Stock also must consent to certain corporate actions prior to the Company engaging in such actions
(i.e., issuing certain additional classes of stock, amending the Company's charter documents in an adverse manner to the Series B Preferred
Stock, changing the number or term of the Board, or repurchasing or redeeming other classes of Company stock). Additionally, subject to certain limitations, for so long as the Series B holders
hold no less than five percent of the Company's common stock (on an as converted basis), they shall as a group be entitled to elect one person to the Board.

Additionally,
the Series B Preferred Stock, as well as the convertible notes (if approved), contain certain weighted average price based anti-dilution protections
that, as long as those securities remain outstanding, would be triggered if the Company issued shares of our common stock (subject to certain adjustments and standard exclusions relating to Company
options) below $3.89 per share.

The
holders of Series B Preferred Stock may also require the Company to redeem all or any portion of the Series B Preferred Stock for a price equal to $11.67 per share
(subject to adjustment for stock splits and combinations) in the event that the Company is unable to obtain effectiveness of a related registration statement within a specified time period and/or
fails to maintain the shelf registration of the common stock underlying such shares or otherwise breaches certain other covenants of the Company.

Since
the conversion price of the Series B Preferred Stock was fixed in the purchase agreement to equal $3.50 per common share, a beneficial conversion feature exists on the
acquisition date equal to the difference between the value of the Company's common stock on the acquisition date, or $4.64, and the conversion price stated in the purchase agreement. The beneficial
conversion feature was
recognized as a reduction in net income available to common stockholders of $3.3 million on the issuance date since the Series B Preferred Stock was immediately convertible to common
stock.

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan, ("ESPP") the Company is authorized to issue up to 1.1 million shares of common stock to its 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 their gross salaries withheld by payroll deduction to purchase the
Company's common stock. The purchase price of the stock is 85% of the lower of the market price at the beginning or end of each six-month participation period. Under the ESPP, employees
were issued 16,915, 24,335 and 4,496 shares in 2004, 2003 and 2002, respectively. As of December 31, 2004, there were 454,241 shares available for purchase.

F-29

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Stock Option Exchange Program

On September 4, 2002, the Company announced a voluntary stock option exchange program for its employees. Under the program, employees were given the
opportunity to elect to cancel outstanding stock options held by them in exchange for an equal number of replacement options to be granted at a future date. The elections to cancel options were
effective on October 2, 2002. The exchange resulted in voluntary cancellation of 1,586,254 employee stock options with exercise prices ranging from $2.19 to $9.57, in exchange for the same
number of replacement options. Replacement options of 1,400,832 were issued on April 4, 2003, as a result of the stock option exchange program. The replacement options have the same terms and
conditions as each optionee's cancelled options, including expiration date for the cancelled options, except that: (1) all replacement options have an exercise price of $2.85, which is equal to
the fair market value of the Company's common stock on April 4, 2003 and (2) six months was added to the vesting schedule of the replacement options granted. Based on the authoritative
guidance in place at the time the program was executed, the Company did not incur any compensation charges in connection with the program.

Certain Anti-Takeover Provisions

The Company's restated certificate of incorporation allows the board of directors to issue up to 2,000,000 shares of Series A preferred stock and to
determine the price, rights, preferences and
privileges of those shares without any further vote or action by its stockholders. The rights of the holders of the Company's common stock will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future. Issuance of preferred stock, while providing desired flexibility in connection with possible acquisitions and other
corporate purposes, could make it more difficult for a third party to acquire a majority of the Company's outstanding voting stock. In 1999, the Company's Board of Directors designated 250,000 shares
of Series A Junior Participating Preferred Stock that contain "poison pill" provisions. In connection with the Tertio acquisition, the Company issued 966,666 shares of Series B Preferred
Stock. The Company has no current plans to issue additional shares of preferred stock.

In
addition, Evolving Systems is subject to the anti-takeover provisions of Section 203 of Delaware General Corporation Law, which prohibit the Company from engaging
in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business
combination is approved in the prescribed manner. The application of Section 203 and certain provisions of the Company's restated certificate of incorporation, including a classified board of
directors, may have the effect of delaying or preventing changes in control of the Company's management, which could adversely affect the market price of the Company's common stock by discouraging or
preventing takeover attempts that might result in the payment of a premium price to the Company's stockholders.

8. Commitments and Contingencies

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB Interpretation No. 34," ("FIN 45"). The Interpretation requires that a
guarantor is required to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken by issuing the guarantee.

F-30

---



The
accounting requirements for the initial recognition of guarantees are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. FIN 45 also requires
disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain other guarantees it has issued, even where those guarantees do not fall within
the scope of liability provisions of the Interpretation. The following is a summary of the Company's agreements that it has determined are within the liability and the disclosure provisions of FIN 45.

As
permitted under Delaware law, the Company has agreements with its officers and directors under which it agrees to indemnify them for certain events or occurrences while the officer or
director is, or was serving, at the Company's request in this capacity. The term of the indemnification period is indefinite. There is no limit on the amount of future payments the Company could be
required to make under these indemnification agreements; however, the Company maintains Director and Officer
insurance policies, as well as an Employment Practices Liability Insurance Policy, that may enable it to recover a portion of any future amounts paid. As a result of the Company's insurance policy
coverage, it believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2004
and 2003.

The
Company has an agreement with Colorado National Bank whereby it guarantees the expenses incurred by certain of its employees in connection with the employees' use of a Company
sponsored credit card. The term is from execution of the arrangement until cancellation and payment of any outstanding amounts. Company policy provides that this credit card may only be used for
Company-related business. Although the employee is primarily responsible for paying this obligation, in the event the employee fails to do so, the Company would be required to pay any unsettled
employee expenses upon notification from the vendor. The estimated maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not
significant. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of
December 31, 2004 and 2003.

The
Company enters into standard indemnification terms with its customers, as discussed below, in the ordinary course of business. Because the Company subcontracts some of the
development of its deliverables under its customer contracts, the Company could be required to indemnify its customers for work performed by its subcontractors. Depending upon the nature of the
customer indemnification, the potential amount of future payments the Company could be required to make under these indemnification agreements may be unlimited. The Company may be able to recover
damages from a subcontractor if the indemnification to its customers results from the subcontractor's failure to perform. To the extent the Company is unable to recover damages from its
subcontractors, the Company could be required to reimburse the indemnified party for the full amount. The Company has never incurred costs to defend lawsuits or settle claims relating to
indemnification arising out of its subcontractors' failure to perform. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of December 31, 2004 and 2003.

The
Company's standard license agreements contain a warranty provision that the software will be free of material defects and will operate in accordance with the stated requirements. The
warranty provisions require the Company to cure any defects through any reasonable means. To date, no claims under the warranty provisions have been brought to the Company's attention. The Company's
customers typically purchase annual maintenance services as well and as a matter of course, the

F-31

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Company
provides fixes for known defects through the provision of such maintenance services. As a result, the Company believes the estimated fair value of the warranty provisions in the license
agreements in place with its customers is minimal. Accordingly, the Company has not recorded liabilities for these warranty provisions as of December 31, 2004 and 2003.

The
Company's software arrangements generally include a product indemnification provision that will indemnify and defend a client in actions brought against the client that claim the
Company's products infringe upon a copyright, trade secret, or valid patent. Historically, the Company has not incurred any significant costs related to product indemnification claims. Accordingly,
the Company has no liabilities recorded as of December 31, 2004 and 2003.

In
relation to the acquisitions of Tertio, TSE and CMS, the Company agreed to indemnify certain parties of and from any losses, actions, claims, damages or liabilities (or actions in
respect thereof) resulting from any claim raised by a third party. The Company does not believe that there will be any claims related to these indemnifications. Accordingly, the Company has no
liabilities recorded for these agreements as of December 31, 2004 and 2003.

From
time to time the Company is involved in various legal proceedings arising in the normal course of business operations. We are not currently involved in any such proceedings.

9. Notes Payable

The Company's notes payable consist of the following (in thousands):

As of December 31,
2004Long-term seller financed notes payable, interest at an effective rate of 11.62%, due in varying quarterly principal installments beginning March 31, 2006, with final maturity on December 31,
2007

$
11,950Short-term seller financed note payable, interest at 5.50%, $2,000 due March 31, 2005 and $2,000 due June 30, 2005


4,000Promissory notes payable to sellers, interest at 5.00%, due March 31, 2005


889Debt issuance costs


(110
)Total notes payable


16,729Less current portion, net of debt issuance costs


(4,880
)Long-term debt, excluding current installments, net of debt issuance costs

$
11,849


The
Company entered into the long-term seller-financed notes payable on November 2, 2004, in conjunction with the acquisition of Tertio. From the acquisition date
through November 2, 2006, the long-term seller financed notes bear interest at 11.0% per annum. From November 2, 2006 through the maturity date of December 31, 2007,
the notes will bear interest at 14.0% per annum. For accounting purposes, interest is recognized using an effective rate of 11.62% for the term of the notes. Interest is accrued to the principal
balance through December 31, 2005, and beginning March 31, 2006, interest is payable on a quarterly basis in addition to the scheduled principal payments. Interest expense of
approximately $265,000 and $9,000 was accrued related to the notes payable issued for Tertio and TSE, respectively, as of December 31, 2004. The long-term seller financed notes
payable may be prepaid at any time without penalty. Beginning in March 2005, if the Company's quarterly cash balances exceed

F-32

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$7.0 million,
the holder of the long-term seller-financed notes may require a prepayment on the note equal to the amount by which the quarterly cash balance exceeds
$7.0 million. Based on its projections of cash balances, the Company believes that these additional payments will not be required in 2005. The scheduled principal payments on the
long-term seller financed notes are as follows (in thousands):

Payment date

AmountMarch 31, 2006

$
1,340June 30, 2006


3,110December 31, 2006


1,430March 31, 2007


1,870June 30, 2007


3,110December 31, 2007


1,090$
11,950


The
long-term notes have an effective interest rate of approximately 11.62% and a maturity date of December 31, 2007. In the 2005 proxy, the Company is asking
stockholders to approve the exchange of the long-term notes into convertible notes. The currently outstanding notes plus accrued interest through May 16, 2005 totaling approximately
$12.7 million, upon stockholder approval, would be exchanged for notes that would be convertible into approximately 3.8 million shares of the Company's common stock at $3.296 per share.
The convertible notes would bear interest at the Federal Applicable Rate, which is approximately 3.3% as of March 2005. In addition, all principal and unpaid interest would be due and payable
on December 31, 2007 under such convertible note. If the Company's quarterly cash balances exceed $7.0 million the holder of the convertible note may require a prepayment on the note
equal to the amount by which the quarterly cash balance exceeds $7.0 million. The notes are secured by substantially all of the assets of Evolving Systems and a pledge, subject to certain
limitations, of the shares of its subsidiaries.

The
long-term seller financed note payable agreements subject the Company to certain affirmative and negative covenants, including a financial covenant indexed to the
Company's computation of EBITDA, as defined.

Evolving
Systems has agreed to convene a meeting of its stockholders to seek the approval from its stockholders of the exchange of the long-term notes into convertible notes.
The Company's inability to convene the Initial Shareholders' Meeting, as defined, by May 16, 2005, constitutes an event of default under this note. The Company believes it will be able to
convene this meeting by the appointed time.

The
Company also entered into the short-term seller financed note payable on November 2, 2004, in conjunction with the acquisition of Tertio. The outstanding principal
amount under the short-term seller financed note is due and payable in two installments of $2.0 million on each of March 31, 2005 and June 30, 2005. The
short-term seller financed note bears interest at a rate per annum equal to five and one-half percent, due on each of the previously mentioned payment dates. Upon an event of
default, the short term seller financed note would bear interest at the greater of (a) eight and one-half percent or (b) the London Interbank Offering Rate (LIBOR). The short
term seller financed note may be prepaid at any time without penalty.

The
notes issued in connection with the Tertio acquisition prohibit us from declaring dividends to our common stockholders during the term of the notes.

F-33

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The
promissory note payable, which was issued in conjunction with the acquisition of TSE, is due and payable on March 31, 2005 and accrues interest at the rate of 5% per annum,
which is also due on March 31, 2005.

10. Income Taxes

The pre-tax income (loss) on which the provision for income taxes was computed is as follows:

For the Years Ended December 312004

2003

2002Domestic

$
1,113

$
7,038

$
(12,407
)Foreign


(987
)




Total

$
126

$
7,038

$
(12,407
)


The
provision (benefit) for income taxes consists of the following (in thousands):

For the Years Ended December 31,2004

2003

2002Current:Federal

$
25

$
147

$
Foreign


291





State


(14
)

20


Total current


302


167


Deferred:Federal








Foreign


(600
)




State








Total deferred


(600
)




Net income tax provision (benefit)

$
(298
)
$
167

$



As
of December 31, 2004 and 2003, the Company had net operating loss carryforwards ("NOL") of approximately $46.1 million and $45.2 million,
respectively, related to U.S. federal and state jurisdictions. The federal net operating loss expires at various times beginning in 2018 and ending in 2023. In addition, the Company has research and
development credit carryforwards of approximately $1.3 million which may expire at various times beginning in 2011. Of the Company's $46.1 million NOL, $9.3 million is related to
disqualified dispositions of stock. Should the valuation allowance related to this portion of the NOL be released, the benefit will be recorded to additional paid-in-capital.
The Internal Revenue Code places certain limitations on the annual amount of NOL's which can be utilized if certain changes in the Company's ownership occur. Changes in the Company's
ownership have occurred that will limit the future utilization of the NOL's.

The
Company receives a tax deduction for stock-based compensation that is in excess of compensation expense recognized for financial reporting purposes. Such benefit arises from an
increase

F-34

---



in
the market price of stock under employee option agreements between the measurement date (as defined in APB Opinion No. 25, "Accounting for Stock Issued to Employees") and the date at which
the compensation deduction for income tax purposes is determinable. During 2004 and 2003, the Company recorded $16,000 and $167,000, respectively, of reduction in taxes payable due to the exclusion of
the tax benefit of stock options exercises in the income statement under APB Opinion No. 25. APB Opinion No. 25 requires that any benefit (including a potential tax benefit) derived from
stock issued, be recorded directly to additional paid-in-capital. This $16,000 and $167,000 of benefit has been included in the accompanying consolidated statement of changes
in stockholders' equity.

Deferred
tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:

As of December 31,2004

2003Deferred tax assetsNet operating loss carryforwards

$
17,192

$
16,874Research and development credit carryforwards


1,287


1,401Depreciable assets


181


98Restructuring


60


65Other


435


698Total deferred tax assets


19,155


19,136Deferred tax liabilitiesDeferred revenue


(343
)

Acquired intangibles


(5,756
)

(1,483
)Total deferred tax liabilities


(6,099
)

(1,483
)Net deferred tax asset before valuation allowance


13,056


17,653Valuation allowance


(17,963
)

(17,653
)Net deferred tax liability

$
(4,907
)
$
Financial statement classificationCurrent deferred tax liability

$
(265
)Long-term deferred tax liability


(4,642
)Net deferred tax liability

$
(4,907
)


In
conjunction with the acquisition of Tertio, certain identifiable intangible assets were recorded. Since the amortization of these identifiable intangibles is not deductible for income
tax purposes, a deferred tax liability of $4.6 million was established at the acquisition date for the expected difference between what would be expensed for financial reporting purposes and
what would be deductible for income tax purposes. This deferred tax liability is carried on the books of the Company's United Kingdom subsidiary, and has no impact on the Company's ability to recover
its U.S.-based deferred tax assets.

F-35

---



In
conjunction with the acquisition of Tertio, future revenue under contracts in existence at the acquisition dates was reduced to an amount equal to the Company's estimated costs to
fulfill its obligations under the contracts plus a reasonable profit margin on the Company's estimated fulfillment effort. The resulting reduction of future revenue recorded for financial reporting
purposes is not deductible for income tax purposes and thus, a deferred tax liability of approximately $600,000 was established at the acquisition date. Both of the aforementioned deferred tax
liabilities will be recognized as a reduction of current income tax expense as the identifiable intangibles are amortized and the contract revenue is recognized.

The
Company continues to maintain a full valuation allowance on the domestic net deferred tax asset due to uncertainties related to the Company's ability to utilize its domestic deferred
tax assets, primarily consisting of certain net operating loss carryforwards, before they expire. The Company's assessment of this valuation allowance was made using all available evidence, both
positive and negative. In particular, the Company considered both its historical results and its projections of profitability for the reasonably foreseeable future periods. The Company's realization
of its recorded net deferred tax assets is dependent on future taxable income and, therefore, the Company is not assured that such benefits will be realized. The Company is required to reassess its
conclusions regarding the realization of its deferred tax assets at each financial reporting date. It is reasonably possible that future evaluation could result in a conclusion that all or a portion
of the valuation allowance is no longer necessary which could have a material impact in the Company's results of operations and financial position.

The
provision (benefit) for income taxes differs from the amount computed by applying the U.S. federal income tax rate of 34% to income (loss) before income taxes as follows for the
years ended:

As of December 31,2004

2003

2002U.S. federal income tax provision (benefit) at statutory rates

$
34

$
2,393

$
(4,218
)State income tax provision (benefit), net of federal impact


37


252


(407
)Intangible write off





74


Non-deductible meals


18


4


25Foreign rate differential


41





Change in valuation allowance


(439
)

(2,703
)

4,600Alternative minimum tax


25


147


Other


(14
)




Provision for (benefit from) income taxes

$
(298
)
$
167

$



The
change in the valuation allowance during 2004 resulted primarily from utilization of the net operating loss carryforwards and adjustments based on the tax return as filed.

11. Benefit Plans

The Company has established a defined contribution retirement plan for its employees under section 401(k) of the Internal Revenue Code (the "401(k) Plan")
that is available to all employees

F-36

---



21 years
of age or older with a month of service. Employees may contribute up to 15% of gross compensation not to exceed the maximum statutory contribution amount. The Company may make
discretionary matching contributions. All employee contributions are fully vested immediately and employer contributions vest 100% after completion of three years service.

Tertio
has established a defined contribution pension scheme that is available to all employees in their first full month of employment. Employees may contribute a percentage of their
earnings, the amount of which is dependent upon the age of the employee, not to exceed the maximum statutory contribution amount. The Company may make discretionary matching contributions. All
contributions are immediately vested in their entirety.

During
2004, 2003 and 2002, the Company recorded a consolidated expense (benefit) of ($45,000), $259,000 and $268,000 respectively, under the aforementioned plans. The benefit in 2004 is
a result of the Company utilizing funds remaining in the 401(k) Plan's forfeiture account to fund the Company match for 2004.

12. Segment Information

In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company defines operating segments as
components of an enterprise for which separate financial information is available. This information is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate
performance and to make operating decisions. The Company has identified its Chief Executive Officer and Chief Financial Officer as its chief operating decision-makers. These chief operating decision
makers review revenues by segment and review overall results of operations.

The
Company currently operates its business as two operating segments based on revenue type: license fees/services revenue and customer support revenue (as shown on the consolidated
statements of operations). License fees and services revenue represents the fees received from the license of software products and those services directly related to the delivery of the licensed
products as well as custom development, integration services and time and materials work. Customer support revenue includes annual support fees, recurring maintenance fees, fees for maintenance
upgrades and warranty fees. Warranty services are typically bundled with a license sale and the related revenue, based on VSOE, is deferred and recognized ratably over the warranty period. With the
acquisition of Tertio, the Company now provides products and services on a global basis. In addition, the Company has a product development facility in Bangalore, India. Total assets by segment have
not been specified because the information is not available to the chief operating decision-making group.

F-37

---



Revenue
information by segments is as follows (in thousands):

For the Years Ended December 31,2004

2003

2002RevenueLicense fees and services

$
11,074

$
14,605

$
12,145Customer support


15,268


13,368


10,81826,342


27,973


22,963Segment profit (loss), excluding depreciation and amortizationLicense fees and services


5,208


9,456


6,501Customer support


8,198


7,171


(557
)13,406


16,627


5,944Other operating expenses


10,563


8,477


11,536Depreciation and amortization


2,819


1,312


1,771Restructuring and other


(15
)

(9
)

5,079Income (loss) from operations

$
39

$
6,847

$
(12,442
)




The Company uses the customer locations as the basis of attributing revenues to individual countries. Financial information relating to the Company's operations
by geographic region is as follows (in thousands):

For the Years Ended December 31,2004

2003

2002RevenueUnited States

$
22,578

$
27,973

$
22,963Europe, Middle East, Africa and Asia


3,764





Total revenues

$
26,342

$
27,973

$
22,963


As of December 31,2004

2003Long-lived assets, netUnited States

$
14,681

$
12,420Europe, Middle East, Africa and Asia


45,573


Total long-lived assets

$
60,254

$
12,420


F-38

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13. Quarterly Financial Information (Unaudited)

Quarterly financial information is as follows (in thousands, except per share data):

|                                                                    |                          | First
Quarter |       | Second
Quarter |   | Third
Quarter |       | Fourth
Quarter |      
|------------------------------------------------------------------- | ------------------------ | ------------- | ----- | -------------- | - | ------------- | ----- | -------------- | -----
|Year Ended December 31, 2003                                        |                          |               |       |                |   |               |       |                |      
|Total revenue                                                       |                          | $             | 8,591 |                | $ | 6,439         |       | $              | 7,148
|                                                                    | Less: operating expenses |               |       | 5,545          |   |               | 5,229 |                |      
|                                                                    |                          |               |       |                |   |               |       |                |      
|Income from operations                                              |                          |               | 3,046 |                |   | 1,210         |       |                | 2,169
|Income before income taxes                                          |                          |               | 3,093 |                |   | 1,259         |       |                | 2,210
|                                                                    |                          |               |       |                |   |               |       |                |      
|Net income                                                          |                          | $             | 3,093 |                | $ | 1,259         |       | $              | 2,084
|                                                                    |                          |               |       |                |   |               |       |                |      
|Net income per common share                                         |                          |               |       |                |   |               |       |                |      
|                                                                    | Basic                    |               | $     | 0.23           |   | $             | 0.09  |                | $    
|                                                                    | Diluted                  |               | $     | 0.21           |   | $             | 0.08  |                | $    
|Year Ended December 31, 2004                                        |                          |               |       |                |   |               |       |                |      
|Total revenue                                                       |                          | $             | 5,766 |                | $ | 5,261         |       | $              | 5,739
|                                                                    | Less: operating expenses |               |       | 5,587          |   |               | 5,496 |                |      
|                                                                    |                          |               |       |                |   |               |       |                |      
|Income (loss) from operations                                       |                          |               | 179   |                |   | (235          | )     |                | 445  
|Income (loss) before income taxes                                   |                          |               | 236   |                |   | (168          | )     |                | 537  
|Net income (loss)                                                   |                          |               | 244   |                |   | (168          | )     |                | 517  
|                                                                    |                          |               |       |                |   |               |       |                |      
|Net income (loss) available to common stockholders                  |                          | $             | 244   |                | $ | (168          | )     | $              | 517  
|                                                                    |                          |               |       |                |   |               |       |                |      
|Net income (loss) available to common stockholders per common share |                          |               |       |                |   |               |       |                |      
|                                                                    | Basic                    |               | $     | 0.02           |   | $             | (0.01 | )              | $    
|                                                                    | Diluted                  |               | $     | 0.01           |   | $             | (0.01 | )              | $    

F-39

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FINANCIAL STATEMENT SCHEDULE

The following financial statement schedule is filed as a part of this Report under Schedule IIValuation and Qualifying
Accounts for the three fiscal years ended December 31, 2004. All other schedules called for by Form 10-K are omitted because they are inapplicable or the required information
is shown in the consolidated financial statements or notes thereto, included herein.

VALUATION AND QUALIFYING ACCOUNTS

|Fiscal
Year |  | Description                     |  | Balance at
Beginning
of Period |     | Recovery of
Bad Debt
Expense |   | Foreign
Currency
Translation
Adjustment |   | Write-Offs
Charged
to
Allowance |   | Balance
at End of
Period
|----------- |  | ------------------------------- |  | ------------------------------ | --- | ---------------------------- | - | --------------------------------------- | - | ------------------------------- | - | ------------------------
|2004        |  | Allowance for doubtful accounts |  | $                              | 65  |                              | $ | (21                                     | ) | $                               |  |                         
|2003        |  | Allowance for doubtful accounts |  | $                              | 290 |                              | $ | (30                                     | ) | $                               |  |                         
|2002        |  | Allowance for doubtful accounts |  | $                              | 348 |                              | $ | (21                                     | ) | $                               |  |                         

S-1

---